With house prices high relative to income, many fear lenders inflated a new housing bubble to bail them out from the old one. Home shoppers recoil at today's home prices. Years ago people reveled in high home prices, often buying for fear of being priced out or for greed to capture home-price appreciation; however, high home prices no longer excite buying frenzies since the housing bust. Plus, lenders won't enable buyer foolishness any more. So now when home prices go up, people worry about whether or not prices will crash again -- and with good reason. If mortgage interest rates rise significantly, lenders don't have affordability products to cushion the payment shock, so sales will crumble, and if rates remain…[READ MORE]
Archive for May, 2016
Did distressed homeowners ruthlessly default or merely chose the timing of the inevitable?
Most people who defaulted on their mortgages couldn't afford to pay off the debt. They chose when to default, but the default was unavoidable. No accepted definition of strategic default exists. Lenders attempted to define a strategic defaulter as any borrower who is capable of making a payment and chooses not to. On the surface that sounds reasonable, but that definition misses a very important distinction: Some people chose to default because they know they can’t afford the payments long term, and they are merely choosing the timing of the inevitable. The only thing strategic about the default is the timing, not whether or not they will lose the home. I prefer the distinction between ruthless default and accelerated default.…[READ MORE]
Development impact fees erode the value of raw land, but the fees are not so high as to present a barrier to new home construction at entry-level prices. A recent article from a noted real estate industry source cited development impact fees as a hindrance to development of entry-level homes. I want to demonstrate why this is not the case. Raw land value Most people view raw land as a cost input similar to concrete, lumber, or labor. While raw land certainly costs builders money, the price of raw land does not behave anything like those other cost inputs. The "sticks and bricks" and other components of house construction are commodities. As commodities they can be easily transported from one…[READ MORE]
Wealthy real estate investors will move their money out of ultra-high-end properties when better investment opportunities become available. The only segment of the housing market that wasn't impacted significantly by the housing bust was ultra-high-end real estate. But that may not hold true in the future. What defines ultra-high-end varies by location, but in general these are houses not subject to large mortgages, often purchased completely in cash. Ultra-high-end homes are not purchased by working class people toiling to pay off a mortgage, so changes in mortgage terms and rates effect the resale value of these properties less than the financed purchases at lower price points. When lenders "innovate" with mortgage terms, or when traders in the bond market moves…[READ MORE]
Down payment assistance, like other government housing subsidy programs, merely rewards one group of would-be homeowners at the expense of another group, in this instance, low-income savers. Further the criteria for doling out the rewards is capricious. In the post Two strategies for more abundant and less expensive housing, I suggested that subsidizing low-income borrowers with tax credits would boost prices for low-end housing, and as a result, builders would provide more of it, making housing more affordable for everyone. As someone pointed out in the astute observations that day, such a policy discriminates against those who fail to qualify -- and if not structured properly it would. But if housing subsidies harm people, exactly who is hurt, and how…[READ MORE]