Author Archives: Ramsey Su




What to Watch

Is it time to go short (or long) the home builders?  No, but as Peter Sellers famously said in “Being There” ………. I like to watch.

First, allow me to lay out some ground work as to what I am watching.


home valuesUS home values heat map, via


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Housing is a very important component of any economy, and often an indicator of the well-being of a society.  In the US, housing has been deteriorating since the sub-prime crisis.  The changes are not only cyclical but structural.  Past experiences need to yield to an objective analysis of where we are heading.  Here is the way I see it.


Defining Recovery

Ten years ago, mortgage financing was a free for all.  Non-existent underwriting guidelines with over 100% LTV, limitless debt to income ratios, no verification, no documentation, no qualification and no income resulted in a manufactured peak for real estate prices.  Home sales and construction were at historical highs with total disregard for underlying demand.  Is this the desired housing market? Should a return to that era be considered a recovery?  Of course not, and yet, that is exactly what the market and policy makers are striving for.




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Taxpayer-Funded Garbage

The Federal Reserve recently released a research article titled “How Sensitive Is Housing Demand to Down Payment Requirements and Mortgage Rates?


ben-bernankeFormerly ruling over rooms full of really smart guys: ex-Fed chairman Ben Bernanke

Photo credit: Karen Bleier / AFP


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Why Buy a House?

Examining the reasons to buy a house today may give us some idea where the housing market is heading in the future.

There are three reasons to buy a house:


Reason 1 – Utility

A house (any dwelling) is a shelter.  It provides enjoyment, a home to raise one’s family, or just a place to watch that big screen TV.  Utility is not quantifiable and it differs from household to household.

Reason 2 – Savings

If financed, a mortgage is a way of saving something every month until the mortgage is paid in full.  If paid for, the savings come in the form of “owners’ equivalent rent”, which is what the census bureau uses to measure inflation in housing.

Reason 3 – Asset appreciation

At 5% appreciation per year, a $100k house today will be worth $412k in 30 years. Even a more modest 3% appreciation would result in better than a double.


house, modernHouse, modern.

Photo credit: Fairfax Media


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Grasshoppers, Ants, Politicians and Central Bankers

(This is my reflection on the Greek tragedy that is unfolding before us.)

30 years – that is the most common term for a mortgage.  30 years –  that is an approximation of the most productive years of an average human.  30s – that is about the age to start the activity known as household formation.

Housing, transportation and food, those are the three essential elements of life.  Of the three, housing is the highest expense for most households in the US.  However, once paid for, housing can maintain its utility value for a long time, unlike food that has be replenished and paid for every day anew.  Once the house is paid for, all kinds of good things happen.  If one manages the mid 30 years of one’s life wisely, then one can enjoy one’s golden years.


KrekelMierImage credit: McKenna


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Signs of the Times

Recently, Mortgage News Daily reported on the current status of home equity in this article: 15% of Low End Homes Remain Under Water.

Summarizing, 8 years after the bursting of the sub-prime bubble, 30% of mortgaged homes still have less than 20% equity and 10% have negative equity. This is not home-ownership. These people are just mortgage slaves in worse condition than if they were just renting.


From Housing Wire : “Housing advocates: REO-to-rental boom is bad for California renters, buyers”. That was the short version. Housing Wire also included the long version. This survey is the shot across the bow. Wall Street may celebrate rent increases as a form of housing recovery, but renters may not share these sentiments. I wonder how many renters appreciate being told it is “cheaper to buy” when they are struggling to come up with first and last months’ rent, plus a deposit.



Image via


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No Mortgage Burning Parties Anymore

Much attention has been paid to mounting student loans and their potential impact on young graduates looking for their first homes.  What about seniors though, the 10,000 baby boomers reaching the age of 65 every day?

A long long time ago, in the era of our grandparents, there was once an event called the mortgage burning party, usually around the time of retirement.  I have not been to one of these parties in a very long time.


Mortgage-Burning-PartyOnce upon a time there was a tradition …

Photo via pinterest


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The Interest Rate Guessing Game

Seldom does a day go by without some guru offering his or her prediction on when the Fed is going to raise rates.  They all come with scholarly theories supporting their prediction.  It sounds like a fun game.  I want to play, but I’m not sure what the object of the game is.




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From 4% to 5%

If the 30 year mortgage rate increases by just a quarter percent to 4.25%, monthly payment increases by 3%, which may only have a minor impact on the market. Half a percent to 4.5% would increase payments by 6.13% and that may start pushing marginally qualified borrowers into the “application denied” pool. With a 1% increase, from 4% to 5%, the monthly payment goes up by 12.44%. Needless to say, in order to qualify household income would have to increase proportionally. That should put a real damper on purchases, especially at the entry level.


30 year fixed rate, log scaleThe 30 year fixed mortgage rate average, 1979 – 2015, log scale, via Saint Louis Federal Reserve Research – click to enlarge.


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There is good news.  Part 3 is the last of the “Real Estate is Doomed” series … and it is short.

“In substance foreclosure (ISF)” is a technical FASB accounting term.  I first learned about this term during the S&L era in pertinence to income property loans.  Once upon a time, S&Ls were holding thousands of loans that were still current, but operating with negative cash flow.  As an example, if an apartment building is collecting $1 million in gross rent, has $300,000 in expenses and a debt service of $800,000, the loan is technically an “in substance foreclosure” (ISF).  The theory being that even if the loan is current, the borrower will run out of funds sooner or later unless his cash flow condition recovers.




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Mortgages Are Cheap, Cheap, Cheap, but …

On the left hand side of the chart below, mortgage rates peaked at 18.28%. By comparison, today’s rate is hovering at less than 4%, a whopping 4.5 times off the peak.  More importantly, there was no time in history when a mortgage loan was cheaper than today.  As we now know, it was all the Fed’s doing.  Mathematically, unless they figure out a way to go negative, they are done.  Can the real estate market flourish when 35 years of continuous stimulation is removed?


reid2Image via


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Too Much Debt

The Chair and the Vice Chair of the Fed both spoke last week.  Janet Yellen testified in front of the House and Senate with this speech.  Stanley Fischer’s speech was delivered here.  They were basically the same speech, Yellen’s just had more fluff for the politically motivated audience.

The message was negative for housing.  Allow me to elaborate.



Image via


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