High-end squatters are starting to be pushed from their houses. Will the added inventory bring down high-end prices, or will the high end be a safe haven?
You wanna stay out with your fancy friends. I'm tellin' you it's got to be the end, Don't bring me down,no no no no no, I'll tell you once more before I get off the floor Don't bring me down.
You want to buy with your fancy friends? I'm tellin' you the rally's got to end. Don't bring them down. I'll tell you once more as prices bounce off the floor, they will go down.
Prices have crashed nationwide because buying only made sense as long as prices were going up. Once the rally stopped, prices were doomed to crash because the only alternate reason to buy is to save money versus renting. In many areas of the country, prices are low enough that buying makes sense because it is cheaper to own than to rent. Locally, that is not the case.
During the rally kool aid intoxication caused people to buy to capture appreciation, but this is not the only manifestation of kool aid intoxication. Now, some people are buying merely because prices have not gone down. This reason is just as crazy because it isn't grounded in anything tangible. The herd is seeking protection from the crash, and people are buying in areas simply because other people are buying and holding up prices. This isn't careful analysis, it is herd-following foolishness.
Back in 2007, many real estate boards had heated arguments between bulls and bears. The bulls would pull up charts showing the huge preceding rally as evidence that prices would go up forever. It is hard to argue with a chart, but past performance is no guarantee of future outcomes, and just as the bears predicted, prices fell off a cliff.
Those who argue for safe-haven speculation make the same argument: prices haven't fallen therefore they will not fall. The bulls ignore the huge inventory of distressed properties as if it isn't there. "I'll believe it when I see it," they say. How much more obvious does it need to be? We can see years worth of inventory in the foreclosure pipeline, and although we don't have addresses of the shadow inventory, First American CoreLogic does, and they say 8.4% of Orange County mortgage holders are delinquent on their payments. That doesn't seem particularly safe to me.
Today Trulia announced America’s Top 10 Cities to Buy vs. Rent and the Top 10 Cities to Rent vs Buy. Trulia calculated the price-to-rent ratio using the average list price compared with average rent on 2 bedroom apartments, condos and townhomes listed on Trulia.com. To create the list, Trulia analyzed the largest 50 cities in America, by population.
“At the peak of the real estate bubble, cities like Miami, Phoenix and Las Vegas were not affordable for many. Now the opposite is true,” said Pete Flint, co-founder and CEO of Trulia. “Home sellers in these hard hit areas are forced to lower their prices to compete with all the foreclosures on the market. As a result , these unattainable markets are so affordable it makes better financial sense to buy than rent.”
Yes, it is better to own than to rent in all of the places listed above. I would also include most of Riverside County. Prices in these areas are well below rental parity. Renters in these areas pay a premium for the freedom of movement and lack of liability -- as they should. Renting is supposed to cost a premium. Ownership is a burden; taxes, maintenance, debt service, transaction costs, and illiquidity.
“It is not a surprise to see cities like New York and San Francisco on the ‘Rent’ cities but I was surprised to see areas like Omaha, Oklahoma City and Kansas City on our rental list, “said Flint “We’re not suggesting that it’s unwise to buy in these areas, though - just that it’s significantly more expensive than renting. In many of these cities, even though home buying is much more costly than renting, prices are still much lower than they have been in a long, long time.”
Trulia.com’s Rent vs. Buy Index - Interpretation Key
Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city are The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense depending on the situation. Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.
Definitions: Total costs of home ownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. Total costs of homeownership include an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions.
Total costs of renting include rent and renter’s insurance.
I was surprised to see San Diego is still unaffordable. Prices have crashed pretty hard there as they led Orange County on the way up and on the way down. If ownership is still more expensive than rent, that market may experience more pain.
One of the weaknesses of the Trulia method is that it does not take into account changes in affordability based on interest rates. With our current 5% interest rates, price to rent ratios near 20 are close to rental parity.
"Why on Earth would you buy down here when you can rent?" asked a friend of mine in Miami Beach not long ago. "Buying is so over."
He promptly moved to Manhattan for work reasons–and bought a $1 million loft on the Upper West Side.
Note the typical behavior. People want to buy when prices are up, and turn more wary when they've collapsed. Logically it makes no sense.
