Table of Contents
This website contains the full text of chapter 1: What is a Bubble?. Much of the remaining content is scattered throughout the analysis posts on the Irvine Housing Blog.
The eBook is available for the very low $4.95 for those who may wish to preview the whole book.
The Great Housing Bubble is arranged into 10 chapters. The first 4 chapters provide background information and are used to define terms and provide a broad conceptual understanding of residential real estate economics, chapters 5 through 8 discuss the structural and psychological factors that inflated and deflated the bubble, and the final two chapters describe methods of coping with the housing bubble.
Chapter 1 is a general description of financial bubbles as a psychological phenomenon and the unique beliefs of residential real estate bubbles.
Chapter 2 details the financing environment surrounding residential real estate. It defines and categorizes the types of borrowers and the types of loan programs available, and it illustrates how financing impacts the wealth of individual owners and the economy as a whole.
Chapter 3 summarizes the mathematics determining the value of residential real estate and examines issues pertaining to the rent-versus-own decision.
Chapter 4 delves into the fine points of determining the value of individual lots and raw land.
Chapter 5 illuminates the credit bubble (which was largely responsible for the real estate bubble) with rigorous detail on the structure of the secondary mortgage market and how the expansion of credit through this market inflated the housing bubble.
Chapter 6 looks at the housing bubble, its various measurements, and explains why the bubble burst.
Chapter 7 is a review of the psychology of real estate bubbles. Financial bubbles are primarily psychological phenomenon, and the various aspects of investor psychology are explored to see how they shape the market.
Chapter 8 is a projection of future house prices based on the data and conditions as they existed in early 2008.
Chapter 9 contains advice for both sellers and buyers who plan to be active while prices are declining.
Chapter 10 is a review of the causes of the bubble and proposals for reforms to prevent residential real estate bubbles from happening again.
Preface xiii
Irvine Housing Blog xiii
The Reservoir of Schadenfreude xiv
Introduction xvii
What is a Bubble? 1
Real Estate Only Goes Up 2
Buy Now or Be Priced Out Forever 2
Confirming Fallacies 3
They Aren’t Making Any More Land 3
Everyone Wants To Live Here 4
Prices Are Supported By Fundamentals 4
It Is Different This Time 5
The Importance of Financial Bubbles 6
Summary 6
Conservative House Financing 8
Mortgage Interest Rates 9
Types of Borrowers 10
Types of Loans 11
Conventional 30-Year Amortizing Mortgage 12
The Interest-Only, Adjustable-Rate Mortgage 12
Negative Amortization Mortgages 13
Stated Income Loans 16
Downpayments 18
Equity Components 19
Initial Equity 20
Financing Equity 20
Inflation Equity 21
Speculative Equity 22
Mortgage Equity Withdrawal 23
The Fallacy of Financial Innovation 26
Summary 28
Fundamental Valuation of Houses 29
Ownership Cost Math 30
Mortgage Payment 31
Property Taxes 31
Homeowners Insurance 31
Private Mortgage Insurance 32
Special Taxes and Levies 32
Homeowner Association Dues and Fees 32
Maintenance and Replacement Reserves 33
Tax Savings 33
Hidden Savings 33
Lost Downpayment Interest 34
Running the Numbers 34
Price-to-Rent Ratio 36
Investment Value 37
Discount Rates 38
Appreciation and Transaction Fees 40
Inflation Premium 44
Renting Versus Owning 46
Summary 47
Valuation of Lots and Raw Land 48
Land Price as a Residual Value 48
Individual Lots 49
Multiple Lots 49
Density and the Value of Land 51
House Price and the Value of Land 51
Irvine’s Woodbury 51
Landowners Capitulate 53
Summary 53
The Credit Bubble 54
Structured Finance 57
Systemic Risk in the Housing Market 60
Mortgage Default Losses 61
Risk Synergy 62
Creditworthiness Risk 62
High CLTV Defaults 63
Fraud and Misrepresentation Risk 63
High DTI Defaults 64
Investment Perception Risk 64
Resale Value Risk 65
The CDO Market Solution 66
Visualizing the Bubble 67
Responsibility for the Bubble 68
Summary 70
The Housing Bubble 71
Price Measurements 72
Price-To-Income Ratios 75
Price-To-Rent Ratios 77
Debt-To-Income Ratios 78
Affordability Limits 81
The Bubble Bursts 87
The Credit Crunch 93
100% Financing 95
Rising Interest Rates 96
Summary 97
Bubble Market Psychology 99
Speculation or Investment? 99
Leverage and Debt 100
Why Speculators Fail 101
Two Kinds of Real Estate Investors 102
Buyer Support Levels 103
Trading Houses 104
Houses as Commodities 106
Mortgages as Options 107
The Stages of Grief 108
Efficient Markets Theory 109
Behavioral Finance Theory 110
Psychological Stages of a Bubble 111
Precipitating Factor 111
Enthusiasm Stage 112
Greed Stage 113
Denial Stage 113
Fear Stage 114
Capitulation Stage 115
Despair Stage 116
Bubbles as Cultural Pathology 117
Appreciation is Income 118
Credit is Savings 118
Debt is Wealth 119
It’s a California Thing 119
The California Social Contract 120
Bailouts and False Hopes 122
Hope Now? 123
Forgiveness of Debt 124
Housing and Economic Recovery Act of 2008 124
Emergency Economic Stabilization Act of 2008 125
Zero Coupon Notes 126
Let Markets Work 128
Summary 128
Future House Prices 130
How Far to Fall 131
Price Action 132
Price-to-Rent Ratio 137
Price-to-Income Ratio 140
Hyperinflation 143
An Educated Guess 145
Price Decline Influences 148
Debt-to-Income Ratios 148
Higher Interest Rates 150
Future Loan Terms 153
Unemployment 154
Foreclosures 156
Decrease in Home Ownership Rates 158
Doomsday Scenario 159
Lingering Problems 161
Summary 162
Buying and Selling During a Decline 163
Selling for Less 164
Paying off a Mortgage 164
Short Sale 166
Foreclosure 167
Recourse vs. Non-Recourse Loans 167
Judicial vs. Non-Judicial Foreclosure 168
Tax Implications 168
A Buyer’s Market 168
Pay the Lowest Possible Price 169
The First Offer is the Best Offer 169
Closing the Deal 171
Summary 171
Preventing the Next Housing Bubble 173
Necessary Intervention 173
Economic Problems 173
Personal Problems 175
Addressing the Cause 176
What did not cause the bubble? 177
What did cause the bubble? 179
Market Solutions 181
Regulatory Solutions 183
Summary 188
Bibliography 189
Index 198
End Notes 204
Free eBooks also available at:
Ebooks eLibrary - Open Ebooks Directory - includes most of the ebooks sold on the internet. Free for addition of one’s own ebooks.
