Table of Contents. Section 1A. Introduction...ix Case & Code Index Topical Index

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1 Table of Contents Future updates and corrections of this text are available on your Student Homepage at Factor 1 Jobs Chapter 1.1 Chapter 1.2 Introduction ix Case & Code Index Topical Index Employment prerequisite to renting or owning Income for the necessities of life...3 Jobs move real estate First nonresidential, then residential Chapter 1.3 California reels from lack of jobs Developing, then accelerating job creation Chapter 1.4 California is closed for business? The anti-business mythology of the Golden State Chapter 1.5 Section 1A Entrepreneurs may start up the recovery The needs of hardcore vacancies in nonresidential space...13 Factor 2 Interest rates Chapter 2.1 Chapter 2.2 Chapter 2.3 Chapter 2.4 Chapter 2.5 Long- and short-term rates Financing for ownership of real estate goes long...15 The yield spread foretells of recessions and recoveries To know how your market will evolve...18 Buyer purchasing power The buyer s price ceiling: savings and borrowings...23 The influence of Federal Reserve policies The discount rate at work...28 Assorted market rates 91-day Treasury Bill Average Auction Rate.. 34 Factor 3 Real estate price speculation Chapter 3.1 Chapter 3.2 The drawdown of sales inventory by speculation Market making, of sorts Agreements for the flip of a property To assign or double escrow the resale i

2 Factor 3 Real estate price speculation (continued) Chapter 3.3 Chapter 3.4 Homebuyer beware: the real estate game lacks fair play Who is the better buyer for a property? Speculations on speculator suppression Make way for the buyer-occupants...56 Factor 4 Home equity Chapter 4.1 Chapter 4.2 Chapter 4.3 Chapter 4.4 Chapter 4.5 Chapter 4.6 Homeownership as a savings plan Implicit rental income offsets risk of loss Home sales volume and price peaks Causes for the rise and fall...68 NODs and trustee s deeds: signs of real estate market conditions Society s costs for permitting REOs To default, or not default Emotional and irrational disbeliefs about losing a home Negative equity and foreclosure A crisis squandered by a government too inactive California homeowners: exercising your right to default A more promising future for all...83 Chapter 4.7 A balance sheet reality check Underwater property: the family s black-hole asset...85 Chapter 4.8 Is it a safe bet a home s value will always rise? Loan-to-value ratio of the negative equity owner...89 Chapter 4.9 California s homeownership insolvency crisis Direct and indirect distress...94 Quiz Section 1A Factor 5 Renting ii

3 Factor 5 Renting Section 1B r 6 Factor 6 Chapter 5.1 Chapter 5.2 Chapter 5.3 Chapter 5.4 Chapter 5.5 Loans Part I: The ARM vs. the FRM Loans Part I: The ARM vs. the FRM Rent: fundamental to a property s value Actual or implicit, rent is the price of possession and use Rentals: the future of real estate in California? The current state of homeownership in California Consumers say they prefer renting to buying The educated young want to be mobile Renting versus buying: the GRM as a measure A comparison of costs to own or rent an SFR Negative equity owners: tenants by another name The economic consequence of ownership benefits lost Chapter 6.1 Chapter 6.2 Chapter 6.3 Chapter 6.4 Loans The real estate loan The danger of an ARMs build-up The story of ARMs, and a homebuyer The iron grip of ARMs on California real estate ARMs depend on FRM rates The ARMs threat: monitoring a sustainable recovery A foreboding trend during recovery Factor 6 Loans Part II: Market influence Chapter 6.5 Chapter 6.6 Chapter 6.7 A lesson from the housing bubble Securitization and subprime lending Interest rate reductions vs. principal cramdowns Mortgage showdown Why won t lenders renegotiate? An aversion to compromise Chapter 6.8 Reducing foreclosures seemingly a good thing for everyone What causes foreclosure? Chapter 6.9 Unregulated high-risk lending practices Abetting the corruptive competitive advantage. 151 iii

4 Factor 6 Factor 7 Factor 7 Factor 8 Loans Part II: Market influence (continued) Chapter 6.10 The financial accelerator events GSEs acquired fewer risky loans Inflation & CPI Inflation & CPI Chapter 7.1 Chapter 7.2 Consumer confidence Fear mongers inflation prediction Mortgage rates will soon rise, if they re right Consumer inflation by calculations Changes are independent of housing price movement Chapter 8.1 Homebuyers feel ready and willing Inform them they are able to buy Factor 9 Factor 10 Savings Chapter 9.1 Chapter 9.2 Bankruptcy s tie to homeownership Let the down payment savings begin The 20% solution: personal savings rates and homeownership The return to down payment fundamentals Quiz Section 1B Construction Factor 13 Pricin iv

