Monthly Archives: July 2010

IHB News 7-31-2010

Our big event is scheduled for Sunday evening from 5:00 to 9:00 at JT Schmids at the District.

If you are looking for something to do on Sunday before the party, this property is having an open house from 1:00 to 4:00. It isn't every day you get to tour a $7,799,000 property.

Irvine Home Address … 25 NEEDLE GRASS Irvine, CA 92603

Resale Home Price …… $7,799,000

Come a little bit closer

Hear what I have to say

Just like children sleepin'

We could dream this night away.

But there's a full moon risin'

Let's go dancin' in the light

We know where the music's playin'

Let's go out and feel the night.

Neil Young — Harvest Moon

IHB News

Our big event is scheduled for Sunday evening from 5:00 to 9:00 at JT Schmids at the District.

I know we have been building this event as an meeting for investors, and those discussions will be a major component of the evening, but as with all previous IHB gatherings, it is also a social event where people can meet and see the faces behind the blog names.

We want to share in the success of Ideal Home Brokers, and what better way to do that than throw a party?

Everyone who reads the Irvine Housing Blog is invited, as are the clients of Ideal Home Brokers. If you're curious, a lurker, a fan, even if you disagree with everything I write, you're welcome to come. Don't stay away just because you may not be interested in investment. If you read the IHB, we want you to stop by.

Based on the emails I have received I am anticipating a strong turnout. I hope to see you Sunday Evening.

Housing Bubble News from Patrick.net

Fri Jul 30 2010

Foreclosures up in 75 pct of top U.S. metro areas (reuters.com)

Foreclosure activity up across most US metro areas (google.com)

Housing Bubble will Not be Reblown; Foreclosures Increase in most Metro Areas (Mish)

Honolulu foreclosures jump 70% (staradvertiser.com)

Three short sales on West Side of LA (doctorhousingbubble.com)

The Threat of Sidelined House Sellers (blogs.wsj.com)

6 Reasons the Housing Market Hasn't Recovered (realestate.yahoo.com)

RealtyTrac Sees "Slim Chance" of Housing Market Recovery (bloomberg.com)

U.S. housing not recovering (breakingviews.com)

Many cities awaiting a housing recovery (msnbc.msn.com)

Can Cities Make Wall Street Pay? (huffingtonpost.com)

All Signs Point to Lower House Prices (irvinehousingblog.com)

Drip after drip of deflation data (blogs.telegraph.co.uk)

Deflation Revisited The Studio Version (theautomaticearth.blogspot.com)

Fed Member's Deflation Warning Hints at Policy Shift (nytimes.com)

With Squeeze on Credit, Microlending Blossoms in US (nytimes.com)

Demographic Doo-doo (pimco.com)

More Builder Evidence of Tax Credit Goose, Post-Credit Bust (calculatedriskblog.com)

In American politics, stupidity is the name of the game (washingtonpost.com)

King-sized foreclosure to hit auction block (detnews.com)

Free Trial of the Property Finder


Thu Jul 29 2010

Phoenix Housing Market Will Get Worse (myfoxphoenix.com)

New House Sales and Bear Market Math (Mish)

Aftermath of Global Housing Bubble Chokes World Banking System (housingstory.net)

Will doomsday scenario hit English house prices? (thisismoney.co.uk)

Germans and Inflation (miller-mccune.com)

What About the Recalculation Into Housing? (wallstreetpit.com)

The Great Decoupling of Corporate Profits from Jobs (robertreich.org)

The job machine grinds to a halt (washingtonpost.com)

The Unemployed, Organized Online, Look to the Midterms (washingtonindependent.com)

Bay Area jobless tap 401k plans (contracostatimes.com)

US Equity Loans Revealing (bullionbullscanada.com)

Citibank branch files to block eviction (therealdeal.com)

Fannie Mae and Freddie Mac Reform Conference Set (May they die!) (housingpredictor.com)

How to end the filibuster with 51 votes (voices.washingtonpost.com)

What I've learned from the market bubbles (marketwatch.com)

Anchoring Effect And Prices (youarenotsosmart.com)

Banks Defrauding Invesors, Auditors, Regulators, Also Help Delinquent Mortgagees (zerohedge.com)

Living Off the Grid: Free Yourself (off-grid.net)

Free Trial of the Property Finder


Wed Jul 28 2010

Are Bay Area House Prices Really Up 18 Percent? (bayarearealestatetrends.com)

Housing markets: Up again? (economist.com)

Consumer Confidence Sinks to 50.4, a 5-Month Low (Mish)

What is this San Jose house really worth? (patrick.net)

Nevada's Economic Misery May Be America's Future (huffingtonpost.com)

Real estate bubble in Texas much smaller than elsewhere (blogs.marketwatch.com)

Tampa FL area has 9-year building site inventory (tbo.com)

US house ownership reaches 10-year low (smh.com.au)

A decade of declining house prices (informationclearinghouse.info)

Still Speculating In Australian Housing: More Punch, Mate! (blogs.forbes.com)

Banks cherry picking individual foreclosures that show up on the MLS (doctorhousingbubble.com)

Banks Withholding Highend Repossessions Over $300,000 From Market (realestatechannel.com)

Here's house of pricey Vernon pensioner (huntingtonhomes.ocregister.com)

Who wrecked the American economy? (irishcentral.com)

Time to wind down Fannie Mae and Freddie Mac (dallasnews.com)

Filibuster Reform Momentum Builds: Senate faces threat of democracy! (huffingtonpost.com)

Free Trial of the Property Finder


Tue Jul 27 2010

Rhode Island housing market set for double-dip (wpri.com)

Housing Market Double Dip is Beginning (housingwire.com)

Don't hold your breath for a bounce in house prices (google.com)

