Mortgage affordability products produce short term results, but they are unstable, and widespread proliferation leads to millions of foreclosures. Affordability products in the 00s were the financing panacea everyone in real estate hoped for. Widespread use of affordability products ushered in a new era of high home ownership rates, rapidly rising prices, and economic prosperity through "liberating" home equity. Everyone got rich: the agents, the brokers, the bankers, the buyers, the sellers, and everyone nearby who enjoyed a prosperous economy driven by the profligate behavior of their neighbors. It was the best of times. Unfortunately, the "innovations" of the last housing bubble proved to be costly failures. These affordability products contained Ponzi finance alternatives such as negative amortization that allowed…[READ MORE]

Real estate agents are among the least ethical business practitioners. They desperately need a culture of conformance to a code of ethics. The law defines what a society deems as minimally appropriate conduct. People who violate the law (and get caught) pay penalties or endure incarceration for their transgressions. However, within the law people may engage in a wide range of behaviors that many others find morally repugnant. The moral compass of each individual determines whether or not they behave in ways others find objectionable. Calibrating this internal moral compass is the world of ethics. Religion is a widespread source of ethical precepts, and many people look to their religious teachings when determining their behavior in the business world. Unfortunately,…[READ MORE]

When construction or renovation costs exceed the resale value, a house literally is worth less than zero. In Coastal California, the sticks-and-bricks construction cost is only a small portion of a house's resale price. The rest is residual land value. In Coastal California it's common to see small houses in beach towns demolished and replaced with a large mansion. In the rest of the country, residual land values are usually too low to justify such activity. With far fewer restrictions on land use in most of the US, land values are much lower. The construction cost of a new house is generally about 80% of the final resale value of a home, leaving 20% for the cost of a finished…[READ MORE]

 The US taxpayer is directly responsible for any losses on loans to low-quality borrowers since 2008. Lenders prefer to loan money to people with ample reserves, strong income, and a proven track record of repaying debts. Borrowers that lack any of those components default at higher rates, so lenders charge them higher interest rates to compensate for the increased costs and potential losses. Competition between lenders prompts them to reach out to fringe borrowers that may be lacking in certain desirable characteristics, but lenders rarely reach too far for too long because shaky borrowers are the first to default in an economic downturn. However in the mid 1990s lenders embarked on a long-term foray into loaning money to high-risk borrowers:…[READ MORE]

Sometimes people make large sacrifices to obtain a home of their dreams; however, sometimes they aren't willing to sacrifice at all. Whenever people buy a home, they make tradeoffs. Do they want to live near the beach in a small condo, or do they want a McMansion and a lengthy commute? In a larger sense, most people also chose whether they want more house or more disposable income. In California, most people feel compelled to sacrifice disposable income to obtain better housing because the alternative is often quite Spartan. The chronic shortage of housing inventory inflates California house prices to very high levels and forces most people to settle for far less than what they would enjoy anywhere else. Contrary…[READ MORE]

By offering private mortgages with only 1% down, Quicken Loans encourages speculators to gamble with other people's money. If most people were to go to Las Vegas and gamble with $1,000 of their own money, they would be cautious; if they lost, they would feel the pain of that loss, and the fear of the consequences would prevent them from taking crazy risks. But instead imagine how their behavior would change if someone else gave them $990, and they only had to put up $10. Ostensibly the $990 would be a loan, but if the gambling borrower is unable to repay, they would simply walk away and default on the loan. Further, those without the capacity to repay would know…[READ MORE]

San Bernardino County housing market report: June 2016 Historically, properties in this market sell at a 25.7% discount. Today's discount is 36.0%. This market is 10.3% undervalued. Median home price is $286,300 with a rental parity value of $451,000. This market's discount is $164,700. Monthly payment affordability has been improving over the last 3 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis increased from $188/SF to $190/SF. Resale prices have been rising for 4 month(s). Over the last 12 months, resale prices rose 8.9% indicating a longer term upward price trend. Median rental rates increased $27 last month from $1,921 to $1,948. The current capitalization rate (rent/price) is 6.5%. Rents have been rising for 12 month(s). Price…[READ MORE]

Finished lot prices tightly tether to new home prices. Both are elevated above historic norms due to low mortgage rates. When mortgage rates first dropped from 6.5% in 2006 to 4.5% in 2009, I warned people that the interest rate stimulus was artificial, and while low rates inflate prices, they are a temporary stimulus with potentially painful withdrawal symptoms as the stimulus is tapered. Since conspiring bankers successfully manipulated the housing market in order to increase the collateral value backing their bad loans, the powers-that-be feel they have no choice but to stimulate housing even if that stimulus induces painful side effects. For the most part, the manipulations of the housing market worked since 2012. By denying short sales, modifying…[READ MORE]

While foreclosures are emotionally painful, in the aftermath a new family moves in to the foreclosed home, and the foreclosed family loses an onerous debt obligation. It's a win-win. It's sad when someone is forcibly evicted from their family home. People develop strong emotional attachments to real property, so many people feel compassion and empathy for those enduring such a difficult loss. Since nobody wants to feel the pain of loss, many people suggest we should stop foreclosures. (See: Should evictions be banned to stop hurting people’s feelings?) When people rally to stop foreclosure, they forget there is a next chapter to the story. What happens to the family and the house after the foreclosure? First, the house doesn't sit…[READ MORE]

Eventually Millennials will buy houses, bubble-era buyers won't be underwater, and the housing market will finally recover. Since early 2012 when housing prices stopped going down, I characterized the price rally as a reflation of the old housing bubble rather than a price recovery. IMO, the crash was the price recovery because the prices that preceded the crash were a bubble with no tether to fundamental values. The price crash restored market prices to values supportable by income and rent. However, most people refuse to accept this reality, particularly deeply underwater homeowners who dismiss the idea that they erred when buying during the bubble. Due to psychological anchoring, most homeowners cling to the illusion that peak housing bubble prices were…[READ MORE]

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