Mathematically, it makes no sense either. The various strata of the market are spread out based on incomes and amounts borrowed. During the housing bubble, the low end increased in price because first-time homebuyers whose income could only afford a $200,000 were instead given a $500,000 mortgage. The added $300,000 pushed up all prices in the marketplace. The natural spread between the low end and the high end was maintained.
However, during the bust, the low end of the market has collapsed, and the high end has held up because lenders decided to let high-end borrowers squat. The result is a wide dispersion of market prices, far wider than what is normal. Market dynamics indicate that the substitution effect will restore the natural balance of prices by lowing prices at the high end. Since many high-end borrowers are delinquent on their loan payments, the only reason the high end has not collapsed so far is that the supply has been withheld by banks not approving short sales and not foreclosing on squatters.
Research out Thursday adds some hard numbers.
Real estate website Trulia.com has looked at major real estate markets across the country and asked: Is it cheaper to buy, or to rent?
By Trulia's math my friend was moving in exactly the wrong direction.
Rent in Manhattan: Home prices there are way too high, says Trulia. (Ditto San Francisco.)
Buy in Miami. And Phoenix. And Las Vegas. And most of the other places that have been flattened by the crash. Homes there are cheap compared to rents.
The cross-over point is about 15 times annual rent, the company believes. In other words, as a rough rule of thumb, homes are probably fairly valued in a city when they cost about 15 times a year's rent. So, for example, if you're paying $10,000 a year to rent a place, think twice about buying a home that costs more than $150,000. Dean Baker, economist at the Washington, D.C. think-tank The Center for Economic and Policy Research, came to a similar conclusion in research on the subject in recent years. Fifteen times is the historic average, he said.
With 5% interest rates, the crossover is closer to 20 than 15. I used to write often about a gross rent multiplier of 160 (I used monthly rent rather than yearly). As interest rates dropped to 5%, the 160 GRM increased to about 220, a number well above historic norms.
So what's the multiple in New York right now?
About 32 times, says Trulia. The average two-bedroom condo or townhouse in New York city costs about 32 times as much to buy as it does to rent. Other major markets over 20 times include Seattle (24 times), San Francisco (22 times) and Portland, Ore. (22 times).
On the other hand Miami list prices are now about eight times annual rents, says Trulia. Phoenix is about 10 times and Las Vegas about 11.
The most beaten down markets are where the best deals are to be had.
Trulia's data need to be taken with some caveats.
Trulia looked at list prices rather than actual transaction prices, so its figures for prices may be too high.
Furthermore drawing the cut-off point at 15 times rents may be on the low side.
Mr. Baker, in conversation yesterday, said that figure assumes that you're only going to stay in your home for the typical seven years. If you stay a lot longer, he says, the transaction costs of buying and selling become less and less important. That makes owning more attractive.
Nonetheless the Trulia analysis seems directionally correct. Work done by the C.E.P.R. last year came to similar conclusions: Namely that markets like New York and the California coast remained expensive compared to rents, while the hardest hit markets now look cheap.
And Trulia's research emphasizes two points that are absolutely spot on.
First, homeowners need to look first and hardest at present cashflow. The cult of homeownership made no sense. If renting is much cheaper than buying, think seriously about it.
Second: The markets that have fallen the furthest now look like good places to buy, while those that seem to be "safest" aren't. As the saying goes: There is no such thing as a "safe" investment, merely one whose risks are not yet apparent. It's a principle that a lot of people forget time and again.
Write to Brett Arends at brett.arends@wsj.com
When the spread between low-end and high-end prices becomes as extreme as it is now, market forces and the substitution effect will force this spread to tighten -- either low-end prices must go up significantly or high-end prices must come down. Both scenarios suggest speculating at the high end is not a good idea.
The worry that failure to buy now will result in permanent inability to obtain the asset.
The belief that prices cannot fall is the fallacy behind safe-haven speculation. This erroneous belief is supported by a host of other fallacies including:
They Aren’t Making Any More Land
Everyone Wants To Live Here
Prices Are Supported By Fundamentals
It Is Different This Time
Doesn't this all sound familiar? Long-time readers of the IHB used to see this nonsense frequently in 2007 when denial ruled the market. It disappeared for a couple of years, but it is resurfacing again. This is kool aid intoxication, a disease proven to be harmful to speculator's net worth.
