Due to a high rate of amateur participation and a lack of accurate information, housing markets are among the least efficient in the financial world. The efficient markets theory postulates that speculative asset prices always incorporate the best information about fundamental values. Adherents to this theory believe that prices change only because new information enters the market and investors act in an appropriate, rational manner with regards to this information. It's a gratifying theory that portrays investors as wise and rational. Unfortunately, it has no basis in reality. Efficient markets theory dominated academic fields in the early 1970s. Academics attempted to tether asset prices to fundamentals through the common-sense notion that people would invest their money rationally. This theory encapsulates…[READ MORE]

If mortgage rates keep rising, home sales will be lower in 2017 than in 2016, prompting talk of another housing recession. Remember all those stories assuring us that higher mortgage rates wouldn't cause any problems with housing? Well, today's featured article is the story where they debunk years of wishful thinking and expose the masses to basic math. It was a long time coming, but I'm glad the financial media is finally breaking the bad news. This isn't rocket science. It doesn't take a supercomputer or a math savant to calculate how much rising mortgage rates will hurt the market. And it doesn't take a genius or a housing market guru to decipher how this will impact housing. For every…[READ MORE]

Illegal immigration advocates attempt scaring policymakers with the specter of a housing crisis caused by mass deportations. Advocates for dubious political policies often resort to scare tactics in hopes that policymakers will favor their policy prescriptions. For example, the advocates of fiscal austerity trumpeted the fear of rampant inflation while most economists stated increased stimulus would achieve a more positive effect. The austerity advocates resorted to emotional appeals and dubious reasoning that later proved wrong. Advocates of strict marijuana laws alarmed politicians with the dangers of legalization, but as more states decriminalized and finally legalized marijuana, very few negative side effects emerged. The latest advocates to resort to dubious arguments are those opposed to deporting illegal immigrants. It's difficult to argue in…[READ MORE]

Coastal housing markets face headwinds while inland markets benefit from Trump's economic policies. Coastal housing markets had a great run over the last 40 years. Land use restrictions created a shortage, falling mortgage rates inflated prices, wage growth created demand, and trade and tax policies favored upward distribution of income and wealth. The combination of all these factors caused residential real estate values to appreciate much more quickly on America's coasts than it did in the heartland. This may be about to change. Land Use Regulatory Relief Donald Trump stated during the campaign that he wanted to roll back land use regulations that restricted growth. I doubt he progresses much on this front, but he could initiate lawsuits that could negate…[READ MORE]

The Fair Housing Act may be used to strike down land development restrictions that cause a disparate impact on minorities, which California's process clearly does. Fact: California house prices are high relative to income due to a shortage of available homes. Fact: California Nimbys lobby local officials to prevent housing from being built to alleviate the shortage. Fact: Calfornia Nimbys will not change because they personally benefit from reduced traffic congestion and higher home prices. What can we deduce from these facts? First, education will make no difference. Some activists try to convince Nimbys to embrace more homes in their neighborhoods. It's a futile effort. I pointed out that Nimbys are hypocrites. I demonstrated that Nimbys don't love their own children. Most people…[READ MORE]

If California wanted to lower house prices, it could tax foreign investment and tax homes left vacant year-round. The primary reason house prices are so high in California is a lack of supply. However, a secondary reason is the influx of foreign investors, many of whom don't live in the properties or rent them out. These foreign purchases drive up prices for locals, and if they don't rent the property, the property disappears from the local housing stock entirely, making our shortage even worse. Buying and maintaining an empty box may be a sound investment decision for foreign investors; however, it's a negative for the economy because local residents must pay more for housing, which reduces the disposable income they…[READ MORE]

Orange County is no longer an LA County bedroom community. High-density condos overtake suburban detached homes as the dominant housing type. I recently noted that The FHA loan limit dooms McMansions in California. The FHA loan limit creates a down payment barrier that first-time homebuyers simply can't overcome. The down payment barrier forces residents to take one of three actions: (1) they move inland to find an affordable single-family home, (2) they substitute to a smaller attached home near work, or (3) they rent. For most OC residents, moving inland to find affordable housing means leaving Orange County entirely. Those who continue working here endure crushing commutes. So far, the Millennial generation opts to rent. Burdened by excessive student loan debt, restrained…[READ MORE]

Whatever legislation Congressional Republicans try to pass will be "talked to death" by Democrats in the Senate. No one knows what Donald Trump will do as President, but since he is an egocentric dealmaker, it's likely that he will want to sign legislation -- even bad legislation -- if he can attach his name to something. While he wields the power to influence Congress through the threat of a veto, he isn't an ideologue who will likely use his veto much. If Congress passes it, he will probably sign it. Establishment Republicans see this as an opportunity. They know Hillary Clinton would never have signed anything they passed, so while the Republican establishment may not like Trump, they see him as a…[READ MORE]

McMansions are no longer affordable or easily financeable in California, so builders will likely build fewer of them. Urban planners and environmentalists advocate high-density development near transit hubs. They entreat us to screeds outlining the demerits of McMansions, and extoll the virtues of walking in urban cores. Unfortunately, much to their chagrin, the buying public disagrees with them. Builders provide what buyers in the market demand. Visionaries may wish demand were different, and some want to force the market to bend to their wishes, but for most of the last 70 years, the buying public demanded a detached single-family house on a large lot. This may be about to change. Buyers preferences won’t change. Despite the concerted efforts of urban…[READ MORE]

Lenders wisely stopped from granting loans to nearly 1,000,000 unqualified borrowers over the last 6 years. Many people blame the last housing bubble on lenders and subprime borrowers. Lenders abdicated their responsibility to vet their borrowers' qualifications, and not surprisingly, many unqualified borrowers entered the buyer pool and ultimately defaulted on their mortgages, leading to millions of foreclosures. The disaster was exacerbated by the proliferation of Option ARM loans that both inflated house prices and masked the problems with borrower's ability to repay with teaser rates and negatively amortizing payments. When these loans caused all borrowers (not just subprime) to implode, crashing house prices took down the economy and millions of qualified and unqualified borrowers along with it. When so…[READ MORE]

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