Foolish beliefs about family homes as investments fueled the housing mania The more certain people become that real estate prices can only rise, the most likely they are to make a foolish emotional purchase that ends in disaster. The efficient markets theory postulates that market participants have equal access to good information and they make rational judgments based on the available data. The theory appeals to vanity because everyone likes to believe they have above average financial acumen and that they make rational decisions. Unfortunately, that isn’t the world we live in. People often fall victim to groupthink, pick and chose what data to believe and what to ignore, and seek the perceived safety of the herd when making financial…[READ MORE]

Housing recovered because lenders stopped foreclosing on delinquent borrowers Many people erroneously believe housing recovered because lenders ran out of delinquent borrowers to foreclose on. They didn’t. Instead, they stopped foreclosing in order to dry up the inventory to drive prices back up. When lenders make loans, they far prefer borrowers to repay those loans; in fact, their entire business plan relies on it. As long as borrowers are current with their payments, lenders are happy and making money. When borrowers don’t make their payments, the end result is a distressed sale. If there are enough of these, market prices are reduced dramatically which causes significant lender losses. Lenders know this too, so when distressed loans became an overwhelming problem, they devised can-kicking…[READ MORE]

Will you pay for your neighbor's reckless borrowing and spending? When borrowers and lenders petition the government for relief through debt forgiveness and bailouts for losses, you are the one paying for whatever the borrower did with that money; the government is merely a middleman facilitator of a tax heist. In a bygone era, lenders lost money if they made bad loans to irresponsible borrowers. With the advent of securitization, much of this risk of loss transferred to investors, and with the economic catastrophe of 2008, lenders learned the government would bail them out for any losses they were unable to pass on to investors. The too-big-to-fail banks no longer attempt to conceal the moral hazard behind their actions; they…[READ MORE]

A generation of move-up buyers is missing 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…[READ MORE]

What distinguishes homeowners from renters? Hint: It’s not what you think What separates homeowners from people who don’t own homes? The answer is not as simple as you might think. If you go back to antiquity, the person who “owned” a house was generally the strongest warrior who was capable to taking it and holding it against all rivals. Over the last 500 years the development of government and stable laws of land ownership made it possible for ordinary people to have claims to real property stronger than the edge of a sword or the barrel of a gun. One of the first attempts to establish property title was the English Doomsday Book of the 11th century. The King set…[READ MORE]