Safe-haven buying is not true investment, it is speculation. It is purchasing property based on faith rather than math. It is following the herd rather than studying and analyzing financial performance. There is no logic to it, but there is the allure of emotional comfort from making the same mistake everyone else does. Everyone who bought in 2006 thought they were going to be rich following the herd. Most of them were slaughtered.
I wish the safe-haven argument were true
In case you didn't notice, the IHB also operates in the real estate sales market. Since most readers of this blog are interested in Irvine real estate, it would benefit my business greatly to embrace buying in Irvine as a safe haven. I don't for one simple reason: safe-haven speculating is foolish. Don't do it. It will cost you dearly.
If you want to buy in Irvine today, know the risks. Prices may go down further (they probably will), and the best case is tepid appreciation or an extended period of flat prices. With the low payments from 5% interest rates, many properties are affordable, but buyers may find themselves underwater while the distressed properties are pushed through the market and interest rates rise. Any buyers planning to buy should expect to stay put for at least five to seven years. If there is any chance of moving three years from now, would-be buyers should rent instead.
Air in the high end
Not many years ago, there was not much debt in the high-end market. Borrowers rarely took out loans over $1,000,000 partly because they were more difficult to qualify for and partly because you couldn't deduct amounts over $1,000,000. In neighborhoods with houses over $1,000,000, it was very unusual to see debt distress because there wasn't much debt used. People would buy into these exclusive neighborhoods with large amounts of cash. Not anymore.
Many nice tract-home neighborhoods became elevated to the $1,000,000 club by borrowed money. People used to sell their homes and port $500,000 in equity to buy a $1,100,000 home. During the housing bubble, they would borrow $2,000,000 with an Option ARM and push prices of homes up to the ridiculous prices we see today. The problem with this is simple: the debt buyers cannot be replaced with equity buyers. Some neighborhoods may survive, but the more debt a neighborhood has, the more it will fall -- when lenders finally get around to pushing out the squatters.
Today's featured property was purchased near the peak on 10/16/2006 for $3,518,000. The owners used a $2,814,167 first mortgage, a $351,771 HELOC, and a $352,062 down payment. Think about that -- these people only put about $350K of their own money in a $3.5M purchase.
On 12/8/2006 they obtained a HELOC for $356,078 to get access to their full down payment.
On 6/14/2007 they obtained a HELOC for $742,400.
Total property debt is $3,556,567
Total squatting time is at least 11 months.
Foreclosure Record Recording Date: 04/06/2010 Document Type: Notice of Sale
Foreclosure Record Recording Date: 09/24/2009 Document Type: Notice of Default
I recently published a list of about 60 properties with NODs filed where the debt is over $1,000,000. Who is going to buy all of these properties? If there were cash buyers to replace the deadbeats, don't you think the lenders would have foreclosed?
Home Purchase Price … $3,518,000 Home Purchase Date .... 10/16/2006
Net Gain (Loss) .......... $(886,940) Percent Change .......... -20.4% Annual Appreciation … -6.2%
Cost of Ownership ------------------------------------------------- $2,799,000 .......... Asking Price $559,800 .......... 20% Down Conventional 4.91% ............... Mortgage Interest Rate $2,239,200 .......... 30-Year Mortgage $573,637 .......... Income Requirement
$11,898 .......... Monthly Mortgage Payment
$2426 .......... Property Tax $567 .......... Special Taxes and Levies (Mello Roos) $233 .......... Homeowners Insurance $395 .......... Homeowners Association Fees ============================================ $15,518 .......... Monthly Cash Outlays
-$1825 .......... Tax Savings (% of Interest and Property Tax) -$2736 .......... Equity Hidden in Payment $1061 .......... Lost Income to Down Payment (net of taxes) $350 .......... Maintenance and Replacement Reserves ============================================ $12,368 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $27,990 .......... Furnishing and Move In @1% $27,990 .......... Closing Costs @1% $22,392 ............ Interest Points @1% of Loan $559,800 .......... Down Payment ============================================ $638,172 .......... Total Cash Costs $189,500 ............ Emergency Cash Reserves ============================================ $827,672 .......... Total Savings Needed
Property Details for 65 GRANDVIEW Irvine, CA 92603 ------------------------------------------------------------------------------ Beds: 6 Baths: 6 full 1 part baths Home size: 5,600 sq ft ($500 / sq ft) Lot Size: 12,683 sq ft Year Built: 2006 Days on Market: 34 Listing Updated: 40318 MLS Number: P734433 Property Type: Single Family, Residential Community: Turtle Ridge Tract: Lacm ------------------------------------------------------------------------------ According to the listing agent, this listing may be a pre-foreclosure or short sale.