US Housing Good News Just Propaganda (bullionbullscanada.com)

US housing 24pc monthly rise makes sales merely "abysmal" (telegraph.co.uk)

Housing sales jumped in June, but does it really matter? (marketplace.publicradio.org)

Why the housing market hasn't recovered yet (helium.com)

Financial Innovation and Government Subsidies Diminish House Ownership (irvinehousingblog.com)

Rent may no longer be a four letter word (sfgate.com)

Extend and Pretend: The Russian doll version (theautomaticearth.blogspot.com)

Deflation concerns: U.S. may face deflation, a problem Japan understands too well (latimes.com)

New Zealand Reserve Bank should target the housing bubble (nzherald.co.nz)

'Systemic risk' is new buzz word as officials try to CREATE another bubble (washingtonpost.com)

Dumpy house in Palo Alto foreclosed (patrick.net)

Not easy to claim abandoned house next door (bankrate.com)


Mon Jul 26 2010

The Government's Role in the Housing Bubble (theatlantic.com)

South FL foreclosure buyers beat by professional investors (miamiherald.com)

Shadow Inventory Builds As Lenders Shift to Short Sales (irvinehousingblog.com)

40,283 of our SF Bay Area neighbors are in mortgage limbo (contracostatimes.com)

SF Bay Area housing data sunny but outlook foggy (snl.com)

Using personal bankruptcy to prevent foreclosure (money.cnn.com)

People become slaves to their houses (nytimes.com)

Bell, California Emails Gone Viral; Citizens Protest $800K Salaries (Mish)

Bell council used little-noticed ballot measure to skirt state salary limits (latimes.com)

Those sweet Bell retirements may cost you too (latimes.com)

Cities seek property tax by giving away land (nytimes.com)

How US following path of Japan. Real estate lost decade. (doctorhousingbubble.com)

U.S. middle class being wiped out by globalization as wealthy benefit (finance.yahoo.com)

Geithner pushes plan to let tax cuts for wealthy expire (cnn.com)

U.S. Mortgage Brokers Get Criminal Check, Tests Under New Rules (bloomberg.com)

Agencies refuse to rate mortgage-backed bonds bc of new legal liability (democraticunderground.com)

Warren's a Candidate for Bank Regulation Job She Devised (nytimes.com)

Elizabeth Warren video from March 08, 2007 (tpmcafe.talkingpointsmemo.com)

Irvine Home Address … 25 NEEDLE GRASS Irvine, CA 92603

Resale Home Price … $7,799,000

Home Purchase Price … unknown

Home Purchase Date …. unknown

Cost of Ownership

————————————————-

$7,799,000 ………. Asking Price

$1,559,800 ………. 20% Down Conventional

4.60% …………… Mortgage Interest Rate

$6,239,200 ………. 30-Year Mortgage

$1,542,129 ………. Income Requirement

$31,985 ………. Monthly Mortgage Payment

$6759 ………. Property Tax

$800 ………. Special Taxes and Levies (Mello Roos)

$650 ………. Homeowners Insurance

$500 ………. Homeowners Association Fees

============================================

$40,694 ………. Monthly Cash Outlays

-$2966 ………. Tax Savings (% of Interest and Property Tax)

-$8068 ………. Equity Hidden in Payment

$2686 ………. Lost Income to Down Payment (net of taxes)

$975 ………. Maintenance and Replacement Reserves

============================================

$33,321 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$77,990 ………. Furnishing and Move In @1%

$77,990 ………. Closing Costs @1%

$62,392 ………… Interest Points @1% of Loan

$1,559,800 ………. Down Payment

============================================

$1,778,172 ………. Total Cash Costs

$510,700 ………… Emergency Cash Reserves

============================================

$2,288,872 ………. Total Savings Needed

Property Details for 25 NEEDLE GRASS Irvine, CA 92603

——————————————————————————

Beds: 6

Baths: 7 full 1 part baths

Home size: 9,300 sq ft

($839 / sq ft)

Lot Size: 25,385 sq ft

Year Built: 2010

Days on Market: 11

Listing Updated: 40387

MLS Number: U10003231

Property Type: Single Family, Residential

Community: Turtle Rock

Tract: Shdc

——————————————————————————

Unparalleled views abound from this newly completed Spanish style custom estate on a highly coveted single loaded street within the exclusive guard gated community of Shady Canyon. This property features beautiful finish qualities throughout and stunning sunset, ocean, Catalina Island and Palos Verdes views. Six bedrooms including detached guest casita, huge interior courtyard with fireplace, gated motor court with on grade 4-car garage. The main floor includes a formal dining room, library and large chef's kitchen that opens to an oversized great room with 24 foot disappearing pocket doors out to the expansive covered loggia and beautifully mature landscaped yard. The expansive grounds include a large pool, spa and barbeque cabana with outdoor kitchen. The subterranean level includes a home theater, gym, game room with wet bar, 1200 plus bottle wine cellar with tasting area, maid's quarters and the main laundry/craft room. In addition an elevator services all three levels.

If you are looking for something to do on Sunday before the party, this property is having an open house from 1:00 to 4:00. It isn't every day you get to tour a $7,799,000 property.

GSE Foreclosures Shatter Record Highs, Keep Climbing

The GSEs have stopped fooling around and begun foreclosure proceedings in earnest.

Irvine Home Address … 39 DESERT WILLOW Irvine, CA 92606

Resale Home Price …… $959,000

You got a fast car

I want a ticket to anywhere

Maybe we make a deal

Maybe together we can get somewhere

Any place is better

Starting from zero got nothing to lose

Tracy Chapman — Fast Car

For the last two years, the GSEs under direction of our government have been trying to make deals with people on loan modifications to keep them in their houses. Together they could have kept some of the distressed inventory off the market. It didn't work out that way.