5 Factor 10 Construction Section 2A Chapter 10.1 Single family residence starts and sales Detached single family residence construction trends Factor 11 Inventory Factor 12 Factor 12 Chapter 11.1 California s vacant residential properties More housing than people Value deflation Value deflation Chapter 12.1 Deflation s push on the real estate recovery A syndicator tracks the market Chapter 12.2 Mark-to-market vs. mark-to-management valuations Real estate deflation at your doorstep Chapter 12.3 The Fed purchases Treasuries Let us fend off deflation Chapter 12.4 Deceleration of inflation on Main Street lowers interest rates Cash pump: drop interest rates, buy treasuries. 206 Factor 13 Factor 14 Pricing Chapter 13.1 California tiered home pricing Price tier fluctuations Chapter 13.2 A realty black hole Belief in ever-rising prices brings implosion Chapter 13.3 Appraisals solely to qualify for mortgages Justifying the buyer s price is another matter Chapter 13.4 Is homeownership a luxury or necessity? The price to dress for success or for family needs Chapter 13.5 Home price bumps congressionally fed A distorted demand with each new subsidy Stock market Chapter 14.1 S&P 500 as an alternative to real estate As a percent of earnings Chapter 14.2 REIT investments as stocks Playing the real estate game from the sidelines. 231 v

6 Factor 15 Retirees Chapter 15.1 Retirement dreams delayed for homeowners Financial woes add to seniors burden Chapter 15.2 Boomers retire and California trembles Retirees move real estate Chapter 15.3 Downsizing and relocating: the traditional retiree pastime Where will they go? Factor 16 First-time buyers Factor 16 First-time homebuyers Chapter 16.1 Household formations and trends in sales volume California new housing and population aged Chapter 16.2 The demographics forging California s real estate market Trends with opportunities for everyone Chapter 16.3 The homeownership decline among the young Restless, relocating with job opportunities Chapter 16.4 Default-insured mortgages for first timers The loss in purchasing power Quiz Section 2A vi

7 Section 2B Factor 17 Fiscal spending Chapter 17.1 Lenders vs. owners When the financial levies broke Factor 18 Monetary policy Chapter 18.1 The lender of last resort The policies and functions of the Federal Reserve Factor 19 Politics Chapter 19.1 Fannie s post-recession lending guidelines Stricter lending policies Chapter 19.2 Mortgage market reform from the executive branch Contested Fannie and Freddie Chapter 19.3 The standardized short sale documentation A federal style for mostly reluctant lenders Factor 20 Chapter 19.4 The timing and strength of 2010 s economic recovery Divining the future from the past Exchange rate Reserved for future use Factor 21 Taxation Chapter 21.1 A nation s housing policy as tax loopholes Tax credit subsidies in action Chapter 21.2 Housing subsidies do not create buyers Deductions create borrowers, and more borrowing Factor 22 Population Chapter 22.1 Rate of population growth California vs. the United States Chapter 22.2 Golden state population trends Population change: The last thirty years vii

8 Factor 23 Regulation Factor 24 Oil prices Factor 24 Oil prices Chapter 23.1 Homeownership and the economy A treacherous two-way street Chapter 23.2 Preventing the next really big real estate bubble Harness market momentum excitement Chapter 23.3 The FHA a flipper s best friend Buyer s agents snitch on the speculator Factor 25 Factor 25 Reserved for future use Weather Weather Reserved for future use Factor Factor War/Civil War/Civil unrest Unrest Reserved for future use Factor 27 The fin Factor 27 Financial crisis ancial crisis Chapter 27.1 Cleaning up after the ruptured housing bubble Residue of the financial accelerator event Chapter 27.2 The speculative price (dis)advantage Negative equity and the Great Liquidation Chapter 27.3 Beware of drastic measures Brought on by desperate times Chapter 27.4 Equity loans contributed to the financial crisis The ATM effect vs. durable homeownership Chapter 27.5 The bumpy flat-line recovery A side-effect of sticky housing prices Quiz Section 2B viii