Million $$ Views Luxury Estate - La Cima Model 1X on Single Loaded Street w Ocean/City Lights & Breathtaking Views * Welcome Entry Courtyard adjoints an Open Air Dining Loggia w Fireplace * 6 BR 6.5 BA + Hm Theater + Bonus Rm 4 Car Garage * Main Floor Master Suite * Complete Saparate Living Suite The Casita is a Private Oasis * 2nd Story Private Access to a spacious Living Rm w Open Kitchen * Super Launddry Rm * Lot of Custom upgrades.
Saparate? Launddry?
Does that description read like a $2,799,000 property?
The regulatory solution proposed herein is simple, yet far reaching. It comes in two parts, the first is to limit the amount lenders can loan to borrowers with a rather unique enforcement mechanism, and the second is to increase the penalties for borrowers who commit mortgage fraud. The following is not in legalese, but it contains the conceptual framework of potential legislation that could be enacted on the state and/or federal level. A detailed discussion of the text follows:
Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance:
1. All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
2. The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income.
3. The total debt-to-income of all debt obligations cannot exceed 36% of a borrower’s gross income.
4. The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs.
Any sums loaned in excess of these parameters do not need to be repaid by the borrower and no contractual provision is permitted that can be interpreted as limiting the borrower’s right to exercise this right, make the loan callable or otherwise abridge the mortgage agreement.
Regulatory Solutions
The regulatory solution proposed herein is simple, yet far reaching. It comes in two parts, the first is to limit the amount lenders can loan to borrowers with a rather unique enforcement mechanism, and the second is to increase the penalties for borrowers who commit mortgage fraud. The following is not in legalese, but it contains the conceptual framework of potential legislation that could be enacted on the state and/or federal level. A detailed discussion of the text follows:
Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance:
1. All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
2. The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income.
3. The total debt-to-income of all debt obligations cannot exceed 36% of a borrower’s gross income.
4. The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs.
Any sums loaned in excess of these parameters do not need to be repaid by the borrower and no contractual provision is permitted that can be interpreted as limiting the borrower’s right to exercise this right, make the loan callable or otherwise abridge the mortgage agreement.
This last statement is the most critical. This is how the enforcement problem can be overcome. Regulators are pressured not to enforce laws when times are good, and decried for their lack of oversight when times are bad. If the oversight function becomes a potential civil matter policed by the borrowers themselves, the lenders know exactly what their risks and potential damages are. Any lender foolish enough to make a loan outside of the parameters would not need to fear the wrath of regulators, they would need to fear the civil lawsuits brought by borrowers eager to get out of their contractual obligations. If any borrower could obtain debt forgiveness by simply proving their lender exceeded these guidelines based on the loan documents, no lender would do this, and regulatory oversight would be practically unnecessary. One key to making this work is to prohibit lenders from introducing a “poison pill” to the loan documents that would make borrowers hesitant to bring suit, otherwise lenders would make their loan callable in the event of a legal challenge forcing the borrower to refinance or sell the property. Basically, if the borrower brought suit and won, they would see principal reduction equal to the deviation from the standards, if they brought suit and lost, they would have no penalty. Most of these cases would be decided by summary judgment based on a review of the loan documents thus minimizing court costs.
Another pillar to the system is the documentation of income as part of the loan document package–the “borrower’s documented income” from the proposed legislation. One of the most egregious practices of the Great Housing Bubble was the fabrication of income by borrowers that was facilitated and promoted by originating lenders. Stated-income loan programs were widespread, and they were the cause of much of the uncertainty in the secondary mortgage market during the initial stages of the credit crunch in the deflation of the bubble. Basically, investors had no idea if the borrowers to whom they had lent billions of dollars were capable of paying them back. Without proper documentation of income, investors lost all confidence in the secondary mortgage market. Stated-income loan programs were one of the first casualties of the credit crunch. These programs should be eliminated totally due to the inherent potential for fraud and the undermining of confidence in the secondary mortgage market stated-income loans create. If lenders can be sued based on the content of the loan documents, and if borrowers can be fined or go to jail for committing fraud or misrepresentation on loan documents, both parties have strong incentive to prepare these documents completely and correctly. Originating lenders will argue this adds to their costs and will result in higher application fees. The amount in question is very small, particularly relative to the dollar amount of the transaction. A small amount of additional expense here will provide huge benefits by assuring investors the borrowers to whom they are loaning money really have the income to pay them back. The benefit far outweighs the cost.
