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]

By reducing local regulatory hurdles to new development, and by providing subsidies to low-income Americans, the free market will provide more housing that will drive down costs for everyone. Housing costs too much in the United States because we don't provide enough housing to meet local demand, elevating both rents and resale home prices relative to local incomes. This problem is particularly acute in California where Potential homebuyers can’t save for down payments with high rents, trapping them in low-quality rental housing for a lifetime. Just as lenders used restricted supply to reflate the housing bubble, a lack of supply has inflated California house prices since the mid 1970s. Ordinarily, if house prices were pushed up above the cost of…[READ MORE]

The tiny house movement is the extreme of housing and possession austerity. Would anyone with the means to live with more chose to live that way? When builders and developers create new projects, they generally produce a variety of floorplans to meet a market niche where they can reasonably expect to sell their inventory in a short period of time. In a typical residential subdivision, condos will range from 900-1,600 square feet, and detached homes can range from about 1,600 square feet all the way up to the monster McMansions 4,000 square feet or larger. In higher density projects, small studio apartments as little as 450 square feet are sometimes offered, but rarely do builders and developers make product any…[READ MORE]

Only high wage earners save on taxes due to the home mortgage interest deduction, and the benefit is lost due to higher house prices paid be everyone utilizing this tax subsidy. Does the home mortgage interest deduction serve any useful purpose? Usually, when the government subsidizes something, it ostensibly serves a greater public good, but if there was ever a greater good served by the home mortgage interest deduction (a debatable claim), this benefit has long since vanished. As it stands today, the deduction rewards a small segment of high wage earners (see article below). Further, those who gain from the deduction spend this savings on higher mortgage payments to pay for houses made more expensive by others utilizing this…[READ MORE]

There are four fundamentals that determine resale value: borrower income, allowable debt-to-income ratios, interest rates, and down payment requirements. When economists write about the fundamentals of housing, they usually mention job and wage growth, both of which impact sales (of special interest to homebuilders), but job and wage growth don't establishing the housing market's equilibrium price level. Job and wage growth are only important in that they impact a borrower's income, which is a true fundamental. Fluctuations in supply and demand are not fundamentals either. Restricted inventory caused by loan modifications and denying short sales---the tactic lenders used to reflate the housing bubble---these manipulations temporarily disrupt the natural balance, forcing buyers to substitute down in quality and elevate prices above…[READ MORE]

The National Association of realtors perpetuates the myth that investors are scooping up family homes and leaving potential buyers out in the cold. Many investors use the OC Housing News to search for properties because it provides a detailed investment analysis of every home available for sale in Orange, Los Angeles, and Riverside Counties. The calculations also show the cost of ownership an owner-occupant would consider in their deliberations. Right now, there isn't much in Southern California for investors to get excited about. The major REO-to-rental funds bid prices up to where the cashflow returns are marginal, and mom-and-pop investors find the prices too high to make the numbers work too. Over the last few years, the Southern California housing…[READ MORE]

Back in 2006 the housing bulls weren't just a little wrong. They were completely and totally and unequivocally incorrect in every way. I recently had a conversation with a CEO of a large housing market forecasting company. In our conversation, I told him about my experience as a housing bubble Cassandra who wrote anonymously for 18 months for fear of repercussion in the industry. He paused, looked at me with a grin, and told me that over the last several years many people told him they called the housing bubble---a humorous case of revisionist history. When I first heard this I was shocked. With everything I went through to hide my identity through my very public writing about the issue,…[READ MORE]

People shopping for houses today are unwilling to purchase substandard housing in hopes of trading up at some later date. Houses are expensive. Many renters would like to buy a house, but they lack the down payment necessary, and many renters are early in their careers when their income isn't high enough to purchase a home they would really like. As a result, first-time homebuyers purchase the least expensive properties available for sale in the housing market, using the highest-cost financing (generally FHA) due to their small down payment. Assuming they sustain ownership, assuming they utilized an amortizing mortgage, and assuming house prices rise, after some period of waiting, the first-time homeowners could sell their starter house---usually to another first-time…[READ MORE]

If an institution is too big to fail, then it must not be allowed to take innovative risks because the potential consequences for the economy are dire. Innovation entails risk. Any profitable business venture that is widely known to be successful is rife with competitors, so profit margins compress until nobody sees an opportunity worth exploiting. New profit centers are created by innovation, but innovation carries a heavy cost as most innovative start-ups fail. When an institution becomes large, it becomes very difficult for them to innovate. Bureaucratic inertia, entrenched ideas, and groupthink all tend to stifle innovation. Usually it's safer for large companies to innovate by purchasing a small, successful start-up and scaling their idea. When an institution becomes…[READ MORE]

Generation X was hurt more than the Baby Boomers or the Millennials by the housing bust because many Generation Xers lost their starter homes, and many others are still trapped in them. The Baby Boomers lost their retirement savings. The Millennials can't afford to enter the housing market. While both the Boomers and the Millennials were damaged by the housing bust, the generation most impacted was Generation X---my generation. If circumstances were different, I might have participated in the housing mania. Most of my cohorts did because the housing mania corresponded to the period in the lifecycle of Generation X where they were most likely to become homeowners. They overpaid for the Baby Boomer's houses, and since many Generation Xers…[READ MORE]