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]

California has a major cultural “religion” that cuts across traditional denominational lines: the religion of real estate and faith in rapid home price appreciation. Religious conviction provides meaning, hope, and joy to billions of people. Faith is belief by choice, generally in the absence of evidence, but sometimes even contrary to evidence. Most of the people on earth embrace a belief in a pleasant afterlife in some form. California is a melting pot of different cultures and a variety of beliefs. It's not uncommon to hear several languages spoken in public places and to interact with a wide variety people following different religions. One thing that unites Californian's is an acceptance of the myriad cultural backgrounds and belief systems. Another…[READ MORE]

Dodd-Frank created the Consumer Financial Protection Bureau that prevents the finance industry from ripping off its customers. More importantly, Dodd-Frank saves homeowners and taxpayers from another painful housing bust. In the past, whenever home affordability became a problem, lenders would come up with some innovative toxic loan product, allowing people to buy homes they really couldn’t afford, renewing the cycle of Ponzi lending and borrowing. During the bubble from the late 80s, adjustable-rate interest-only loans became common, and prices rose to the limit of affordability these products created. During the housing bubble of the 00s, prices reached a ceiling in late 2003, but lenders “innovated” again and originated and securitized option ARMs, pushing prices up to unsustainable levels. To prevent…[READ MORE]

The Panama Papers uncovered the money laundering schemes funneling millions into high-end real state. What happens to this market if the flow of illegal funds suddenly stops? New York city is flooded with Russian cash. Irvine, California, is flooded with Chinese cash. Miami, Florida, is flooded with crime cash. What happens to these housing markets---the recipients of much of this money---when the flow of money abruptly stops? When wealthy oligarchs and the nearly-wealthy who support them in exchange for government largess find themselves faced with tough times, rather than exporting their wealth to foreign safe havens, these wealthy players often find domestic concerns force them to repatriate their money to preserve their status at home. Perhaps this money is needed…[READ MORE]