The American Dream used to symbolize the rewards from hard work and sacrifice. During the housing mania, it became associated with conspicuous consumption, sloth, immediate gratification, and entitlement. The American Dream? Many people want to immigrate to the United States so they too can have a chance at obtaining the American Dream. Can you imagine the stories that recent immigrants must have relayed to those in the “old country” when the housing boom was going on? How do you explain to someone who comes from a stable (or practically non-existent) housing finance system that doesn’t “innovate” what went on in America in 2004, 2005, and 2006? Immigrant: “In America, they will give you a house with no job and no savings.”…[READ MORE]

Since lenders will can-kick during future times of economic weakness, houses may not be affordable, bringing sales volumes down, but prices probably won't decline much. In 2004-2006, the pundits said that appreciation would moderate and resume its “normal” 5%+ yearly rates in the future. Gary Watts even assured us that “Fifteen percent is pretty much in the bag for Orange County in 2006,” he says. “It’s impossible for prices to go down this year.” It’s difficult to imagine a statement that was more wrong. But Gary Watts wasn't alone in his delusions. Most people who bought property in 2004-2006 assumed house prices were going to rise 10%+ per year forever. Recency bias pervades financial markets and taints investors' decisions. Prices…[READ MORE]

When the federal reserve prints money to buy mortgage-backed securities, it lowers mortgage rates and allows potential buyers to borrow more money and push house prices higher. The federal reserve sets policy in meetings of the Federal Open Market Committee (FOMC), a group of bankers. The FOMC sets target interest rates and directs its traders to either buy or sell securities to meet interest rate targets. When the federal reserve buys Treasuries, the price goes up, and interest rates go down. When the federal reserve sells Treasuries, the price goes down, and interest rates go up. Prior to the financial meltdown in 2008, the federal reserve only bought short-term Treasuries, but in an effort to rescue housing, they began an…[READ MORE]

Back in 2013, I predicted that existing home sales would remain low for the foreseeable future. That prediction proved to be correct. By 2013 it was clear that the banks were avoiding or delaying foreclosure or short sale until prices rose high enough for them to avoid losing money on the sale. They had no choice. When the banks were exposed to $1 trillion in unsecured mortgage debt, they simply couldn't take the losses. Clearly, no matter what else happened in the market, lenders kicked the can with loan modifications and suspend homes in cloud inventory for as long as necessary. As I noted back in 2013, since problems in the market can't be resolved by lowering price, the inevitable problems…[READ MORE]

At some point, the investors who bought distressed properties from 2009 through 2014 will want to liquidate their holdings. Will those sales provide additional overhead supply that will slow home price appreciation? In a normal and healthy real estate market, owner occupants dominate sales. These owners accumulate equity through paying down a mortgage and home price appreciation, and they execute move-up trades seven to ten years after they buy their starter homes. Unfortunately, that isn’t the market we had from 2006 through 2014. For several years owner occupant sales were stuck in a holding pattern at 1990s levels. Orange County home resale volumes were very weak by historic norms, and the only increase in sales volumes from 2012 through 2014 came…[READ MORE]

Government programs ostensibly designed to benefit homeowners were really intended to bail out the banks. In April of 2008, I wrote a post about the psychology behind the various government programs designed to help banks kick the can until conditions got better. In the nine years that transpired since then, their efforts went from frantic, to desperate, to sublimely ridiculous. Each step along the way, the sheeple were strung along and enticed to make a few more mortgage payments in what will prove an ultimately futile effort to benefit from occupying a property they can’t afford. Over the years, others picked up on the nonsense. This in 2011 from US Congressional Representative Patrick McHenry: How Homeowners Are Hoodwinked. This in…[READ MORE]

Anyone considering buying a house needs to understand debt-to-income ratios because these measures of a borrower's capacity to repay the debt is fundamental to mortgage underwriting. Debt-to-income ratios are concerned with monthly income. These are not measures of total debt or total income, only the monthly payments on debt compared to monthly gross income. Notice also that the benchmark is monthly gross income, not take-home pay. The monthly gross income standard is important because tax policy can pose problems for borrowers with high debt-to-income ratios because after paying their mortgage and their taxes, they don't have much left over to live a life. Strangely, lower income borrowers can often endure higher debt-to-income ratios because they receive other tax benefits that…[READ MORE]

Many housing analysts suggest the lack of inventory is because potential sellers are concerned they can't find another home to buy. This is a red herring. The real reason is the lack of move-up equity. Back in 2012, I postulated that homeowners would list their homes as soon as prices reached near-peak levels when they could get out without completing a short sale. After watching prices inflate to peak levels and the listings failed to materialize, I concluded that the lack of equity to complete a move-up is what kept supply from coming to market. Loan modifications kept homes off the market to facilitate the recovery. As these loan modifications expired, some of these properties came to market as equity…[READ MORE]

Unilaterally modifying home mortgages was a necessary step to ensure banks survived the housing bust. Ostensibly, homeowners and lenders agreed to the price of money (interest rate and payment) when the promissory note was signed. Unfortunately, during the housing bubble, the terms of these notes were onerous, and many borrowers faced excessive monthly housing costs while simultaneously facing declining house prices and the elimination of their equity. With no equity, little hope of future equity, and rising payments, many borrowers opted to strategically default -- and lenders worried that more would follow. Banks were still exposed to $1 trillion in unsecured mortgage debt when housing collapsed. The threat of strategic default and the reality of a trillion dollars in unsecured debt…[READ MORE]

Large down payments shut many borrowers out of the housing market — many unreliable ones -- which is why large down payments make housing so stable. It's also why many rally against it. Down payments form the bedrock of the housing market. Large down payments serve the interests of homeowners and politicians by preserving homeownership, lowering volatility in the market, and reducing the risk to our financial system. The primary people who oppose large down payments profit from short-term boosts in transaction volumes and higher prices, realtors and originate-to-sell lenders. Left-wing housing advocates also view large down payments as a barrier to putting unqualified borrowers into houses -- of course, they fail to acknowledge the "unqualified" nature of many of these…[READ MORE]