The Collected Works of Author and Blogger Larry Roberts

Archive for August, 2012

The opening of The Great Housing Bubble succinctly described the real estate bubble: What is a Bubble? A financial bubble is a temporary situation where asset prices become elevated beyond any realistic fundamental valuations because the general public believes current pricing is justified by probable future price increases. If this belief is widespread enough to cause significant numbers of people to purchase the asset at inflated prices, then prices will continue to rise. This will convince even more people that prices will continue to rise. This facilitates even more buying. Once initiated, this reaction is self-sustaining, and the phenomenon is entirely psychological. When the pool of buyers is exhausted and the volume of buying declines, prices stop rising; the belief in…[READ MORE]

The settlement with the major banks dramatically altered their incentives. As part of the settlement, banks can count short sale losses toward their settlement amount. Foreclosures don't count. So how did banks respond? They dramatically reduced their REO processing and focused on approving short sales. This had two impacts on MLS inventory. First, the lingering short sales that polluted the MLS for months were cleared out. And second, far fewer REO were processed to replace the REO the banks were selling. By clearing out the backlog and not replacing with fresh supply, the number of properties available for sale on the MLS dried up. As a side benefit, prices went up increasing the bank's capital recovery on the properties they…[READ MORE]

The arguments about whether there is or is not a shadow inventory have gotten silly. There is a shadow inventory, and there are certain facts we can establish about it. First, there are millions of delinquent mortgage squatters who will not be given free homes. The exact number is impossible to ascertain because no accurate records are kept outside the banks who aren't accurately sharing this information. Since the banks aren't disseminating accurate information (why would they?), CoreLogic, who relies on voluntary information, consistently under reports the problem. Second, the disposition of these properties will require a sale on the MLS. This may be as an REO after a foreclosure, or it may be as a short sale in lieu…[READ MORE]

It's been difficult to be bearish in 2012. First, we had the chorus of perennially wrong bottom callers make their usual prognostications, then Calculated Risk called the bottom, then the banks unexpectedly and abruptly slowed their rate of REO processing to create a shortage of MLS inventory. This MLS shortage has resulted in bidding wars, rising prices, and falling sales volumes. With those conditions, even the serious problems overhanging the market look insignificant. Most of the bears have gone into hibernation and their views have been largely ridiculed much like they were in 2006. Even I have caved in to the market bulls. It's hard to argue for lower prices when affordability is high and supply is low. There are…[READ MORE]

President Obama's housing policies have been as successful as the circumstances would allow. Back in June I quipped, Obama’s housing policy succeeded wildly by failing spectacularly. Personally, I would have preferred he let the banks go bankrupt, nationalize them, fire management, recapitalize the banking system, and sell them off the bank's stock when the economy recovered. Unfortunately, the flash-point of the crisis occurred while Bush was still in office, and these institutions were deemed too big to fail. Obama continued Bush's flawed policies and looked for solutions that did not bankrupt the banks. This left few good options. Once bank bankruptcy was taken off the table, the natural corrective mechanisms in the system could not be allowed to function. Mark-to-market accounting…[READ MORE]

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