The dismal failure of these programs was completely predictable because most of the people in trouble could never afford the homes they bought. Everyone was trying to get ahead, and like cars packing in to the fast lane, the volume of traffic brought things to a standstill. Any place is better than were these debtors are now. Most can rent for far less than their current and future payments, many are underwater, and few have any realistic hope of equity for the foreseeable future.

Starting from less than zero, they have nothing to lose… except perhaps their debts.

GSE Foreclosure Starts Start Coming Faster in 2010

Tuesday, July 27th, 2010, 4:13 pm — Jacob Gaffney

The level of foreclosures starts in mortgages owned by Fannie Mae and Freddie Mac, the government sponsored enterprises (GSE), is at its highest point ever in 2010 as the rate of new foreclosures continues to increase.

The June 2010 Mortgage Monitor data provided by Lender Processing Services (LPS) Applied Analytics shows that the spike in foreclosure starts is greatest at 6+ months of delinquency. Analysts have suggested that this may be occurring due to the recent increase in HAMP cancellations. Total foreclosure starts for 2010 are at 1.46m, compared to 1.68m for the same period in 2009 and 1.25m in 2008, to be sure, but the rate at which the starts increase during 1H10 is at the fastest pace LPS Applied Analytics has seen.

Look at that massive spike! The GSEs have stopped fooling around with borrowers. While the commercial banks are shifting their emphasis to short sales to liquidate their backlog of delinquent loans, the GSEs are ramping up their foreclosures.

In a conversation about the findings, vice president Herb Blecher said that "HAMP trials originally were meant to last three months, but almost 1.3m mortgages were trialed in a short period and so we know that some trials run four, five or six months before they are either converted or cancelled."

To be sure, the official HAMP default rates are different, standing a 1.7% after six months — a claim that's hotly disputed.

After delaying the process for two years with a series of failed loan modification programs, the most recent of which being HAMP, the government appears to be giving up on delinquent borrowers. Nobody can reasonably argue that the government didn't do everything it could to save people's homes encourage widespread moral hazard through its indefinite squatting programs.

However, LPS finds that the foreclosure trend is not bleeding over into the market-at-large. Delinquencies and foreclosures remain stable, though elevated, with seasonal trends somewhat muted. Foreclosure starts on non-agency mortgages have also been relatively stable over the last several months, as have the rates on 90+ days default.

In short, for every mortgage performing, the mortgage data analytics firm finds two are deteriorating. At a loss mitigation conference last week, Edward DeMarco, acting director of the Federal Housing Finance Agency, said that banks should consider foreclosing when borrowers are not being rehabilitated.

We are falling farther and farther behind and building an ever-larger shadow inventory.

There are some in government who see the right answer and are pointing the way.

FHFA Director DeMarco: No "Silver Bullet" for the GSEs

Wednesday, July 21st, 2010, 4:39 pm — Jacob Gaffney

… He said that streamlined and transparent loss mitigation is "critical" to saving the GSEs. In the Q&A, DeMarco told an attendee that the FHFA believes the area of principal forgiveness remains "fraught with difficulty,"

Is that secret code for "its a dumb idea that isn't going to happen?" Do any of you want to see the army of HELOC abusers be given a free pass and be allowed to keep their homes?

People get principal reduction all wrong. What we should have is foreclosure, which provides debt reduction, then we should forgive those debts through bankruptcy. The debt needs to be foregiven, but the people need to move out of the houses they can't afford and didn't pay for first. Foreclosure is a superior form of principal reduction.

and in cases "where there is no borrower," even if homeowners are avoiding contact, then the bank should foreclose.

"If you have an abandoned property or a borrower not willing to discuss or work with anything, then get going," he advised.

This is why the transition to short sales will ultimately fail. There are far too many properties that are empty, or where the loan owner has simple stopped responding to the lender. Many of the latter group are simply going to squat until they are kicked out.

And it isn't only the GSEs that are increasing foreclosures. Some banks are finally getting around to booting out the high-end squatters.

Foreclosures boom among nation's most creditworthy

Foreclosures among borrowers with prime conforming loans have shot up 425% since January 2008, according to Lender Processing Services, which compiles mortgage data. Conforming loans are those eligible for purchase by Fannie Mae and Freddie Mac, the federal agencies that buy mortgages from lenders.

Jumbo prime loans not eligible for purchase by Fannie or Freddie have done even worse — foreclosures on those have increased nearly 600%.

Jumbo loans are typically mortgages worth more than $729,750.

Those percentages are so large because the number was so small in January 2008. These numbers will continue to increase as the hopelessly overextended accelerate their defaults.

"Jobs is a major impact. It's a huge factor," says Ken Shuman, a spokesman with Trulia.com, a real estate search engine. "A lot of homeowners on the higher end are also savvy investors. They're seeing their home has lost 30% of their value, we're seeing a lot of strategic defaults."

A strategic default occurs when a borrower stops paying a mortgage they can afford to pay, often because the house's value has fallen below the loan balance.

An accelerated default occurs when a borrower stops paying a mortgage they can't afford to pay long term, often because the payment will increase, the house's value has fallen, and they can rent something for far less.

While the U.S. may be seeing signs of a peak in foreclosures in some of the hardest-hit markets, foreclosure activity continued to rise in many of the nation's metropolitan areas in the first half of the year.

RealtyTrac reports today that 154 of 206 U.S. metropolitan areas with populations of 200,000 or more posted year-over-year increases in foreclosure filings, covering properties in various stages of the foreclosure process.

The top 20 metro areas with the highest foreclosure rates were in four states — Florida, California, Nevada and Arizona, according to the report.

