The Collected Works of Author and Blogger Larry Roberts

Archive for December, 2016

The housing bubble pulled forward a generation of buyers; the housing bust cost these buyers their homes and their good credit, removing many of them permanently from the housing market. Lenders succeeded in manipulating market prices by restricting supply; however, for a true recovery in housing, the market requires resurgent demand from first-time homebuyers and move-up buyers. These two groups are typically the largest source of housing demand, with the first-time homebuyer the bedrock of the housing market; without first-time homebuyers, no move-up market exists. The first-time homebuyer market propels upward by job growth and household formation; when the economy is strong and creating good-paying jobs, young people form new households and use their new income to bid for real…[READ MORE]

Removing the supply of distressed homes created a supply shortage homebuilders responded to by providing more houses, hiring construction workers, and stimulating the economy. If I understand Keynesian theory properly — which is important to understand federal reserve policy — inflating asset values through low interest rates triggers businesses to expand because borrowing costs are so low, they can make marginal opportunities productive. As businesses expand, they hire more people for their operations. The newly employed create demand for goods and services, stimulating more demand for goods and services, which in turn creates more business demand, puts more people back to work, and so on — a virtuous circle. Unfortunately, during periods of overcapacity, the expansion proceeds slowly because businesses…[READ MORE]

Higher interest rates reduce housing demand by causing mortgage applications to decline, reducing loan balances, harming employment, and suppressing wages. The federal reserve establishes interest rate policy, and for six years, the federal reserve held the benchmark federal funds rate to zero to stimulate the economy. They finally raised rates last December and followed with a second boost this December, the first rate hikes in a decade. During the period when interest rates were held at zero percent, the federal reserve applied stimulus through a policy known as quantitative easing, a fancy term for printing money. Quantitative easing and mortgage interest rate stimulus were designed to bail out Wall Street, not benefit Main Street. In 2013 the federal reserve decided to…[READ MORE]

Rather than react with excitement and increased urgency, potential homebuyers fear rapidly rising home prices signal a new housing bubble. Does it? California endured three large housing bubbles since the early 1970s. Each one was kicked off by a huge house price rally, inflating prices well beyond any reasonable fundamental measure. From early 2012 to mid-2013, the house price rally was just as steep as previous price surges, but not as long in duration. Cautious home shoppers fear this latest rally may signal yet another housing bubble, but rather than purchase for fear of being priced out forever, buyers wait or decide to safely rent instead. I consider this cautious behavior a great sign for housing. In the past, realtors…[READ MORE]

Lenders lower standards to qualify more borrowers and increase business, a precursor to another bubble, but only if risk is again mispriced. The recipe for a housing bubble includes many ingredients such as loose lending standards. However, loose standards merely qualify more borrowers. While qualifying more borrowers may extend the rally, it requires a gross mispricing of risk and enormous capital flows into unstable loans before prices get pushed up into bubble territory. Let’s assume for a moment all qualification standards were eliminated and anyone who wanted to borrow money could get a loan, similar to what happened in 2004 through 2006. Would this cause a housing bubble? In my opinion, it would not. It would inflate prices, and it would…[READ MORE]

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