The house price crash and subsequent bubble reflation was heavily influenced by bank policy. Most people assume house prices are the result of market forces determined by supply and demand from individual homebuyers and home sellers. The reality is that policies at the major banks, particularly policies related to delinquency and foreclosure, often become so important that they overshadow the activities of everyone else. Back in September of 2010, I first observed that How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate. Today I want to revisit that post and update it based on what we learned over the last five years. The insane lending practices of the housing bubble abruptly terminated in a credit crunch in…[READ MORE]

Lenders tighten the terms of loan modifications as prices near the peak and lenders have less risk of loss in foreclosure. When a borrower secures a loan to purchase a house, they negotiate with lenders over the cost of borrowing (interest rate). In the wake of the new mortgage regulations, loan terms are generally uniform among lenders, and the cornerstone of residential real estate lending is the mortgage agreement, the document that the borrower signs that pledges the house as collateral if they stop making payments according to the Promissory Note. Ostensibly, when the promissory note was signed, loanowners and lenders agreed to the price of money (interest rate and payment) and terms. Unfortunately, during the housing bubble, the terms…[READ MORE]

Historically, properties in this market sell at a 25.7% discount. Today's discount is 34.9%. This market is 9.2% undervalued. Median home price is $264,200 with a rental parity value of $403,100. This market's discount is $138,900. Monthly payment affordability has been improving over the last 9 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis increased from $173/SF to $173/SF. Resale prices have been rising for 3 month(s). Over the last 12 months, resale prices rose 3.1% indicating a longer term upward price trend. Median rental rates increased $16 last month from $1,764 to $1,780. The current capitalization rate (rent/price) is 6.5%. Rents have been rising for 12 month(s). Price momentum signals rising rents over the next three…[READ MORE]

As more families eschew homeownership in favor of renting, the cost of renting residential real estate continues to rise. In the depths of the Great Recession, incomes dropped and many people lost their jobs and many others barely hung on. Ordinarily, such circumstances would cause rents to weaken as fewer workers with less money bid on the available rental housing stock, forcing landlords to compete with each other for tenants. Unfortunately, that isn’t what happened. When the housing bust began, lenders foreclosed on the subprime borrowers whose loans blew up first. This displaced a great many people who were forced to search for rentals. In an efficient market, each new renter would have matched by a new rental unit as…[READ MORE]

Stable house prices with low volatility isn't very exciting, but it's the best thing possible for residential real estate. The norm in California housing over the last 40 years has been extreme volatility. We had one stretch in the mid 1990s when prices were closely tethered to rent, but other than that house prices were either in a bubble or over-correcting to the downside. For the most part, the rest of the US did not participate in the wild price swings characteristic of California, but starting in 2003, financial innovation in housing finance brewed up a toxic concoction of unstable mortgage products that inflated a massive housing bubble and a deep over-correcting crash. Prior to the housing bubble, the normal…[READ MORE]

Is the crisis in housing due to toxic mortgage products or people refusing to pay their mortgage obligations? Have you noticed that eight years after housing collapsed and three years after housing bottomed, people still refer to housing as being in a crisis? As long as millions of delinquent mortgage squatters refuse to pay their mortgages, and as long as lenders refuse to foreclose on the deadbeats, then housing is still in crisis. 362,000 American delinquent mortgage squatters refuse loan modifications, so obviously we can't modify our way out of the problem. Further, bailouts like loan modifications by their nature create moral hazard by preventing an individual or family from enduring the consequences of their bad decisions. It simply is…[READ MORE]

The "months of supply" indicator has little or no predictive power and often gives a false impression of the strength or weakness of the real estate market. The "months of supply" is a measure of market absorption, providing a reading of how fast homes are selling relative to the supply of inventory currently available. For example, if a market has 50 homes available for sale and sells 10 of them, it would take 5 months to sell the remainder if no additional inventory came to market. The "months of supply" is supposed to be indicative of how aggressive buyers are relative to sellers. In theory, a market with a low months of supply would have greater buyer demand than one…[READ MORE]

Subsidized credit is the process of taking credit from worthy borrowers and providing it to unworthy borrowers. I always find it interesting when writings from many years ago resonate through the ages as if they were written yesterday, like the writings of Frédéric Bastiat, a 19th century French economist. Plato’s Republic has a similar resonance. Plato’s critique of the shortcomings of democracy are still just as valid today as they were 2,500 years ago when he wrote it. Usually, I feature recent news articles less than a few weeks old. Today, I am featuring an essay written more than 160 years ago. The fact that it resonates so well today shows just how farsighted his vision was. Our obscure French…[READ MORE]

Historically, properties in this market sell at a 18.5% discount. Today's discount is 24.1%. This market is 5.6% undervalued. Median home price is $296,600 with a rental parity value of $385,400. This market's discount is $88,800. Monthly payment affordability has been worsening over the last 1 month(s). Momentum suggests unchanging affordability. Resale prices on a $/SF basis increased from $168/SF to $169/SF. Resale prices have been rising for 3 month(s). Over the last 12 months, resale prices rose 3.6% indicating a longer term upward price trend. Median rental rates increased $2 last month from $1,700 to $1,702. The current capitalization rate (rent/price) is 5.5%. Rents have been rising for 12 month(s). Price momentum signals rising rents over the next three…[READ MORE]

Negative cashflow investments are generally a losers game. The only path to success is for rapid appreciation that often fails to materialize. Real estate investors during the housing bubble put their money to work on faith. There is no logical reason to believe house prices only go up. In fact, there have been two prior periods in California’s recent history where house prices did, in fact, go down. However, with kool aid intoxication, otherwise known as faith-based investing, reality is ignored. If you truly believe house prices only go up, no price is too high, and you don’t have to worry about a backup plan if house prices don’t go up. There is only one viable backup plan when a…[READ MORE]