What is Equity? In simple accounting terms, equity is the difference between how much something is worth and how much money is owed on it (Equity = Assets – Liabilities.) People who purchase real estate use the phrase “building equity” to describe the overall increase in equity over time. However, it is important to look at the factors which either create or destroy equity to see how market conditions and financing terms impact this all-important feature of real estate.   For purposes of illustration, equity can be broken down into several component parts: Initial Equity, Financing Equity, Inflation Equity, and Speculative Equity. Initial Equity is the amount of money a purchaser puts down to acquire the property. Financing Equity is…[READ MORE]

Speculation or Investment? Real estate is viewed by many people as a good investment. Realtors often use this idea as part of their sales pitch. As was described in detail in the post What is a Bubble?, this view is fallacious and it is one of the beliefs responsible for creating an asset price bubble. To understand why houses are not a good investment, one needs to understand the difference between investment and speculation. An investment is an asset purchased to obtain a predictable and consistent cashflow. This would include things such as bonds and rental properties or even cash in a savings account. The value of the asset is based on the cashflow, and this value can be determined…[READ MORE]

How Much a House Really Costs A useful way to look at the total cost of housing is to evaluate the monthly cost of ownership. An ownership cost is any expenditure required for the possession of property. A working definition is important because there are many hidden or forgotten costs people overlook. These costs are borne by owners and not by renters. There are 7 costs to owning a house. Although some of these costs are not paid on a monthly basis, they can be evaluated on a monthly basis with simple math. These costs are: 1.Mortgage Payment 2.Property Taxes 3.Homeowners Insurance 4.Private Mortgage Insurance 5.Special Taxes and Levies 6.Homeowners Association Dues or Fees 7.Maintenance and Replacement Reserves Mortgage Payment…[READ MORE]

Perhaps the hardest part of the housing bubble was not taking part in the rally. There was pressure from everyone and the lenders were giving away money. It was very difficult to make a conscious choice not to participate, particularly when people want to own. I felt these desires; I wanted to own again. My intellect and my emotions were in conflict. Now that the bubble is bursting and prices are coming down, I see the light at the end of the tunnel, but it is still difficult to wait. Like Archie Bunker said, "Patience is a virgin." I will only buy once at the bottom, and I want the time to be right. For those who participated in the…[READ MORE]

When I started writing for this blog, I wrote a series of posts culminating in Predictions for the Irvine Housing Market published on March 11, 2007. It seems only fitting to take this opportunity to take a look ahead at 2008 and make some predictions for 2008 based on the events we have witnessed in 2007. The first stages of a decline are are always slow to register on the median home price because the low end of the market collapses first leaving only the more desirable, high-end property transactions in the market. We have documented on this blog numerous individual properties sporting 15% to 20% declines, and housingtracker.net has documented a drop in asking prices in Orange County from…[READ MORE]

In an earlier post, How Sub-Prime Lending Created the Housing Bubble, I gave a brief description of the impact of adding a large number of new buyers to the market. However, the title is somewhat misleading because it does not fully explain how the bubble was inflated. In this post, I hope to provide a more detailed explanation of what factors and conditions combined to drive prices so high. The Great Real Estate Bubble was caused by 4 interrelated factors: Separation of origination, servicing, and portfolio holding in the lending industry. Innovation in structured finance and the expansion of the secondary mortgage market. The lowering of lending standards and the growth of subprime lending. Lower FED funds rates as a…[READ MORE]

When the market turned up in the late 1990's the balance of power in the market shifted. During the last decline, the buyers had an advantage. During the bubble the advantage went to the sellers. The seller's market went on for so long and became so feverish that people have forgotten (or may never have known) what it was like to see buyers in control of the action. The purpose of this post is to re-educate buyers on how to behave in a buyer's market. Buyers have the Power As a buyer, you must remember you are the one in control. You are the scarce commodity in the marketplace. The seller is one of many for you to chose from,…[READ MORE]

Like the change of seasons, real estate markets move in cycles. During the last cycle, the real estate market peaked in 1990, and the market bottomed in 1997. The primary reason the bottom formed was because incomes and rents finally caught up to housing prices. They say a picture is worth a thousand words.These images are both from 1997. The first appears to be from a condo development in Orange. The actual pricing is not important: the relationship between the cost of a rental and the cost of ownership is very important. This is why the bottom formed. The next time someone tries to convince you the cost of ownership is near the cost of rental, remember the simple calculation…[READ MORE]

Do you remember in Houses Should Not Be a Commodity, there was a long discussion on the stages of grief as they relate to the housing market? The market is shifting from denial into bargaining. Jim Cramer has made news lately with his antics. The links below are to videos where he has demonstrated for us the following progression as it relates to the chart above: Denial -- On housing, November 2006 Anger -- He is always angry. His show is Mad Money... Depression and Detachment -- Plow under the Inland Empire Dialogue and Bargaining -- Lobbying for a Rate Cut When you think about it, isn't the whole discussion about a bail-out bargaining? We all know the government is…[READ MORE]

The valuation of land used for residential housing is mysterious and often misunderstood. The purpose of this post is to explain how residential land is valued. Once the forces governing land value are understood, it becomes obvious why the Irvine Company is so protective of house prices in Irvine, and why the Irvine Company wants to maximize salable density on its land holdings. The equations which govern the valuations of large parcels are very similar those which determine the value of an individual lot; therefore, to better understand the valuation of large parcels, one should fully understand how to evaluate an individual lot. Individual Lots The market value of a individual lot is equal to the revenue it could generate…[READ MORE]

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