The Collected Works of Author and Blogger Larry Roberts

Archive for June, 2009

One of the most important "big picture" lessons of The Great Housing Bubble is that when people believe they have no risk, they behave in very foolish ways. One of the most destabilizing impacts on our financial system was the development and widespread use of credit default swaps that convinced lenders and investors that they had no risk in large financial transactions. The people originating and pricing these instruments did not property analyse and price the risks they were taking on, and the resulting collapse destabilized our entire financial system and created the financial debacle we are enduring today. This foolish belief that there is such a thing as a no-risk financial transaction filtered down to individual buyers of residential…[READ MORE]

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 follows: Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value…[READ MORE]

What is Rental Parity? Rental Parity is a mathematical relationship between rental rates and property values where rent is equal to the monthly cost of ownership. There are many assumptions and variables that impact Rental Parity -- so many that it takes a spreadsheet to try to explain it. (We have a calculator that provides the total cost of ownership on a monthly basis to compare to the cost of renting. What is perhaps more useful to buyers is the ability to run the calculation in reverse -- If you know what you spend on rent, you can estimate how much house you can afford.) The fluid relationship between rents and prices provides a conceptual understanding of value. Rental rates…[READ MORE]

Unlike the heyday of the Great Housing Bubble when 100% financing was readily available, it now takes cash to close a real estate deal. If you have no cash, you get no house. So how much cash does it take to close a deal? and how much cash do you need to have available to get through the process and still have a life? The actual cash demands during the process come from four main areas: Downpayment -- 3.5% - 20%+ Closing Costs -- 1% - 3% Inpsection Contingencies -- 0% - 5%+ Furnishing and Move In -- 2% - 5%+ The down payment is the largest and most obvious use of cash in the homebuying process. Down payments are…[READ MORE]

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