Author Archive: Irvine Renter

 The US taxpayer is directly responsible for any losses on loans to low-quality borrowers since 2008. Lenders prefer to loan money to people with ample reserves, strong income, and a proven track record of repaying debts. Borrowers that lack any of those components default at higher rates, so lenders charge them higher interest rates to compensate for the increased costs and potential losses. Competition between lenders prompts them to reach out to fringe borrowers that may be lacking in certain desirable characteristics, but lenders rarely reach too far for too long because shaky borrowers are the first to default in an economic downturn. However in the mid 1990s lenders embarked on a long-term foray into loaning money to high-risk borrowers:…[READ MORE]

Sometimes people make large sacrifices to obtain a home of their dreams; however, sometimes they aren't willing to sacrifice at all. Whenever people buy a home, they make tradeoffs. Do they want to live near the beach in a small condo, or do they want a McMansion and a lengthy commute? In a larger sense, most people also chose whether they want more house or more disposable income. In California, most people feel compelled to sacrifice disposable income to obtain better housing because the alternative is often quite Spartan. The chronic shortage of housing inventory inflates California house prices to very high levels and forces most people to settle for far less than what they would enjoy anywhere else. Contrary…[READ MORE]

By offering private mortgages with only 1% down, Quicken Loans encourages speculators to gamble with other people's money. If most people were to go to Las Vegas and gamble with $1,000 of their own money, they would be cautious; if they lost, they would feel the pain of that loss, and the fear of the consequences would prevent them from taking crazy risks. But instead imagine how their behavior would change if someone else gave them $990, and they only had to put up $10. Ostensibly the $990 would be a loan, but if the gambling borrower is unable to repay, they would simply walk away and default on the loan. Further, those without the capacity to repay would know…[READ MORE]

Finished lot prices tightly tether to new home prices. Both are elevated above historic norms due to low mortgage rates. When mortgage rates first dropped from 6.5% in 2006 to 4.5% in 2009, I warned people that the interest rate stimulus was artificial, and while low rates inflate prices, they are a temporary stimulus with potentially painful withdrawal symptoms as the stimulus is tapered. Since conspiring bankers successfully manipulated the housing market in order to increase the collateral value backing their bad loans, the powers-that-be feel they have no choice but to stimulate housing even if that stimulus induces painful side effects. For the most part, the manipulations of the housing market worked since 2012. By denying short sales, modifying…[READ MORE]

While foreclosures are emotionally painful, in the aftermath a new family moves in to the foreclosed home, and the foreclosed family loses an onerous debt obligation. It's a win-win. It's sad when someone is forcibly evicted from their family home. People develop strong emotional attachments to real property, so many people feel compassion and empathy for those enduring such a difficult loss. Since nobody wants to feel the pain of loss, many people suggest we should stop foreclosures. (See: Should evictions be banned to stop hurting people’s feelings?) When people rally to stop foreclosure, they forget there is a next chapter to the story. What happens to the family and the house after the foreclosure? First, the house doesn't sit…[READ MORE]

Eventually Millennials will buy houses, bubble-era buyers won't be underwater, and the housing market will finally recover. Since early 2012 when housing prices stopped going down, I characterized the price rally as a reflation of the old housing bubble rather than a price recovery. IMO, the crash was the price recovery because the prices that preceded the crash were a bubble with no tether to fundamental values. The price crash restored market prices to values supportable by income and rent. However, most people refuse to accept this reality, particularly deeply underwater homeowners who dismiss the idea that they erred when buying during the bubble. Due to psychological anchoring, most homeowners cling to the illusion that peak housing bubble prices were…[READ MORE]

Rents and resale prices only rise faster than incomes due to supply shortages during periods when job growth is strong. It costs too much to live in California because the chronic shortages of housing supply inflates California house prices and rents. Starting in the 1970s with regulations like CEQA, California began to restrict growth. This inhibited builders and developers from bringing new product to market to meet demand in many areas. When any commodity is in short supply, prices tend to rise; houses are no exception. There are not enough houses to go around, so people substitute down in quality to obtain a place to live. This downward substitution effect lifts house prices at every level of the housing ladder…[READ MORE]

As one of the chief architects of the housing bubble, Angelo R. Mozilo deserved prison time and loss of wealth for his nefarious deeds. Most people don't understand how the housing bubble was actually inflated. Many incorrectly believe the degradation of home lending standards caused a surge of demand that bid prices up to unsustainable levels. While that's partially true, that isn't the full story. While mortgage standards were nearly eliminated, and millions of unqualified borrowers were allowed to buy homes, that isn't why prices got so high. If bankers eliminated lending standards today, but used conventionally amortizing 30-year loans, prices would go up a little as people substituted downward in quality to obtain housing, but overall house prices would…[READ MORE]

When asset values rise and stay up, that's considered prosperity. When asset values rise and then fall, that's considered a bubble. What will happen with housing tomorrow? Nobody wants to overpay for a house. From 2006 to 2011, anyone who bought a house anywhere in the United States paid more than they would have if they had waited until March of 2012. Of course, it isn't practical to time the bottom tick of any financial market, so prudent buyers with an understanding of value, look at key benchmarks to determine when prices are too high or too low. The benchmark I favor is rental parity. Rental parity represents a crossover point where renting and owning have an equal monthly cost.…[READ MORE]

Previous loan modifications and old HELOCs face resetting to higher rates and recasting to full amortization likely leading to further loan modification. In the heat of financial distress during the depths of the recession, many people asked their banks for unilateral loan term modifications in favor of the borrower. Ordinarily, banks would never consider such a request, but since so many borrowers were distressed, and since foreclosure would result in a loss of original capital, many lenders offered these distressed borrowers deals to keep them paying. Borrowers thought they were getting a deal. Many enjoyed reduced payments, and since fees, charges, fines, and other garbage was clandestinely added to the loan balance, borrowers only saw the benefit and ignored the…[READ MORE]

Monthly Housing Report

In Memoriam: Tony Bliss 1966-2012
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