Archive for April, 2016

FHA insured mortgages are assumable, meaning a borrower can transfer the debt to a different borrower rather than paying off the old debt, a useful feature in a rising mortgage rate environment. Over the last 35 years, mortgage interest rates have fallen steadily, so very few buyers active in the housing market today have ever experienced a rising mortgage interest-rate environment. When rates steadily fall, people typically refinance and terminate their old mortgage in favor of a new one with better terms. Most people expect rates to rise from our record lows, and when rates rise, people typically don't refinance because they want to keep their low mortgage interest-rate mortgage. In a rising mortgage rate environment, people need to use…[READ MORE]

Principal reduction rewards those who deserve help the least at a very high cost paid by those who obtain no benefit at all. Principal reduction transfers wealth from one party to another. For every underwater borrower who ostensibly needs principal reduction, there's an investor who holds that loan as an asset; for the borrower to gain, the investor must lose. While few may decry the confiscation of wealth from the one-percenters, most of these loans are held by pension funds for ordinary Americans, and most of those are backed by government loan guarantees, so any widespread principal reduction program would be paid for by everyone, not merely a demonized select few. Further, costly principal reductions fail to benefit many people…[READ MORE]

Everyone who buys a new home believes the neighborhood is perfect, and after they move in, any additional residents ruin the neighborhood with more traffic congestion. None of the new residents notice the glaring hypocrisy. Whenever a family buys a new house, the builder constructed that house only because no local opposition group was strong enough to prevent its construction; however, once new homeowners move in, many of them immediately adopt the belief that traffic congestion is out of control and any new development will ruin the character of their neighborhood, so these nimbys band together to prevent others from obtaining the same benefit they enjoy. Through willful ignorance, these new homeowners fail to comprehend the hypocrisy of this attitude…[READ MORE]

Lenders utilize FICO scores to evaluate the risk that a borrower will repay the debt as agreed. The lower the score, the higher the risk, so lenders charge higher rates for lower FICO score borrowers. The availability of credit cycles from periods of tight underwriting standards to periods of lax standards. Credit-fueled markets like real estate are most stable when credit is tight because very few borrowers default. 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 the borrower fails to pay. It would seem obvious and intuitive that lenders would always be focused on those things, but history shows that when times are…[READ MORE]

Homebuilders won't build what they can't sell, and household formation isn't so robust that builders must provide more to keep pace with demand. Since 2012 the financial media chronicled the reflation of the old housing bubble but portrayed it falsely as a robust recovery based on strong fundamentals. Ordinarily, when prices rally in the market for any commodity, good, or service, the rally originates from resurgent demand that outstrips the available supply, and as a result, sellers and suppliers produce more to meet demand. Since 2012 when house prices bottomed, none of the usual signs of strong demand were present. For example, consider that since the rally began, the housing market witnessed the following: 20-year lows in home ownership 6-year…[READ MORE]

IRVINE, Calif., January 2, 2016 – OC Housing News San Bernardino County Housing Market Report: January 2016 Historically, properties in this market sell at a 25.7% discount. Today's discount is 32.2%. This market is 6.6% undervalued. Median home price is $280,200 with a rental parity value of $406,600. This market's discount is $126,400. Monthly payment affordability has been worsening over the last 1 month(s). Momentum suggests unchanging affordability. Resale prices on a $/SF basis increased from $184/SF to $184/SF. Resale prices have been rising for 1 month(s). Over the last 12 months, resale prices rose 7.0% indicating a longer term upward price trend. Median rental rates declined $23 last month from $1,845 to $1,822. The current capitalization rate (rent/price) is…[READ MORE]

In its simplest form, a personal Ponzi scheme is borrowing money to pay debt service: acquiring new debt to pay old debt. It's a path to disaster. What is a personal Ponzi scheme? Aren't Ponzi schemes the advanced financial management crime of sophisticated money managers like Bernie Madoff? Not really. A Ponzi Scheme is any investment where the returns come not from the investment but from the capital contributions of new investors. If you change the terms slightly, a Ponzi Scheme is also any debt where the payment of debt comes not from wage income but from borrowed money from new lenders. In that respect, personal Ponzi schemes are easy to begin and grow. Anyone can borrow money to pay debt,…[READ MORE]

By reducing local regulatory hurdles to new development, and by providing subsidies to low-income Americans, the free market will provide more housing that will drive down costs for everyone. Housing costs too much in the United States because we don't provide enough housing to meet local demand, elevating both rents and resale home prices relative to local incomes. This problem is particularly acute in California where Potential homebuyers can’t save for down payments with high rents, trapping them in low-quality rental housing for a lifetime. Just as lenders used restricted supply to reflate the housing bubble, a lack of supply has inflated California house prices since the mid 1970s. Ordinarily, if house prices were pushed up above the cost of…[READ MORE]

The tiny house movement is the extreme of housing and possession austerity. Would anyone with the means to live with more chose to live that way? When builders and developers create new projects, they generally produce a variety of floorplans to meet a market niche where they can reasonably expect to sell their inventory in a short period of time. In a typical residential subdivision, condos will range from 900-1,600 square feet, and detached homes can range from about 1,600 square feet all the way up to the monster McMansions 4,000 square feet or larger. In higher density projects, small studio apartments as little as 450 square feet are sometimes offered, but rarely do builders and developers make product any…[READ MORE]

Only high wage earners save on taxes due to the home mortgage interest deduction, and the benefit is lost due to higher house prices paid be everyone utilizing this tax subsidy. Does the home mortgage interest deduction serve any useful purpose? Usually, when the government subsidizes something, it ostensibly serves a greater public good, but if there was ever a greater good served by the home mortgage interest deduction (a debatable claim), this benefit has long since vanished. As it stands today, the deduction rewards a small segment of high wage earners (see article below). Further, those who gain from the deduction spend this savings on higher mortgage payments to pay for houses made more expensive by others utilizing this…[READ MORE]

In Memoriam: Tony Bliss 1966-2012