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Author Archive: Irvine Renter

During the housing mania, every house was desirable, so prices inflated everywhere. Unlike the bubble era, today's buyers only want desirable properties or neighborhoods. During the housing mania, lending standards were eliminated and toxic loan products with teaser rates and negative amortization flourished. As a result, anyone could borrow any amount they wished to buy a home anywhere they wanted -- and that's only a slight exaggeration. With liar loans, borrowers and complicit lenders rendered income requirements meaningless. Even transparent lies, like the woman on food stamps claiming $150K+ income, were eagerly funded. Further, the borrower's income stretched to ludicrous levels with teaser rates where the borrower only needed to qualify for some low initial rate rather than the payment…[READ MORE]

Excessive debt-service burdens reduces a borrower’s ability to leverage themselves to buy houses at today’s inflated prices. During the 00s lenders saddled borrowers with excessive loads of debt: housing, car, consumer, student. There were no legal limits to the percentage of borrower income lenders could claim, so lenders provided so much debt that borrowers operated personal Ponzi schemes (borrowed from Peter to pay Paul) to keep their lives afloat. And why not? Homeowners worried very little about their debt loads because their house appreciated in value and served as another breadwinner. As long as debt was cheap, borrowers never needed their own income or savings to repay, and some dispensed with the need for either income or savings and simply…[READ MORE]

With house prices high relative to income, many fear lenders inflated a new housing bubble to bail them out from the old one. Home shoppers recoil at today's home prices. Years ago people reveled in high home prices, often buying for fear of being priced out or for greed to capture home-price appreciation; however, high home prices no longer excite buying frenzies since the housing bust. Plus, lenders won't enable buyer foolishness any more. So now when home prices go up, people worry about whether or not prices will crash again -- and with good reason. If mortgage interest rates rise significantly, lenders don't have affordability products to cushion the payment shock, so sales will crumble, and if rates remain…[READ MORE]

Most people who defaulted on their mortgages couldn't afford to pay off the debt. They chose when to default, but the default was unavoidable. No accepted definition of strategic default exists. Lenders attempted to define a strategic defaulter as any borrower who is capable of making a payment and chooses not to. On the surface that sounds reasonable, but that definition misses a very important distinction: Some people chose to default because they know they can’t afford the payments long term, and they are merely choosing the timing of the inevitable. The only thing strategic about the default is the timing, not whether or not they will lose the home. I prefer the distinction between ruthless default and accelerated default.…[READ MORE]

Development impact fees erode the value of raw land, but the fees are not so high as to present a barrier to new home construction at entry-level prices. A recent article from a noted real estate industry source cited development impact fees as a hindrance to development of entry-level homes. I want to demonstrate why this is not the case. Raw land value Most people view raw land as a cost input similar to concrete, lumber, or labor. While raw land certainly costs builders money, the price of raw land does not behave anything like those other cost inputs. The "sticks and bricks" and other components of house construction are commodities. As commodities they can be easily transported from one…[READ MORE]

Wealthy real estate investors will move their money out of ultra-high-end properties when better investment opportunities become available. The only segment of the housing market that wasn't impacted significantly by the housing bust was ultra-high-end real estate. But that may not hold true in the future. What defines ultra-high-end varies by location, but in general these are houses not subject to large mortgages, often purchased completely in cash. Ultra-high-end homes are not purchased by working class people toiling to pay off a mortgage, so changes in mortgage terms and rates effect the resale value of these properties less than the financed purchases at lower price points. When lenders "innovate" with mortgage terms, or when traders in the bond market moves…[READ MORE]

Down payment assistance, like other government housing subsidy programs, merely rewards one group of would-be homeowners at the expense of another group, in this instance, low-income savers. Further the criteria for doling out the rewards is capricious. In the post Two strategies for more abundant and less expensive housing, I suggested that subsidizing low-income borrowers with tax credits would boost prices for low-end housing, and as a result, builders would provide more of it, making housing more affordable for everyone. As someone pointed out in the astute observations that day, such a policy discriminates against those who fail to qualify -- and if not structured properly it would. But if housing subsidies harm people, exactly who is hurt, and how…[READ MORE]

A cabal of bankers conspired to remove the supply of homes from the MLS so when they later foreclose on their delinquent borrowers, they can recover more money on their bad loans. In a conspiracy a group of people band together to act in ways that benefit the group. Often these actions are contrary to how the individuals would have acted on their own. When the group is a business it acts as a cartel, usually with the intention of controlling prices through manipulation of market supply: OPEC is a classic example. Since the collapse of the housing bubble, I posit that a cartel of too-big-too-fail banks conspired to manipulate pricing in the housing market by engaging in actions that…[READ MORE]

In a bold statement against local development opposition groups, a new movement touts the positive aspects of providing new housing for the next generation. Local community opposition groups, also known as Nimbys, are a potent force in California politics. Overcoming nymbyism requires local politicians to stand up to emotional and vociferous constituents and approve projects for the greater public good. Often such a move is political suicide, so politicians take the easy way out and give in to nimby demands. A classic example of rampant nymbyism is the local opposition to affordable housing in Huntington Beach, California. In order to comply with State law, the City of Huntington Beach is required to provide affordable housing. Residents of the city strongly…[READ MORE]

Dodd-Frank curbed lending and contributes to the ongoing decline in the home ownership rate, but the lending that Dodd-Frank prevents is the toxic lending that caused the housing bubble and crash that pummeled the home ownership rate. For nearly 100 years, Presidential administrations crafted housing policies to maximize the rate of homeownership and the rate of home price appreciation. Both Democrat and Republican administrations touted homeownership as the best investment a middle-class family could make, and home ownership became synonymous with the American Dream. We reached peak American Dream in the early 00s. At the time, the surface conditions appeared great: house prices appreciated rapidly, mortgage equity withdrawal fueled an economic boom, subprime lending provided homeownership opportunities to nearly everyone,…[READ MORE]

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In Memoriam: Tony Bliss 1966-2012
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