Other RealtyTrac findings:

•94,466 properties received a foreclosure filing in the Miami-Fort Lauderdale-Pompano Beach metro area during the first half of 2010, more than any other metro area.

The metro area with the second-highest total filings was Los Angeles-Long Beach-Santa Ana, which had 93,263.

•Las Vegas continued to post the nation's highest metro foreclosure rate in the first half. One in 15 of its housing units received a foreclosure filing — more than five times the U.S. average.

Foreclosures are falling one month then rising the next as lenders grope for solutions to the catastrophe they're facing. The only thing that has been constant is the delinquency rate that has risen for the last three years and continues to rise.

The answer to the problem is a combination of short sale and foreclosures, and to clear the market of the mortgage debris will require low interest rates, low prices, and more qualified buyers. We have the low interest rates, we will have lower prices, and as for qualified buyers, that may take a while.

He paid how much?

I am always astounded when I see what people paid in Columbus Grove.

  • The original buyer paid $1,273,000 for this property on 4/19/2006. He used a $1,082,050 first mortgage and a $190,950 down payment.
  • After waiting the minimum two month period, he refinanced with a $954,750 first mortgage and a $142,000 HELOC — and gave up his non-recourse protections in the process.
  • On 5/16/2008, he added another to the title and trashed their credit too.

Foreclosure Record

Recording Date: 11/18/2009

Document Type: Notice of Default

He didn't get much squatting time as this was sold to our flipper at auction on 5/21/2010 for $785,000. That is $488,000 less than the original buyer paid. Not a bad deal for the flipper.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 39 DESERT WILLOW Irvine, CA 92606

Resale Home Price … $959,000

Home Purchase Price … $785,000

Home Purchase Date …. 5/21/2010

Net Gain (Loss) ………. $126,050

Percent Change ………. 16.1%

Annual Appreciation … 82.8%

Cost of Ownership

————————————————-

$959,000 ………. Asking Price

$191,800 ………. 20% Down Conventional

4.62% …………… Mortgage Interest Rate

$767,200 ………. 30-Year Mortgage

$190,070 ………. Income Requirement

$3,942 ………. Monthly Mortgage Payment

$831 ………. Property Tax

$550 ………. Special Taxes and Levies (Mello Roos)

$80 ………. Homeowners Insurance

$175 ………. Homeowners Association Fees

============================================

$5,578 ………. Monthly Cash Outlays

-$946 ………. Tax Savings (% of Interest and Property Tax)

-$988 ………. Equity Hidden in Payment

$332 ………. Lost Income to Down Payment (net of taxes)

$120 ………. Maintenance and Replacement Reserves

============================================

$4,096 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,590 ………. Furnishing and Move In @1%

$9,590 ………. Closing Costs @1%

$7,672 ………… Interest Points @1% of Loan

$191,800 ………. Down Payment

============================================

$218,652 ………. Total Cash Costs

$62,700 ………… Emergency Cash Reserves

============================================

$281,352 ………. Total Savings Needed

Property Details for 39 DESERT WILLOW Irvine, CA 92606

——————————————————————————

Beds: 5

Baths: 3 full 1 part baths

Home size: 3,200 sq ft

($300 / sq ft)

Lot Size: 5,282 sq ft

Year Built: 2006

Days on Market: 12

Listing Updated: 40376

MLS Number: S624539

Property Type: Single Family, Residential

Community: Columbus Grove

Tract: Alex

——————————————————————————

This property is in backup or contingent offer status.

Fabulous floorplan!!! Offering approx. 3200 sq. ft. with all the ammentities …Rich hardwood floors downstairs with new carpet and paint. Gourmet kitchen with granite counters and stainless appliances. Rod iron staircase. Attached three car garage.

ammentities?

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend, and don't forget to come join us Sunday evening from 5:00 to 9:00 at JT Schmids.

Irvine Renter

https://www.irvinehousingblog.com/wp-content/uploads/images/uploads/01%20Post%20Images%202010-8/Fund%20Party%208-1-2010%20.jpg

All Signs Point to Lower House Prices

Unless sales volume picks up or inventory stops coming to market, prices are going to go down.

Irvine Home Address … 148 TAPESTRY Irvine, CA 92603

Resale Home Price …… $1,149,900

Oh Gravity is working against me

And gravity wants to bring me down

Oh twice as much ain't twice as good

And can't sustain like a one half could

It's wanting more

That's gonna send me to my knees

John Mayer — Gravity

Affordability is like gravity. When house prices rise far beyond what people can afford, rather than being priced out forever — which is what people fear — the force of affordability causes prices to fall. Lenders try to cheat this process with affordability products, but as we have all seen, Affordability Mortgage Products Make Prices Unaffordable. When the instability of these products causes high delinquency rates, they are removed from the market, and the gravity of the situation takes over; prices fall.

Housing Market Stumbles

Construction Slows, Inventories Build Amid Weak Job Growth, Tax-Credit End

By NICK TIMIRAOS and ROBBIE WHELAN — July 21, 2010

The housing market, whose collapse pulled the economy into recession in late 2007, is stalling again.

In major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans. The expiration of a federal home-buyers tax credit at the end of April is weighing on the market.

Any hopes of property appreciation have stalled for the foreseeable future. The rate of sales is 20% off historic norms and inventory continues to pile up. Buyers are finding the power that sellers enjoyed just a few months ago has reversed. It is quickly becoming a buyers market. When these changes in the market occur, expect to see even lower sales volumes as sellers initially refuse to lower prices and properties stay on the market longer. This fall, sellers will either lower their price to sell or take their properties off the market. The flippers, short sellers and banks with too much REO will lower their prices to clear their inventory. Discretionary sellers with WTF asking prices will be left behind.