If such a law were passed, agency interpretation and court case precedents will end up defining adequacy in loan documentation. A single W2 does not establish a work history, but 2 years worth is probably excessive documentation. One of the most contentious areas will likely be documenting the income of the self-employed. In theory, the self employed must document their incomes to the US government either through Schedule C reports or corporate K-1s. The argument the self-employed have traditionally made is that these documents understate their income. Since many self employed take questionable tax deductions, there is probably some truth to the claim that tax records understate their income; however, why should the self-employed get to have both benefits? If the self-employed had to use their tax returns as loan documentation, they probably would not be quite so aggressive in taking deductions. A new business without a tax return or with only one year of taxable receipts probably is not stable enough to meet standards of income necessary to assume a long-term debt.
The poor quality of loan documentation during the bubble was a mistake of originating lenders; therefore, in this proposal much of the burden of paperwork and liability for mistakes falls on the lenders. During the deflation of the bubble, lenders paid an enormous price for some of their lax paperwork standards, but much of the problem was also due to borrowers misrepresenting themselves in the loan documents. There were instances where lenders encouraged this behavior, but in the majority of cases, the document fraud was perpetrated by the borrowers. The only recourse available to a lender is a civil suit as there are few criminal penalties associated with loan documentation and almost no enforcement. It can be very difficult and costly for lenders to pursue civil damages, and few lenders attempt it even when they have a strong case. To create a more balanced set of responsibilities, the borrowers must face criminal penalties for fraud and misrepresentation on loan documents. If borrowers know the lender can turn documents over to a prosecutor who will charge the borrower with a crime if they make false material statements, borrowers will be much less likely to commit these acts.
The parameters of the forming limitations on the debt-to-income ratio and combined-loan-to-value are essential to prevent bubbles in the housing market and to prevent the banking system from becoming imperiled in the future. People will commit large percentages of their income to house payments when prices are rising quickly; however, they do this out of fear of being “priced out” and greed to make a windfall from appreciation. These are the beliefs that inflate a bubble. Borrowers cannot sustain payments above the traditional parameters for debt service without either defaulting or causing a severe decline in discretionary spending. The former is bad for the banks, and the latter is bad for the entire economy. This must be prevented in the future. There are a number of reasons why high combined-loan-to-value lending is a bad idea: it promotes speculation by shifting the risk to the lender, it encourages predatory borrowing where borrowers “put” the property to a lender, it promotes a high default rate because borrowers are not personally invested in the property, it discourages saving as it becomes unnecessary, and it artificially inflates prices as it eliminates a barrier to market entry. This last reason is one of the arguments used to get rid of downpayment requirements. The consequences of this folly became readily apparent once prices started to fall.
The payment must be measured against “30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used.” One of the worst loan programs of the Great Housing Bubble was the 2/28 ARM sold to large numbers of subprime borrowers. These borrowers were often qualified only on their ability to make the initial payment, and these borrowers were generally not capable of making the fully amortized payment when the loan reset after 2 years. Regulations like this would prevent a recurrence of the foreclosure tsunami triggered by the use of this loan program. It is also important to ban negative amortization because it would allow the loan balance to grow beyond the parameters of qualification, and it invites property speculation. Perhaps borrowers would not be concerned because they would receive debt forgiveness of the expanding balance. Lenders should be wary of these loans after their dismal performance in the deflation of the bubble, but institutional memory is short, and these loan programs could make a comeback if they are not specifically outlawed. This provision is careful to allow interest-only loans. They are still a high-risk product, but an argument can be made that these loans have a place, and there is no need to completely ban them. They will not have a future as an affordability product capable of driving up prices if the borrower must still qualify for the fully amortized payment.
For the lending provisions to have real impact, they must apply to both purchases and to refinances, thus the clause, “Loans for the purchase or refinance of residential real estate.” If the rules only applied to purchases, there would be a tremendous volume in refinances to circumvent the regulations. The caps on debt-to-income ratios, mortgage terms and combined-loan-to-value only have meaning if they are universally applied. The combined-loan-to-value standard is based on the “appraised value of the property at the time of sale or refinance.” The new appraisal methods will have impact here. It is important that the records need only be accurate as of the time of the transaction. If a borrower experiences a decline in their income or if the property declines in value to where they no longer meet the loan standard, it does not mean they can go petition for debt relief.
