The Collected Works of Author and Blogger Larry Roberts

Archive for April, 2013

Down payments are the bedrock of the housing market. Large down payments preserve home ownership, reduce volatility in the market, and reduce the risk to our financial system. The only people who oppose them are realtors and originate-to-sell lenders who see down payments as an impediment to profits and left-wing housing advocates who see down payments as a barrier to putting unqualified borrowers into houses. Down payments preserve home ownership because people who've put down large down payments rarely default. In purely economics terms, people shouldn't consider sunk costs like down payments in their decision making. However, homeowners do. People simply don't walk away from properties where they've put a lot down, even if they're deeply underwater. The decision is…[READ MORE]

I have been accused of being "old school" because I never embraced the innovations in real estate finance that inflated the housing bubble. In 2006 preparing for home ownership only required finding a house and signing a few loan documents. It's a lot more difficult today. Now the old rules are back. Buyers today have to save for a down payment and make sure the payments are affordable. Since so many forgot the old ways, I felt it necessary to revisit these old methods to educate the next generation -- and perhaps reeducate the old one. Adjusting your finances People can adjust to whatever income and expenses they have if given a little time. Transitioning from renting to home ownership…[READ MORE]

Since the end of 2008 the Federal Reserve has had a Zero Interest Rate Policy (ZIRP), which is the overnight rate interest rate changed to it's member banks, it's called the federal funds rate.  This interest rates influences treasury yields, corporate bonds, and mortgage  rates.  The current rate is about .25% or less on a annual basis.  In addition, they Federal Reserve also creates money in a program called Quantitative Easing.   The Federal Reserve justifies these policies by claiming the recession is so extremely bad (and it is) that's its necessary to set the rate to almost zero to simulate business borrowing (expansion) and and home purchasing.  The negative affect of this policy is on retired people's savings because…[READ MORE]

The valuation of land used for residential housing is mysterious and often misunderstood. The valuation of lots and raw land requires a detailed knowledge of construction and marketing costs as well as a good estimate of the sales price of the final product: a residential housing unit. In short, the value of a lot is the total revenue (sales price of the home) minus the costs of production and the necessary profit. Land value is a residual calculation. The value of a piece of land is whatever is “left over” after all the other costs of production and profits are subtracted from revenue. This is a key point. Land for residential home use has no intrinsic value. It is a…[READ MORE]

The mainstream media housing market cheerleaders have been touting the declining delinquency rates as a sign of market health. As I recently pointed out, contrary to media spin, mortgage delinquencies are trending higher. We know that lenders don't want to foreclose and recognize losses, particularly since banks are still exposed to $1 trillion in unsecured mortgage debt. If they were forced to write down the losses on their bad loans or approve too many short sales, the losses would drive them out of business -- either that, or we would have another massive government bailout to deal with. The only way lenders can avoid recognizing losses is to avoid foreclosure and deny short sales until prices rise back to bubble-era…[READ MORE]

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