On Tuesday, the U.S. Census Bureau said single-family housing starts in June fell by 0.7%, to a seasonally adjusted annual rate of 454,000. The U.S. started 1.47 million homes in 2006, before the housing bubble popped.

Future construction looks even weaker. Permits for single-family starts fell 3% in June, following big declines in both May and April. "We're hovering at post-World War II lows," said Ivy Zelman, president of Zelman & Associates, a research firm.

From June 2006 through last month, California lost 43% of its construction jobs, or 401,900 positions. I see the reality of this every day, and this number does not reflect that large number of people in my industry that work part time. So many people I know and have worked with are suffering right now. It is very sad.

Economists aren't singling out one reason for the stalling housing market. A variety of factors have led to flagging confidence, they say, including sluggish labor markets, global economic turmoil and falling stock prices.

While the housing downturn dragged the economy into a recession nearly three years ago, now it is the economy that is pulling down housing, says economist Patrick Newport at IHS Global Insight. Without sustained job growth, the housing market likely won't improve. That in turn will ricochet across manufacturing, retail and other trades heavily dependent on home building and consumer spending.

This is something the bulls refuse to acknowledge. The unemployed do not buy homes.

The Wall Street Journal's quarterly survey of housing-market conditions in 28 major metropolitan areas shows that inventory levels have grown in many markets. But inventory fell in some of the weakest ones, including several Florida markets, Atlanta, and Charlotte, N.C.

At the end of June, inventory was up 33% from year-ago levels in San Diego, and by 19% and 15% in Los Angeles and Orange County, Calif., respectively, according to data compiled by John Burns Real Estate Consulting. Rising inventory can lead to price declines later.

We have all been watching the IHB chart of inventory go up very steeply, and it is show no signs of leveling off.

Jeff Gans, a 45-year-old engineer from Baltimore who designs software for car manufacturers, has contemplated buying a house or condo for more than a year. But concerns about job stability have kept him on the sidelines.

Even falling interest rates aren't enough to whet consumer appetites for housing. Last week, the average rate on a 30-year fixed-rate mortgage was quoted at 4.57%, according to Freddie Mac, the lowest since its survey began in 1971. But demand for home-purchase mortgages sits near 14-year lows, according to the Mortgage Bankers Association, down 44% over the past two months.

With mortgage rates at historic lows, isn't it surprising to find demand for mortgage at historic lows as well? That emphasizes how weak demand really is. If record low mortgage interest rates doesn't stimulate demand, what will?

The government last fall extended tax credits worth up to $8,000 to home buyers who signed contracts by April 30, causing sales to surge early this year. Those buyers had until June 30 to close their sales until Congress, concerned that the backlog of sales wouldn't close in time, extended the deadline through September.

Analysts long expected the withdrawal of a federal tax credit, which had juiced sales, to lead to a slower-than-usual summer.

"It's the magnitude that's been the issue,'' says Douglas Duncan, chief economist at Fannie Mae. "The drop-off in activity has surpassed expectations.''

"surpassed expectations?" LOL! That is a nice way to spin it. Will the price decline "deliver superior performance" as well?

Reports should show that completed transactions of home sales held up through June. But newly signed contracts in May and June have plunged.

To be sure, some housing markets show signs of healing. Home-sales activity in New York, Washington, D.C., and parts of California continue to improve. But other markets, including Tampa, Fla., and Chicago, face rising foreclosures and weak job growth.

Low mortgage rates and falling prices have made homes more affordable in many markets than at any time in the past decade. But those affordability gains have been offset for many buyers by tighter lending standards, particularly for "jumbo" loans that are too large for government backing. Banks are requiring down payments of 20% and more and strong credit scores because they must hold jumbo loans in their portfolios.

So when banks are risking their own money, they are concerned about getting repaid…. What an interesting idea. They charge higher interest rates too.

More broadly, the housing market faces two big problems: too many homes and falling demand. More than seven million borrowers are 30 days or more past due on their mortgage payments or in some stage of foreclosure. Rising foreclosures will keep pressure on prices as banks put more homes on the market.

Last month, nearly 39,000 borrowers received government-backed loan modifications, but more than 90,000 borrowers fell out of the program, the Obama administration said on Tuesday.

Moreover, the pool of potential buyers remains constrained by the unprecedented number of homeowners who are underwater, or who owe more than their homes are worth.

That's making it particularly hard for traditional "trade up" homeowners like Maria Billis to pull the trigger on a home purchase. Ms. Billis can't sell her townhouse in Boynton Beach, Fla., because its value has fallen by a quarter. That puts it below the $160,000 that she owes the bank.

The 31-year-old human resources consultant, who married last month and wants to start a family, found a half-dozen homes in her price range but doesn't want to sell her current home for less than the amount owed. She has considered buying the new home and renting the townhouse, but concedes, "It's a big risk."

It's not a big risk. If she had purchased a property with a cost of ownership at or below rental parity, it would be no big deal; however, that isn't what she did. And neither did anyone else during the bubble. The most obvious sign of the housing bubble, at least to me, was the fact that you couldn't rent out a property for enough to cover the cost. I remember thinking, "why would anyone do this?" I was so naive, that it never occurred to me that people might do that in order to speculate on appreciation.

The real risk is buying a property that can't be rented for enough to cover the costs. Whenever you buy a property, you have to ask yourself what happens if you can't or don't live in it. If the answer is, you lose lots of money each month, then it probably isn't a good idea to buy it. Its really just common sense.

Mortgage-finance giants Fannie Mae and Freddie Mac also are starting to push more repossessed homes onto the market. The companies owned 164,000 homes at the end of March, up 80% from a year ago.

