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Author Archive: Irvine Renter

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]

The real estate wealth effect is really a Ponzi scheme built on debt, not a passive byproduct of naturally rising house prices. When many individuals act for the same reasons at the same time, they take on the characteristics of a herd. In those instances, the behavior of the herd can largely be explained by the behavior of the individuals that comprise the herd. Macro economists seek correlations to infer causations for economic events; however, they often fail to investigate the individual incentives driving the herd behavior that shows up in their data. As a result, macro-economists often conjure up completely erroneous interpretations for trends in data, trends easily explained by looking at the micro-economic level. My favorite example is…[READ MORE]

California home sales weaken because prices are higher than most potential buyers can qualify to borrow, a problem that will worsen if mortgage rates rise. Borrowers face real limits on mortgage debts thanks to Dodd-Frank. Prior to Dodd-Frank lenders would extend credit without regard to a borrower's ability to repay because lenders could sell these loans to eager investors willing to accept the repayment risk. The ability-to-repay rules mandate that lenders must document a borrower's income and demonstrate the borrower has the ability to repay on a fully-amortized repayment schedule; thus Dodd-Frank eliminated liar loans and Option ARMs, two toxic loan products that destabilized the housing market. Without toxic affordability products, the four fundamentals of housing market pricing, borrower income,…[READ MORE]

FHA insured mortgages are assumable, meaning a borrower can transfer the debt to a different borrower rather than paying off the old debt, a useful feature in a rising mortgage rate environment. Over the last 35 years, mortgage interest rates have fallen steadily, so very few buyers active in the housing market today have ever experienced a rising mortgage interest-rate environment. When rates steadily fall, people typically refinance and terminate their old mortgage in favor of a new one with better terms. Most people expect rates to rise from our record lows, and when rates rise, people typically don't refinance because they want to keep their low mortgage interest-rate mortgage. In a rising mortgage rate environment, people need to use…[READ MORE]




In Memoriam: Tony Bliss 1966-2012