The Collected Works of Author and Blogger Larry Roberts

Archive for April, 2015

High house prices are demanded by foolish Ponzis, enjoyed by real homeowners, and favored by politicians pandering to both groups. Why are high house prices the keep rising considered a universal good? Does everyone benefit if house prices are high and keep moving higher? The assumption is that ever-rising house prices are good, and that a decline in house prices is bad. Ordinarily we cheer when the price of an essential product goes down, and complain when it goes up. Recently gasoline fell from $4 per gallon down to $3 per gallon, then it rebounded back up to $4 per gallon quickly. I felt good about the drop from $4 to $3, but when price went back up, I was…[READ MORE]

Rather than being priced out forever, the real risk in today's housing market is getting priced in for a very long time. Since lenders learned to can-kick their way out of any bout of irresponsible lending, they created a new phenomenon in modern real estate: priced-in forever. In a bygone era prior to the housing bubble, it was nearly impossible to be priced-in to your home for very long. Adequate down payment requirements coupled with stable and steadily rising prices made it unlikely a homeowner would ever be unable to sell and pay off the mortgage. If a borrower became financially distressed and started missing mortgage payments, either they would sell voluntarily, or the lender would foreclose to force a…[READ MORE]

Buyers can't be priced out forever, but many potential buyers can be priced out for long periods of time. Buy Now or Be Priced Out Forever! Does everyone remember that refrain from realtors during the housing bubble? It's not as effective of a sales tactic as it used to be, but some agents still use it. When prices rise faster than their wages, people can obtain less real estate with their income, so there is a natural tendency for people to react with urgency because they don't want to be forced to accept lower quality accommodations later on. When people react to the fear of being priced out, they often act irrationally and buy whatever is available, and in their…[READ MORE]

High degree of market overvaluation suggests for the foreseeable future house prices will appreciate far less than the average of the last 40 years. My favorite measure of value for individual properties and the entire market is the ratio of rent to home ownership cost. I prefer this method because it incorporates the effect of mortgage rates and more closely emulates the conditions people face when they decide whether to rent or own. Another method economists examine is the ratio of price to rent. It's a blunt instrument because it doesn't capture the impact of mortgage rates, but demonstrates the imbalances and distortions caused by record-low mortgage rates. Home shoppers today are right to be concerned about another housing bubble.…[READ MORE]

Your house is only worth what your buyer can pay for it. Your take-out buyer must be leveraged more aggressively than you are. One of my earliest posts in May of 2007 was about the impact future loan terms have on future home prices. If interest rates go on a sustained rise, financing home purchases will become more expensive. That is the math. Unfortunately, most people don't realize this has implications for how much they will be able to sell their house for later on. Most people assume whatever trend was in place in the past will continue indefinitely. Even long-term trends like generally rising home prices for several decades may be the result of underlying factors like falling mortgage…[READ MORE]

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