Another reason inventory is rising: "Unrealistic sellers have flooded the market" after reports of bidding wars and home-price increases earlier in the year, says Steven Thomas, president of Altera Real Estate, a brokerage in Orange County. The amount of time that homes there have sat on the market there has swelled to 3.78 months, up from 2.35 months in April.

Steve Thomas managed to get his made-up numbers into national media. I suppose congratulations are in order. At least he got the trend right.

"The sellers think the market's coming back. They've tacked on an extra 5 to 10 to 15%. The buyers aren't going for it," says Jim Klinge, a real-estate agent in Carlsbad, Calif. Over the next six months, "it's going to feel like a double-dip because sellers are going to have to lower their prices."

Jim the Realtor gets it. And notice I capitalized the R with him.

Not all sellers will take that step. Jerry Anderson has listed his four-bedroom home in Dana Point, Calif., on and off the market for the last two years. He's cut the price to $1.25 million, down from $1.75 million, but hasn't had any offers on the home, which has three fireplaces and ocean views.

Mr. Anderson, who bought the home in 1987, says he'll take it off the market in December if it doesn't sell rather than cut the price.

We will undoubtedly be taking it off the market….

Matt Carney listed his Moreno Valley, Calif., home for $337,000 in February, and lowered the price on Tuesday for the third time, to $297,000. He says he can't go any lower because he owes $274,000 on the home and doesn't want to dip into savings to pay for transaction costs.

In other words, this guy is underwater and in denial.

The High end is going to be crushed

I have consistently maintained my belief that the market for properties needing loans over the $729,750 jumbo-conforming limit are going to suffer tremendous pricing pressure. The common delusion in the mainstream media is that this market has already recovered and it is a safe haven. This market is going to collapse, and the price declines will be breathtaking.

Lenders are facing delinquency rates on big mortgages at much higher rates than for smaller mortgages. Think about that — if the rich pretenders were doing well and recovering from the recession, wouldn't they be paying their mortgage? Shouldn't the delinquency rates on jumbo mortgages be much lower than on conforming?

But Orange County is diffferent, right? So we know that the high end is delinquent on their loans at a greater rate than the low end. Wouldn't it stand to reason that the high end would also have more distressed properties? Nope. The distressed inventory is being withheld from the market. So far this year, only 202 properties with estimated values of over $1,000,000 have been sold at auction. It really is a squatters paradise.

Lenders will not give away these homes even though the result of their inaction is essentially that. The jumbo market is denial on a massive scale. Lenders are somehow hoping that all these people are going to find work at a pay rate capable of making payments on these million dollar mortgages. It's not going to happen. At some point, lenders are going to realize this, and they are going to want their money back. The Ponzis, the system gamers, and other delusional loan owners are going to get wiped out, and this market will be cleared. When it happens, the carnage will be epic.

I don't know when this will happen. It should have happened already. I never thought lenders would allow so much squatting to go on for so long. They can't allow multi-year squatting in these properties without more and more borrowers opting to do the same. The lenders who wise up first and liquidate these properties will obtain the best pricing. Those that hold out with hopes the cartel will sustain unsustainable pricing will lose the most money. Let the liquidation begin.

Countrywide was really stupid

  • This property was originally purchased on 11/22/2004 for $1,002,500. The owner used a $750,000 first mortgage and a $257,500 down payment.
  • On 10/27/2005 they obtained a $172,500 HELOC.
  • On 7/26/2006 Countrywide gave this family a $1,240,000 first mortgage.
  • Total mortgage equity withdrawal is 490,000 including their down payment.
  • Total squatting time was about 1 year.

Foreclosure Record

Recording Date: 10/27/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/14/2009

Document Type: Notice of Default

I don't know how Wells Fargo ended up with this loan, but they bought the property as foreclosure auction for $1,049,700. Apparently, dropping the bid $200,000 wasn't enough. They have the property listed at the price their realtor thought they could get. I bet they don't.

Irvine Home Address … 148 TAPESTRY Irvine, CA 92603

Resale Home Price … $1,149,900

Home Purchase Price … $1,049,700

Home Purchase Date …. 3/25/2010

Net Gain (Loss) ………. $31,206

Percent Change ………. 3.0%

Annual Appreciation … 27.7%

Cost of Ownership

————————————————-

$1,149,900 ………. Asking Price

$229,980 ………. 20% Down Conventional

4.62% …………… Mortgage Interest Rate

$919,920 ………. 30-Year Mortgage

$227,905 ………. Income Requirement

$4,727 ………. Monthly Mortgage Payment

$997 ………. Property Tax

$250 ………. Special Taxes and Levies (Mello Roos)

$96 ………. Homeowners Insurance

$252 ………. Homeowners Association Fees

============================================

$6,321 ………. Monthly Cash Outlays

-$1271 ………. Tax Savings (% of Interest and Property Tax)

-$1185 ………. Equity Hidden in Payment

$399 ………. Lost Income to Down Payment (net of taxes)

$144 ………. Maintenance and Replacement Reserves

============================================

$4,408 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$11,499 ………. Furnishing and Move In @1%

$11,499 ………. Closing Costs @1%

$9,199 ………… Interest Points @1% of Loan

$229,980 ………. Down Payment

============================================

$262,177 ………. Total Cash Costs

$67,500 ………… Emergency Cash Reserves

============================================

$329,677 ………. Total Savings Needed

Property Details for 148 TAPESTRY Irvine, CA 92603

——————————————————————————

Beds: 4

Baths: 3 full 1 part baths

Home size: 3,050 sq ft

($377 / sq ft)

Lot Size: 4,995 sq ft

Year Built: 2004

Days on Market: 9

Listing Updated: 40380

MLS Number: U10003116

Property Type: Single Family, Residential

Community: Quail Hill

Tract: Tape

——————————————————————————

According to the listing agent, this listing is a bank owned (foreclosed) property.

