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Author Archive: Irvine Renter

The housing bubble was not a subprime problem: it was a middle-class prime borrower problem. Conventional wisdom holds that the housing bubble and bust was caused by loaning money to subprime borrowers who defaulted in large numbers and fell into foreclosure, resulting in a dramatic price crash. Many believe the housing crash would have been avoided if lenders simply hadn't loaned money to subprime borrowers. The conventional wisdom is wrong. The collapse of the housing bubble was inevitable because the loan products upon which pricing depended were unstable. Although the subprime borrowers defaulted first, all borrowers defaulted in large numbers because the loans there were given were toxic; in fact, delinquency rates were many times normal for prime borrowers as…[READ MORE]

The current housing recovery is not supported by economic fundamentals, but manipulative price supports will likely hold until fundamentals improve. The word recovery implies improvement, but so far, the improvement is limited to price. Shouldn’t a housing recovery show improvement in multiple areas, not just price? A real housing recovery would be characterized by resurging new home construction and steady gains in sales and prices commensurate with strong job growth and rising incomes. The activity currently characterized as recovery lacks these characteristics. To this, lenders and underwater homeowners undoubtedly say, "so what?" As long as house prices go up, lenders and loanowners get out from under their bad bubble-era loans; they care about nothing else. Unfortunately, this so-called recovery hurts new buyers,…[READ MORE]

Early reports are that OC housing demand is picking up early. Is this an anomaly caused by low mortgage rates or the beginning of a new sustained rally? The Orange County housing market, like other Coastal California housing markets, is subject to extreme price volatility and sudden changes in the delicate balance between buyers and sellers. The chronic shortage of available housing causes most of the problems. In late 2007, the credit crunch caused buyer demand to evaporate, and by early 2008, foreclosures flooded the MLS with supply creating a deep buyer's market. In 2009 the with stimulus from tax credits, the market changed again, and sellers found plenty of eager buyers to absorb whatever was available. When the tax…[READ MORE]

Retiring baby boomers helped lower the labor participation rate, and with fewer workers, housing demand is far less than it should be. During the housing bubble, many astute observers of the market outlined the various reasons housing was going to crash: mortgage resets, delinquencies and foreclosures, and an economic contraction caused by the collapse of mortgage equity withdrawal spending. While these obvious problems came to the forefront, a less obvious housing headwind went unnoticed, and now this headwind holds the market down: retiring baby boomers. Ordinarily when someone retires, a new worker is hired to take their place. Similar to a move up market, a retiring senior often vacates a high-level position in an organization, and hiring a replacement causes…[READ MORE]

Every asset is salable at a price. Adjusting to a market without government guarantees has a cost, but 30-year mortgages would still exist. Most people recognize the GSEs should be eliminated because their implied government backing is now explicit. These entities are not private entities, although many private investors would like them to be so they could profit off the government guarantee. Whenever people start discussing how to reform or terminate the GSEs, invariably someone will try to scare everyone by claiming US housing finance will cease to function, the housing market will crash, or some other nonsensical doomsday scenario will come to pass. I suspect the current round of fear mongering over GSE reform comes from GSE investors who…[READ MORE]

NAr revises previously reported data by 25% to 30% but claims their analysis based on faulty data was still good. They have no shame. I write a monthly housing market report each month, so I understand the need to provide timely and accurate data and reporting. It's a big task, and it requires attention to detail, but beyond that, reporting data accurately requires the desire to do so, something the NAr completely lacks. The National Association of realtors is dedicated to advancing the interests of listing agents who dominate the organization. Their primary focus is to generate real estate sales and commissions that provide income for its members. realtors don't care if the data their organization publishes is accurate; their…[READ MORE]

Progressives like Keynesian monetary policy and inflation in general because it's a stealth tax on the rich, Conservatives oppose it for the same reason. An acquaintance of mine challenged me to read Paul Krugman's blog for a few weeks; in exchange he would read Ayn Rand's Atlas Shrugged. As I like exposing myself to other points of view, I started reading Krugman's work. As an objective reader searching for good data and analysis, I appreciate Paul Krugman's wonkish posts, but his over-the-top partisanship, juvenile name-calling, and extreme arrogance make his writings a turn off to anyone who's not a partisan Democrat. I find myself selectively skimming past the partisan bullshit searching for kernels of truth. There’s Something About Money (Implicitly…[READ MORE]

Borrowers can save money in the short term with ARMs, but these loans carry significant risks, particularly when mortgage rates begin to rise again. If someone buys in a cashflow property with an 8% yield, it's an investment with a fairly predictable return. The soundness of the investment springs from it's boring predictability, not from the more exciting caprice of resale price or speculation. Cashflow investments are wise, whereas speculative investments are lucky. During the housing bubble, many people made a great deal of money because they had the good fortune to buy right before a financial mania took hold. Most participants thought they were savvy investors, but in reality, they were just lucky: they bought the right asset at…[READ MORE]

High foreclosure rates are caused by many factors, but by far the largest is a high loan-to-value ratio because it limits the borrowers options in default. Defaults are loan disease. There are many causes of the disease, from unemployment to loss of market value, but there is only one symptom that lenders care about — defaults. Patients in good health cure from disease more often than those in poor health. Borrowers with equity cure at better rates than those who are underwater or facing a rental savings enticement, and many who see better futures in different circumstances will walk away from the debts and succumb to the loan disease. In borrower's terms, the cure for loan disease is delinquency; unfortunately,…[READ MORE]

The FHA is lobbying the Justice Department on behalf of lenders who want to make bad loans with impunity. At the most basic level, lenders, realtors, and borrowers inflated a housing bubble because they got everything they asked for. From 2004 to 2006, there were no barriers whatsoever to complete real estate transactions as inventory was abundant, prices were financeable, and buyers were motivated. It was the best of all possible real estate markets. Right now everyone who wants to see more transactions at higher prices is complaining about stringent lending standards. In their minds if qualifications were looser, more people would qualify for home loans, and they would make more money. They would be quite content to enjoy the…[READ MORE]

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