The Collected Works of Author and Blogger Larry Roberts

Archive for May, 2016

The spring house price rally of 2016 shows signs of weakness because buyers can’t afford high house prices despite very low mortgage interest rates. Most housing analysts predicted a robust spring rally with increasing home sales and increasing prices. With low unemployment, an improving economy, and budding wage growth, the signs all pointed to a strong spring market. Unfortunately, now that house prices reached the previous peak in many areas, fewer and fewer buyers can afford them. When house prices go up absent an increase in wages -- which they have over the last four years in California -- affordability declines. In simpler terms, if potential buyers don’t make more money, but prices go up anyway, fewer buyers can afford…[READ MORE]

House prices reached the peak of the previous housing bubble, but was this the inflation of a new bubble or a true and durable recovery? The house price rally that began in 1997 climaxed in a financial mania in 2006, the Great Housing Bubble. By definition, a financial bubble is an unsustainable increase in asset prices followed by a crash that wipes out most of the previous increase. Since prices at the bubble's peak defy any fundamental valuation, the "recovery" from a bubble is the crash because the crash restores prices to their fundamental values (often with a downside overshoot). After the housing crash, everyone who paid peak values wanted to see a return to the ridiculous and unjustifiable prices…[READ MORE]

During the housing mania, every house was desirable, so prices inflated everywhere. Unlike the bubble era, today's buyers only want desirable properties or neighborhoods. During the housing mania, lending standards were eliminated and toxic loan products with teaser rates and negative amortization flourished. As a result, anyone could borrow any amount they wished to buy a home anywhere they wanted -- and that's only a slight exaggeration. With liar loans, borrowers and complicit lenders rendered income requirements meaningless. Even transparent lies, like the woman on food stamps claiming $150K+ income, were eagerly funded. Further, the borrower's income stretched to ludicrous levels with teaser rates where the borrower only needed to qualify for some low initial rate rather than the payment…[READ MORE]

Excessive debt-service burdens reduces a borrower’s ability to leverage themselves to buy houses at today’s inflated prices. During the 00s lenders saddled borrowers with excessive loads of debt: housing, car, consumer, student. There were no legal limits to the percentage of borrower income lenders could claim, so lenders provided so much debt that borrowers operated personal Ponzi schemes (borrowed from Peter to pay Paul) to keep their lives afloat. And why not? Homeowners worried very little about their debt loads because their house appreciated in value and served as another breadwinner. As long as debt was cheap, borrowers never needed their own income or savings to repay, and some dispensed with the need for either income or savings and simply…[READ MORE]

Los Angeles County Housing Market Report: May 2016 Historically, properties in this market sell at a 9.5% discount. Today's discount is 16.7%. This market is 7.2% undervalued. Median home price is $521,600 with a rental parity value of $624,800. This market's discount is $103,200. Monthly payment affordability has been improving over the last 3 month(s). Momentum suggests improving affordability. Resale prices on a $/SF basis declined from $417/SF to $416/SF. Resale prices have been falling for 1 month(s). Over the last 12 months, resale prices rose 7.6% indicating a longer term upward price trend. Median rental rates increased $0 last month from $2,666 to $2,666. The current capitalization rate (rent/price) is 4.9%. Rents have been rising for 12 month(s). Price…[READ MORE]

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