Archive for October, 2012

For the last several years I have written in favor of low prices as the best option for putting the country back of firm economic footing. The argument is simple: Low prices make for a lower cost of ownership which translates to more disposable income for homeowners to use to purchase goods and services to drive the broader economy. Disposable monthly income is a superior economic stimulus because it's sustainable. The savings each month are consistent and reliable. Contrast that to HELOC money that comes in a lump sum and once spent requires larger payments which reduces disposable income. Lower monthly cost of ownership is a sustainable source of disposable income to stimulate an economy. HELOC money is not. So…[READ MORE]

Since the housing bust began in 2007, housing analysts focused on lender activity as the best indicator of future housing supply and the direction of future housing prices. The reasoning for this is simple: lenders control the housing market. Prior to the housing bust, the housing market was a collection of individual homeowners unrestrained by their mortgage obligations. Once prices began to fall, many would-be sellers submerged beneath their debts and required lender approval for a sale. The short sale was born. Many others defaulted on their loans, and lenders foreclosed on the delinquent borrowers until lenders became overwhelmed with REO inventory. Between the REOs that the banks own and the short sales that they must approve, the market changed…[READ MORE]

Each month before I prepare the OCHN market newsletter, I think about ways I can improve it and deliver more value to users. This month, I added a new metric to the report that I believe provides a more intuitive way to look at the current state of the market. I applied the mortgage interest rate to the median home price to backward calculate the monthly cost of ownership for the market. I like this approach because it returns a number immediately comparable to rent. When I first thought about this indicator, I didn't think it would reveal anything of value. It's basically the inverse of the rental parity calculation I already perform. I was wrong. When I plotted out…[READ MORE]

The availability of credit cycles from periods of tight underwriting standards to periods of lax standards. When credit is tight is when credit-fueled markets like real estate are most stable. In a tight credit environment, lenders are very focused on ensuring the borrower can repay the loan and the lender can recover their capital if they don't. It would seem obvious and intuitive that lenders would always be focused on those things, but competition tends to drive standards down as lenders take more risk.  In the early stages of the credit cycle, lenders begin extending credit to less creditworthy borrowers. This adds to the borrower pool, and in the case of real estate, it adds to the buyer pool. This…[READ MORE]

The law concerning foreclosures in California is set to change on January 1, 2012. Many are concerned this will complicate the foreclosure process and grind the foreclosure machinery to a halt. So far the banks have taken little notice. Some speculated there would be a last-minute push to get foreclosures done before the change took effect. That isn't happening. The banks are in no hurry to process their backlog of foreclosures, and if the changes in the law complicate the process for them, they will grin and bear it. Calif. hands trial lawyers 'nuclear weapon' to use against mortgage industry: legal expert By Kerri Ann Panchuk -- October 5, 2012 • 8:42am The Homeowner Bill of Rights launched in California…[READ MORE]

Assume for a moment that house prices have bottomed. This still isn't certain, but it's looking more and more each day like the bottom is in. The final piece to the puzzle that convinced me house prices weren't going to reverse course came when Ben Bernanke announced the federal reserve was going to purchase $40B per month in mortgage-backed securities for as long as it takes to make housing and employment to come back. Further, to reiterate his commitment to the policy he stated, "We're not going to rush to begin to tighten policy. We're going to give it some time to make sure the recovery is well established." You can't fight the Fed. Basically, the federal reserve is going…[READ MORE]

Each month I publish the OCHN Market Newsletter. It provides the most detailed and accurate view of the housing market available without the realtor spin. I believe potential homebuyers should have the best information possible to make reasonable and rational decisions regarding the purchase of a home. Despite how bearish I have been, my strictly mechanical reports have been issuing strong buy signals since last fall. Now that house prices have turned positive, rents are still going up, interest rates are trending down, affordability is at record highs, and houses are undervalued by historic norms, the report is very bullish. And as I noted recently, I am turning bullish too. Notice the downside overshoot in the chart below. It may…[READ MORE]

I am no longer bearish. I have been an outspoken housing bear for over five years now, but based on recent developments, I have far fewer worries about another catastrophic decline in house prices. The recent changes are as follows: Federal reserve's open-ended commitment to unlimited stimulus for as long as it takes no matter the consequences. Lending cartel's improved control of inventory liquidation. Removal of most barriers for refinancing underwater loans to aid kicking the can to spread out liquidations. These new developments when combined with some older existing policies has finally created the conditions for a manufactured bottom to form. Federal government's suspension of mark-to-market accounting allowing unlimited delinquent mortgage squatting. Federal reserve's zero percent interest rate to…[READ MORE]

The spring rally is over. Every year prices and sales volumes increase from January through August, then they decline for the remainder of the year generally hitting bottom on the last business day in December. The pattern repeats every year, and it's not new or surprising. realtors generally take advantage of this phenomenon to call the bottom every year and to stoke fears of being priced out to generate more spring and summer sales. By fall, many buyers stop looking, particularly those with families who don't want to disrupt their children by moving during the school year. Over the last five years, sales volumes have been extraordinarily low due to the collapse of the housing bubble and the resulting unemployment…[READ MORE]

When it comes to predicting future home prices, nobody really has a clue. It's very difficult to predict when the market is so heavily manipulated and the erratic decisions of a few key players can completely change the outcome. For example, the federal reserve controls the interest rate stimulus, and although they are currently saying they plan to leave interest rates low for years to come, they could change their minds. The supply of REO on the market is completely at the discretion of a cadre of banks colluding to restrict supply to drive prices higher in order to lose less money on their bad loans from the bubble. This is a cartel, and if it begins to break down,…[READ MORE]

Monthly Housing Report

In Memoriam: Tony Bliss 1966-2012