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Author Archive: Irvine Renter

The last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people's inability to distinguish between desire and demand. Most people want a house. About 65% of Orange County residents own their homes, but probably 95% of residents wish they did. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit. True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not…[READ MORE]

Several people have asked about the accuracy of my post Predictions for the Irvine Housing Market. I have the DataQuick numbers through April of 2008, so we can take a look. First, when I first made the chart below, I did not have accurate numbers. The base number I used of $687,000 was incorrect. Using the three-month moving average of prices, the real number was $723,750. With this new, more accurate number, we can compare the projected drop with the real figures.   Well, it is even worse than I imagined. When I first suggested that Irvine's median home price might decline 12% in a single year, it was a bold prediction. Prices had never dropped that much in Irvine…[READ MORE]

We all want affordable housing. There are numerous government programs designed to provide low-cost rental and ownership properties to people in all walks of life. Lenders, builders, realtors and buyers all benefit from affordable housing because affordability means an increase in transaction volumes and more money into the pockets of those dependent on the real estate market. The difficult problem with affordable housing is how to provide it without making it unaffordable. Finance is not the answer. Most of those who worked in the mortgage business really believed the "financial innovation" meme. I have contended that the entire idea is a fallacy. At its core, the belief among financiers is that affordability products reach more customers and permit home ownership…[READ MORE]

Today, we will look at two families, the Peakers and the Troughers (gotta love those names, right?) Both families have a combined family income of $150,000 per year, and they have both saved $100,000 they can put toward a downpayment on a house. It is the Summer of 2006, and each family is looking at a $1,000,000 home. The Peakers think the property is a good deal, so they put their $100,000 down and borrow $900,000 with an adjustable-rate mortgage starting at 6% with a 10-year fixed period followed by a 20 year fully amortized payment at a new interest rate. Their monthly payments are $4,500 a month, but after all of the adjustments for taxes and fees and the…[READ MORE]

Investment Value of Residential Real Estate The United States Department of Labor Bureau of Labor Statistics measures the Rent of primary residence (rent) and Owners' equivalent rent of primary residence (rental equivalence). They make this distinction because a house has both a consumptive purpose and an investment purpose. The consumptive value is measured by rent or rental equivalence. There is legitimate financial reason pay more than the rental equivalence price. The normal rate of house appreciation – not the unsustainable kind witnessed during the Great Housing Bubble – can provide a return on investment. The source of this added value is the leverage of mortgage financing and the hedge against inflation obtained through a fixed-rate mortgage. The investment premium, which…[READ MORE]

Efficient Markets Theory The efficient markets theory is the idea that speculative asset prices always incorporate the best information about fundamental values and that prices change only because new information enters the market and investors act in an appropriate, rational manner with regards to this information(i). This idea dominated academic fields in the early 1970s. Efficient markets theory is an elegant attempt to tether asset prices to fundamentals through the common-sense notion that people would not behave in irrational ways with their money in financial markets. This theory is encapsulated by the “value investment” paradigm prevalent in much of the investment community. Efficient Markets Theory   In an efficient market, prices are tethered to perceived fundamental valuations. If prices fall…[READ MORE]

Bailouts and False Hopes One of the more interesting phenomenon observed during the bubble was the perpetuation of denial with rumors of homeowner bailouts. Many homeowners held out hope that if they could just keep current on their mortgage long enough, the government would come to their rescue in the form of a mandated bailout program. Part of this fantasy was not just that people could keep their homes, but that they could keep living their lifestyle as they did during the bubble. What few seemed to realize was any government bailout program would be designed to benefit the lenders by keeping borrowers in a perpetual state of indentured servitude. With all their money going toward debt service payments, little…[READ MORE]

Mortgage Default Losses There is risk of loss in any investment, and losses in collateralized debt obligations arise from the difference in the book value of the underlying mortgage note and the actual resale value of the collateral on the open market, if this collateral is subject to foreclosure. There is an important distinction that must be made between the default rate on a mortgage loan and the resultant loss incurred when a default occurs. High mortgage default rates do not necessarily translate into high mortgage default losses and vice-versa. Subprime loans have had high default rates since their introduction. When subprime mortgages began to capture broader market share starting in 1994, the rate of home ownership in the United…[READ MORE]

During the Great Housing Bubble, many speculators tried to make money through trading houses. The vast majority of these traders were not professionals but amateurs who thought they could be professionals. Most amateurs ended up losing money because they did not understand what it takes to be successful in a speculative market. The first and most obvious difference in the investment strategy between professional traders and the amateurs in the general public is their holding time. Traders buy with intention to sell for a profit at a later date. Traders know why they are entering a trade, and they have a well thought out plan for their exit. The general public adopts a “buy and hold” mentality where assets are…[READ MORE]

An option contract provides the contract holder the option to force the contract writer to either buy or sell a particular asset at a given price. A typical option contract has an expiration date, and if the contract holder does not exercise their contract rights by a given date, they lose their contractual right to do so. An option giving the holder the right to buy is a “call” option, and the option giving the holder the right to sell is a “put” option. The writer of an options contract is typically paid a fee or a premium for taking on the risk that prices may move against their position and the contract holder may exercise their right. The holder…[READ MORE]

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