HIGHEST and BEST FINAL OFFER – Please include the MULTIPLE OFFER FORM that I have uploaded in the media section. We have submitted offers and are in a multiple offer situation. To be fair to your client, please have them bring in their H&B Offer. Call with any questions. From the moment you arrive you will notice the value in this home. Gorgeous curb appeal with flagstone accents and inlay in driveway. Enter into the large living room with a formal dining area to the left. Light-Bright and open kitchen area with granite countertops, pantry, upgraded appliances and cabinetry. There is a large family room with fireplace and access to rear yard. There is plenty of room upstairs with generous bedrooms. The hard scape and landscape in the rear yard is wonderful; covered patio, flagstone, double swing and a koi pond.

Another Ignorant and Misguided Attack on the 30-Year Fixed-Rate Mortgage

The 30-year fixed rate mortgage provides a reasonable balance between affordability and buying power. Historically, it has been associated with stable housing markets. Despite these facts, some foolishly want to see it replaced with adjustable-rate mortgages.

Irvine Home Address … 14 IRON Spgs Irvine, CA 92602

Resale Home Price …… $839,000

I was born with the wrong sign

In the wrong house

With the wrong ascendancy

I took the wrong road

That led to the wrong tendencies

I was in the wrong place

At the wrong time

For the wrong reason

And the wrong rhyme

On the wrong day

Of the wrong week

I used the wrong method

With the wrong technique

Wrong

Wrong

Depeche Mode — Wrong

I recently wrote the post Government Bureaucrat Recommends Against 30-Year Fixed-Rate Mortgages. The author of that article wrote a scathing and dismissive rant against the 30-year fixed rate mortgage, and he provided no rational arguments for his opposition to its widespread use. I thought it was a one-off written by a crank who had too much coffee that day. Apparently he has company.

I am prone to write stinging rebukes to poorly written garbage on the web, but when I call someone out, I will devote the post to building a factual argument as to why they are wrong. I never ask anyone to just take my word for it because I am some kind of expert. Authority comes from the presentation of data in a compelling argument. Mindless rants don't make authors an authority, it makes them lunatics.

The source article for today's post is horrible. I don't know if the writer is a lunatic, but she certainly is very wrong about her reasons for opposing the 30-year fixed rate mortgage.

The Government's Role in the Housing Bubble

Megan McArdle — Jul 23 2010

I never would have guessed that years in, we'd still be debating the role of the government in the housing bubble. Conservatives are still pinning most of the blame on the Community Reinvestment Act, while liberals are saying that there's no evidence that government played any significant role–unless, perhaps, it was all the fault of Alan Greenspan.

As it happens, I think that the government did play a role. A big role. But I think it's rather subtler, and thus, rather more problematic, than most people on either side are discussing.

To me, the unsung villain of the mortgage crisis is the 30-year fixed rate self-amortizing mortgage with no prepayment penalty. This hothouse creature is beloved of liberals, who like any product that gives the consumer the power to shaft banks whenever it is to their advantage. And it is beloved of conservatives because it smacks of sober citizens taking on modest, stable obligations they can meet.

The 30-year fixed-rate mortgage has been popular among progressives and conservatives alike because it is a good loan product. (Note she used the old term liberals demagogueed by the Right rather than the more fashionable progressives.) She makes a ridiculous straw-man argument that the Left is out to screw the banks. Perhaps some die-hard conservatives who are willing to believe anything bad about progressives will believe that, but the reason the Left likes the 30-year loan is because it provides a means for average wage earners to acquire wealth. Paying down a mortgage through the forced savings of an amortizing mortgage used to be the primary wealth generating mechanism of the middle class — that is until we allowed everyone to rob the piggy bank with HELOCs.

Did you notice the writer setting the emotional groundwork with the phrases "unsung villain" and "hothouse creature" and "the power to shaft banks?" This dismissive language is not presenting a sound argument based on facts, it is setting the stage for an emotional argument based on hyperbole.

But this product is about as stable as a nitroglycerine shot with a TNT chaser.

That statement is complete and utter bullshit. Actually, bullshit is a statement with a casual disregard for the truth — realtorspeak is a good example. The statement above is an intentional lie. A lie cloaked with emotional baggage to disguise its intent.

The 30 year fixed rate mortgage was ultimately at the heart of the Savings and Loan crisis.

That statement is a half-truth used to support a weak argument. The heart of the S&L fiasco was an asset-liability mismatch. Banks often borrow with short-term funds and lend on a long-term basis. The 30-year fixed rate mortgage contributes to this problem, but ultimately this is a financial management problem at banks. Nobody forces banks to underwrite these loans, and nobody forces them to match those loans with short-term deposits. This is a choice banks make that sometimes blows up in their face. Banks could float long-term bonds to match their loans, and they can also offload them to the secondary market; in fact, that is one of the primary arguments for keeping a secondary market in place.

Yes, yes, deregulation set the stage for the ultimate denouement–but the Savings and Loans were deregulated in such a haphazard fashion in part because they were being slowly driven into bankruptcy by their huge collection of low-interest, long-term real estate loans, in an environment where Paul Volcker had briefly driven short-term interest rates up to 20%. While fraud and abuse were certainly rampant, the enormous scope of the problem was not due to S&L officers suddenly becoming more thievish, or regulators more tolerant of thievery, but because everyone in the industry was flopping as wildly a a beached sturgeon in an attempt to keep their banks solvent atop large portfolios of low-interest loans. Meanwhile, whenever interest rates dropped, people would refinance, meaning that even the high-interest loans they did make didn't help much.

