Author Archive: Irvine Renter

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]

Principal reduction rewards those who deserve help the least at a very high cost paid by those who obtain no benefit at all. Principal reduction transfers wealth from one party to another. For every underwater borrower who ostensibly needs principal reduction, there's an investor who holds that loan as an asset; for the borrower to gain, the investor must lose. While few may decry the confiscation of wealth from the one-percenters, most of these loans are held by pension funds for ordinary Americans, and most of those are backed by government loan guarantees, so any widespread principal reduction program would be paid for by everyone, not merely a demonized select few. Further, costly principal reductions fail to benefit many people…[READ MORE]

Everyone who buys a new home believes the neighborhood is perfect, and after they move in, any additional residents ruin the neighborhood with more traffic congestion. None of the new residents notice the glaring hypocrisy. Whenever a family buys a new house, the builder constructed that house only because no local opposition group was strong enough to prevent its construction; however, once new homeowners move in, many of them immediately adopt the belief that traffic congestion is out of control and any new development will ruin the character of their neighborhood, so these nimbys band together to prevent others from obtaining the same benefit they enjoy. Through willful ignorance, these new homeowners fail to comprehend the hypocrisy of this attitude…[READ MORE]

Lenders utilize FICO scores to evaluate the risk that a borrower will repay the debt as agreed. The lower the score, the higher the risk, so lenders charge higher rates for lower FICO score borrowers. The availability of credit cycles from periods of tight underwriting standards to periods of lax standards. Credit-fueled markets like real estate are most stable when credit is tight because very few borrowers default. In a tight credit environment, lenders are very focused on ensuring the borrower can repay the loan and the lender can recover their capital if the borrower fails to pay. It would seem obvious and intuitive that lenders would always be focused on those things, but history shows that when times are…[READ MORE]

Homebuilders won't build what they can't sell, and household formation isn't so robust that builders must provide more to keep pace with demand. Since 2012 the financial media chronicled the reflation of the old housing bubble but portrayed it falsely as a robust recovery based on strong fundamentals. Ordinarily, when prices rally in the market for any commodity, good, or service, the rally originates from resurgent demand that outstrips the available supply, and as a result, sellers and suppliers produce more to meet demand. Since 2012 when house prices bottomed, none of the usual signs of strong demand were present. For example, consider that since the rally began, the housing market witnessed the following: 20-year lows in home ownership 6-year…[READ MORE]

IRVINE, Calif., January 2, 2016 – OC Housing News San Bernardino County Housing Market Report: January 2016 Historically, properties in this market sell at a 25.7% discount. Today's discount is 32.2%. This market is 6.6% undervalued. Median home price is $280,200 with a rental parity value of $406,600. This market's discount is $126,400. Monthly payment affordability has been worsening over the last 1 month(s). Momentum suggests unchanging affordability. Resale prices on a $/SF basis increased from $184/SF to $184/SF. Resale prices have been rising for 1 month(s). Over the last 12 months, resale prices rose 7.0% indicating a longer term upward price trend. Median rental rates declined $23 last month from $1,845 to $1,822. The current capitalization rate (rent/price) is…[READ MORE]

In its simplest form, a personal Ponzi scheme is borrowing money to pay debt service: acquiring new debt to pay old debt. It's a path to disaster. What is a personal Ponzi scheme? Aren't Ponzi schemes the advanced financial management crime of sophisticated money managers like Bernie Madoff? Not really. A Ponzi Scheme is any investment where the returns come not from the investment but from the capital contributions of new investors. If you change the terms slightly, a Ponzi Scheme is also any debt where the payment of debt comes not from wage income but from borrowed money from new lenders. In that respect, personal Ponzi schemes are easy to begin and grow. Anyone can borrow money to pay debt,…[READ MORE]

Monthly Housing Report

In Memoriam: Tony Bliss 1966-2012