What they are saying about The Great Housing Bubble "The Great Housing Bubble is a fantastic resource for anyone looking to understand why home prices fell. The writing has exceptional depth and detail, and it is presented in an engaging and easy-to-understand manner. It is destined to be the standard by which other books on the subject will be measured. It is the first book written after prices peaked, and it is the first in the genre to detail the psychological factors that are arguably more important for understanding the housing bubble. There have been a number of books written while prices were rising that used measures of price relative to historic norms and sounded the alarm of an impending…[READ MORE]

What they are saying about The Great Housing Bubble "A very well-written and thoughtful analysis of what went wrong in the housing world and how we can avoid this problem in the future.  Lawrence Roberts has a great understanding of the subject and does an excellent job communicating his ideas to the reader.” Jim Randel – Best-selling author, Confessions of a Real Estate Entrepreneur What is a Bubble? A financial bubble is a temporary situation where asset prices become elevated beyond any realistic fundamental valuations because the general public believes current pricing is justified by probable future price increases. If this belief is widespread enough to cause significant numbers of people to purchase the asset at inflated prices, then prices will…[READ MORE]

What they are saying about The Great Housing Bubble "…The cover is perhaps the clearest representation of what Roberts' book really is: a clearly-communicated, often satirical, and at some points very stern, no-nonsense account of why home prices soared, fomenting the nation's housing bubble, leaving couples across the nation struggling to stay afloat on their mortgages. …In a market already flooded with books on the housing crisis, The Great Housing Bubble scores points by focusing on explanation and less on inundating a reader with the sort of heavy-handed quantitative analysis that only a few economists can love. While some figures are necessary, the book's message is never bogged down. Instead, Roberts presents multiple facets of the real estate market by…[READ MORE]

The last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people's inability to distinguish between desire and demand. Most people want a house. About 65% of Orange County residents own their homes, but probably 95% of residents wish they did. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit. True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not…[READ MORE]

Several people have asked about the accuracy of my post Predictions for the Irvine Housing Market. I have the DataQuick numbers through April of 2008, so we can take a look. First, when I first made the chart below, I did not have accurate numbers. The base number I used of $687,000 was incorrect. Using the three-month moving average of prices, the real number was $723,750. With this new, more accurate number, we can compare the projected drop with the real figures.   Well, it is even worse than I imagined. When I first suggested that Irvine's median home price might decline 12% in a single year, it was a bold prediction. Prices had never dropped that much in Irvine…[READ MORE]

We all want affordable housing. There are numerous government programs designed to provide low-cost rental and ownership properties to people in all walks of life. Lenders, builders, realtors and buyers all benefit from affordable housing because affordability means an increase in transaction volumes and more money into the pockets of those dependent on the real estate market. The difficult problem with affordable housing is how to provide it without making it unaffordable. Finance is not the answer. Most of those who worked in the mortgage business really believed the "financial innovation" meme. I have contended that the entire idea is a fallacy. At its core, the belief among financiers is that affordability products reach more customers and permit home ownership…[READ MORE]

Today, we will look at two families, the Peakers and the Troughers (gotta love those names, right?) Both families have a combined family income of $150,000 per year, and they have both saved $100,000 they can put toward a downpayment on a house. It is the Summer of 2006, and each family is looking at a $1,000,000 home. The Peakers think the property is a good deal, so they put their $100,000 down and borrow $900,000 with an adjustable-rate mortgage starting at 6% with a 10-year fixed period followed by a 20 year fully amortized payment at a new interest rate. Their monthly payments are $4,500 a month, but after all of the adjustments for taxes and fees and the…[READ MORE]

Investment Value of Residential Real Estate The United States Department of Labor Bureau of Labor Statistics measures the Rent of primary residence (rent) and Owners' equivalent rent of primary residence (rental equivalence). They make this distinction because a house has both a consumptive purpose and an investment purpose. The consumptive value is measured by rent or rental equivalence. There is legitimate financial reason pay more than the rental equivalence price. The normal rate of house appreciation – not the unsustainable kind witnessed during the Great Housing Bubble – can provide a return on investment. The source of this added value is the leverage of mortgage financing and the hedge against inflation obtained through a fixed-rate mortgage. The investment premium, which…[READ MORE]

Efficient Markets Theory The efficient markets theory is the idea that speculative asset prices always incorporate the best information about fundamental values and that prices change only because new information enters the market and investors act in an appropriate, rational manner with regards to this information(i). This idea dominated academic fields in the early 1970s. Efficient markets theory is an elegant attempt to tether asset prices to fundamentals through the common-sense notion that people would not behave in irrational ways with their money in financial markets. This theory is encapsulated by the “value investment” paradigm prevalent in much of the investment community. Efficient Markets Theory   In an efficient market, prices are tethered to perceived fundamental valuations. If prices fall…[READ MORE]

Bailouts and False Hopes One of the more interesting phenomenon observed during the bubble was the perpetuation of denial with rumors of homeowner bailouts. Many homeowners held out hope that if they could just keep current on their mortgage long enough, the government would come to their rescue in the form of a mandated bailout program. Part of this fantasy was not just that people could keep their homes, but that they could keep living their lifestyle as they did during the bubble. What few seemed to realize was any government bailout program would be designed to benefit the lenders by keeping borrowers in a perpetual state of indentured servitude. With all their money going toward debt service payments, little…[READ MORE]

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