Regulatory Solutions The regulatory solution proposed herein is simple, yet far reaching. It comes in two parts, the first is to limit the amount lenders can loan to borrowers with a rather unique enforcement mechanism, and the second is to increase the penalties for borrowers who commit mortgage fraud. The following is not in legalese, but it contains the conceptual framework of potential legislation that could be enacted on the state and/or federal level. A detailed discussion of the text [Read More...]
Oct 012008
Oct 012008
Preventing the Next Housing Bubble The pain of the deflation of a housing bubble cannot be avoided by trying to keep the bubble inflated, or by trying to deflate it slowly. The only way to avoid these problems is to prevent the bubble from inflating in the first place through some form of intervention in the mortgage market. Intervention can take the form of a market-based intervention demanded by investors and ratings agencies, and it can also come about through direct [Read More...]
Oct 012008
Buying and Selling During a Decline During the bubble price rally, sellers and realtors, the agents of sellers, had everything going their way. It was easy to price and sell a house. A realtor would look at recent comparable sales, and set an asking price 5% to 10% higher and wait for multiple bids on the property–some of which would come in over asking. The quality of the property did not matter, and the techniques used to market and sell [Read More...]
Oct 012008
Price Decline Influences There are a number of factors that will influence the timing and the depth of the price decline. There are a number of psychological factors and technical factors in play. [1] These include: Smaller Debt-to-Income Ratios Increasing Interest Rates and Tightening Credit Higher Unemployment Foreclosures Decrease in Ownership Rates Government Intervention Smaller debt-to-income ratios impact the market because buyers tend to put a smaller percentage of income toward housing payments during price declines. Increasing interest rates decrease the [Read More...]
Oct 012008
Price-to-Income Ratio Since incomes and rents are closely related, evidence for the Great Housing Bubble that appears in the price-to-rent ratio also appears in the price-to-income ratio. National price-to-income ratios are quite stable. There has been a slight upward drift with the decline of interest rates since the early 1980s peak, but from the period from 1987 to 2001, this ratio remained in a tight range from 3.9 to 4.2. The increase from 4.1 to 4.5 witnessed from 2001 to 2003 can [Read More...]
Oct 012008
Future House Prices For all our wisdom and collective experience, none of us knows what the markets will do next. Like an ocean current or a raging river, a financial market charts its own course. It is fickle and feckless and flows without regard to our hopes and dreams. The ebbs and flows of financial markets are meaningful to us, but in reality they are just movements in price; nothing more. Price rallies make homeowners blissful and renters bitter, while [Read More...]
Oct 012008
Bailouts and False Hopes One of the more interesting phenomena 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 [Read More...]
Oct 012008
Psychological Stages of a Bubble Once a bubble starts to form, it will go through several identifiable stages: enthusiasm, greed, denial, fear, capitulation, and despair. Each of these stages is characterized by different speculator emotional states and different resulting behaviors. There are outside forces that also act on the market in predictable ways in each one of these stages. Most often, these outside factors serve to reinforce the market’s herd behavior and exacerbate changes in price. Precipitating Factor There is [Read More...]
Oct 012008
Bubble Market Psychology Financial markets are driven by fear and greed: two basic human emotions. Rationality and careful analysis are not responsible for, or predictive of, current or future price levels in markets exhibiting bubble pricing as the emotions of buyers and sellers takes over. [1] The psychology of speculation drives bubble markets, and because of the nature of fear and greed, most speculators are doomed to lose their money. In contrast, true investors are not subject to the emotional [Read More...]
Oct 012008
The Bubble Bursts When a bubble in a financial market pops, it does not explode in spectacular fashion like a soap bubble; it is more comparable to a breached levee which releases water slowly at first. [1] Once the financial levee is ruptured, the equity reservoir loses money at increasing rates. It washes away the imagined wealth of homeowners who bought late in the rally or used home equity lines of credit to fuel consumer spending until the reservoir is nearly empty [Read More...]
Oct 012008
The Housing Bubble Affordability Limits Affordability is a measure of people’s ability to raise money to obtain real estate. It is often represented as an index that compares the cost to finance a median house price to the percentage of the general population with the income to support this house price. For instance, in Orange County, California, in 2006, only 2.4% of the population earned enough money to afford a median priced home. When affordability drops below 50%, there is a problem [Read More...]
Oct 012008
The Housing Bubble Prices went up a large amount during the Great Housing Bubble, but what makes this price increase a bubble? To answer this question it is necessary to accurately measure price levels and review historic measures of affordability to establish these price levels are not sustainable. [1] Measuring house prices is not a simple task, and there are many methods market watchers use to evaluate market prices. These include the median, the average cost per square foot, and the [Read More...]
Oct 012008
The Credit Bubble Visualizing the Bubble With a huge influx of capital into the secondary mortgage market when the Federal Reserve lowered interest rates in 2001-2004, the industry was under tremendous pressure to deliver more loans to hungry investors seeking higher yields. This caused the already-low loan standards to be all but eliminated. All of the worst “innovations” in the lending industry occurred during this period: Negative Amortization loans, Stated-Income loans (Liar Loans,) NINJA loans (no income, no job, no assets,) 100% [Read More...]
Oct 012008
The Credit Bubble The Great Housing Bubble was not really about housing; it was about credit. Most financial bubbles are the result of an expansion of credit, and the Great Housing Bubble was no exception. Housing just happened to be the asset class into which this capital flowed. It could have been stocks or commodities just as easily, and if the government gets too aggressive in its actions to prevent a collapse in housing prices, the liquidity intended to prop up real estate [Read More...]
Oct 012008
Valuation of Lots and Raw Land The valuation of land used for residential housing is mysterious and often misunderstood. [1] The valuation of lots and raw land requires a detailed knowledge of construction and marketing costs as well as a good estimate of the sales price of the final product: a residential housing unit. In short, the value of a lot is the total revenue (sales price of the home) minus the costs of production and the necessary profit. Land [Read More...]
Oct 012008
Investment Value 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 to 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 [Read More...]
Oct 012008
What they are saying about The Great Housing Bubble “The author, Larry Roberts, is best known for his daily posts as IrvineRenter on the Irvine Housing Blog. Long before Lehman crashed, Fannie Mae was taken over, and even before home prices were dropping nationally, he was one of the few voices presenting real information on the housing bubble. The author’s background is in new housing development in Southern California. It was a good start to understanding how things worked. Supplemented [Read More...]
Oct 012008
What they are saying about The Great Housing Bubble “…the author has a background in real estate that’s far removed from the sales process, he’s able to step back and provide the sort of unemotional, macro-economic overview that seems quite atypical for a guide to investing in real estate. …Filled with 64 exhibits, 146 footnotes and a nine-page bibliography of source material, “The Great Housing Bubble” is probably not a casual read during a day at the pool or the [Read More...]
Oct 012008
What they are saying about The Great Housing Bubble “The author does an excellent job in showing how various commercial and investment banks sought to create a speculative market for home loans by the process of securitization. The main tool was collateralized debt obligations (CDO’S).The idea is purely speculative since real estate is a nonliquid durable asset. The bundling and selling of trillions of dollars worth of the subprime backed bonds that were not only highly risky, but of uncertain [Read More...]
Oct 012008
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 [Read More...]
Oct 012008
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 [Read More...]
Astute Observations