The regulations would only need to apply to loans “secured by a mortgage and recorded in the public record.” People can still borrow money from any source they wished as long as the lender knows they will not have any claim on residential real estate. If a lender wanted to issue a loan secured by real estate outside of the outlined standards, the borrower would not have to pay back that money. If a borrower has non-recorded debts which create a total indebtedness requiring more than 36% of their gross income, they would not be eligible for a home equity loan even if they met the other qualifications. In such circumstances, it is better to limit borrowing than increase the probability of foreclosure.
Many states have non-recourse laws on their books. These laws serve to protect the borrower from predatory lending because the lender cannot go after other assets of the borrower in the event of default. In theory this should make lenders more conservative in their underwriting; however, the behavior of lenders in California, a non-recourse state, during the Great Housing Bubble was not conservative. These laws do serve to protect borrowers, and they should be enacted for purchase-money mortgages in all 50 states.
Since one of the goals of regulatory reform is to inhibit the behavior of irrational exuberance, the sales tactics of the National Association of Realtors should be examined and potentially come under the same restrictions as securities brokers through the Securities and Exchange Commission. After the stock market crash which helped precipitate the Great Depression, Congress created the Securities and Exchange Commission to regulate the sales activities of securities brokers. There are strict regulations in place governing the representations made concerning the future performance of investment opportunities. These protections were put in place to protect the general public from the false promises made by stockbrokers in the 1920s which many naïve investors believed. The same analogy holds true for Realtors. The National Association of Realtors has launched numerous advertising campaigns suggesting erroneously that residential real estate is a great investment and appreciation will make home buyers wealthy.
The result of these restrictions will be that all homeowners will have at least 10% equity in their properties unless they have borrowed from a government program like the FHA where the combined-loan-to-value can exceed the limits. This equity cushion would buffer lenders from predatory borrowing and a huge increase in foreclosures if prices were to decline. Home equity in the United States has been declining since the mid 1980s, and it actually declined while prices rose during the Great Housing Bubble due to the rampant equity extraction. The lack of an equity cushion exacerbated the foreclosure problem as many homeowners who owed more on their mortgage than the house was worth simply stopped making payments and allowed the house to fall into foreclosure.
Summary
A future bubble in the housing market must be prevented. The economic and personal problems resulting from the deflation of the Great Housing Bubble must not be inflicted on another generation. Just as those who endured the Great Depression struggled to understand what went wrong and prevent its reoccurrence, we must prevent another bubble in the housing market. There are both market-based alternatives and regulatory-based policies that could serve to prevent the next housing bubble. The market based solution proposed herein is to expand the use of the income approach to property appraisal to tether prices to fundamental values. The regulatory solution proposed herein is a multifaceted approach that limits lending to within certain standards. The policing mechanism is a shift to civil enforcement through allowing borrowers to obtain debt forgiveness for amounts lent outside of the approved parameters.
The Great Housing Bubble was an epic event impacting the lives of nearly every household in the United States and around the world. At first it was a giant house party fueled by excessive borrowing and spending by homeowners. The hangover was not pleasant. As of the time of this writing the full history of the fallout is not yet recorded. The decline in prices to this point has been breathtaking and unprecedented. When the full history is written, and the final impact of the bubble is measured, many will remember the Great Housing Bubble as one of the most important historical events of their lifetime.
In 2008 the National Association of Realtors launched a commercial advertising campaign claiming that residential real estate doubles in value every 10 years. Besides the obvious inaccuracy of the claim, it is the kind of claim no stockbroker would be allowed to make. The mantra of all realtors is that house prices always go up. There are currently no limits to the distortions and outright lies realtors can tell prospective buyers with regards to the investment potential of residential real estate. Buyers are already prone to believe the fallacies of unlimited riches in real estate, and these fallacious beliefs lead to housing bubbles. Realtors should be prevented from making representations concerning the investment potential of real estate. Since the regulatory framework for this kind of regulation and oversight is already in place under the auspices of the Securities and Exchange Commission, Congress would merely need to make Realtors subject to these regulations in order to solve the problem.
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