The answer to this, as you may recall, was . . . the creation of the massive private market in mortgage bonds. In an environment with a floating currency and considerable worries about inflation, the only thing that can neutralize the risks of the 30-year mortgage is laying them off to as large a pool as possible.

Selling low-interest loans in the secondary market is still the answer. There is no problem here. Banks are currently under no obligation to keep any loans they originate on their balance sheets. During the debates on financial reform, there was a proposal for banks to keep 5% of the loans they originated on their balance sheets, and it was defeated by intense opposition from the banking lobby. Their primary argument was that it created asset-liability mismatch. They were right.

MIchael Lewis chronicles what happened next in the still-terrifyingly-relevant Liar's Poker.

Give me a break. She has now associated all the evils of Wall Street with a 30-year fixed rate loan? Did she really think nobody on the web would call her on that nonsense?

Moreover, this product exists, as far as I can tell, only because of massive government intervention into the markets, a point that Reihan Salam and Chris Papagianis made in their recent, excellent piece.

"As far as I can tell?" I respect that she has the courage to flaunt her ignorance so publicly. The product exists because people demand it. People demand it because it is a good and stable loan product that builds wealth for ordinary Americans. The government supports it because it provides stability in housing markets.

Until the Great Depression, the mortgage was a very, very different product. There was no amortization, and down-payments were often massive–half or more of a home's value. They lasted perhaps 3 or 5 years, and were rolled over if borrowers could not meet the balloon payment. The default crisis of the 1930s resulted from the inability to roll those loans, and so the government stepped in, causing the fifteen year self-amortizing loan to proliferate. This process was especially accelerated by the VA loans that were offered to returning veterans. Eventually, the payment terms stretched out to allow more and more people to buy homes.

This had some curious effects. As aforementioned, it was ultimately not good for banks that were restricted to the kind of boring business many commentators would like to see banks return to: loaning money to consumers and small businesses, and taking deposits.

Yes, that is exactly what banks are supposed to do. Is that boring? Are we supposed to have an exciting banking system? Did everyone enjoy the volatility in our economy over the last several years? It was certainly exciting. Financial innovation is a fallacy. Banks are supposed to be boring, stable institutions. What does she want?

The mismatch between their short-term obligations and their long-term assets too easily becomes catastrophic.

Nonsense. If banks do not properly utilize the tools available to them to prevent asset-liability mismatch, they can certainly go broke, but that is only a catastrophe for the poorly managed bank. It isn't a catastrophe for the economy. She is pointing to some bogeyman that doesn't exist.

It also–at least according to economists I've interviewed–contributed to the long, broad run-up in housing prices that took place in the latter half of the twentieth century.

She must have interviewed some real idiots. The transition from a 50% down interest-only loan market of the Great Depression to the 20% down conventionally amortizing loan market beginning after WWII did see a runup in prices. However, once prices stabilized in the early 1950s, the 30-year fixed rate mortgage provided a stable price-to-income structure with excellent affordability for the next 25 years (see graph below). Even then the system broke down in the late 1970s because allowable DTIs got out of control, not because of the mortgage product.

People price their homes by their monthly payment, and what the bank will lend them. As banks lent more, and longer terms lowered the monthly payment for a given loan amount, people bid up the price of housing. This created the expectation of steadily appreciating home values–something that had not been historically true.

This statement is inaccurate. Robert Shiller did detailed studies on this subject for the book Irrational Exuberance. His studies showed that expectation of appreciation was not present prior to the late 1970s. The 25 year period of stability from 1950-1975 — the heyday of the 30-year fixed rate mortgage — did not have expectation of appreciation. If you look carefully at the chart of inflation-adjusted home prices, you see that prices did not rise faster than the general rate of inflation during this period.

Over time, people began pricing expected appreciation into their purchase price as well, a phenomenon that again, tended to accelerate over time.

No, this was a phenomenon of the first bubble of the late 70s, and with each successive bubble and continued "innovations" which allowed people to access appreciation for spending money, the expectation of appreciation and the desire for free money has created an entire population of kool aid addicts.

Most subtly, and most perniciously of all, it created generations of buyers who thought of all mortgages as thirty-year fixed rate loans.

Perniciously? I wish everyone thought of mortgages as 30-year fixed-rate loans. If they did, we wouldn't have a demand for interest-only and Option ARMs — the real culprits of the housing bubble.

People in other countries understand that their mortgage rate resets when interest rates go up.

I think the author is revealing her hidden agenda here: she is pandering to banking interests that would rather issue adjustable rate mortgages at the bottom of the interest rate cycle. Banks would certainly rather have everyone on ARMs because it offloads the interest rate risk. When interest rates go up, the value of fixed-rate annuities goes down. The value of fixed-rate loans held on bank balance sheets will plummet. I wonder if she it receiving compensation from banking interests?

Even the people who theoretically understood that they were taking on an adjustable rate mortgage didn't have any cultural context for them–no unhappy childhood memories, no newspaper stories, no parents or friends to warn them about what would happen when the loan rate reset. And of course, many very naive people simply assumed that their floating-rate mortgage was fixed–and were rooked by unscrupulous mortgage brokers.

I am not sure what she is arguing for here, but the fact that we have had 25 years of steadily falling interest rates is exactly why some boneheads continue taking out adjustable-rate mortgages when it makes no sense to do so. The next bailout of the mortgage and housing industry will come from those idiots taking out ARMs today. The ARM reset issue hasn't gone away, it has only been temporarily deferred by even lower interest rates.

As I see it, this decades long intervention in the housing market took a terrible toll. And whenever this product went bad, rather than reconsidering its support, the government staged another intervention to keep this type of loan alive.

The first statement is true: government intervention has certainly ruined the housing market, but the connection to the 30-year mortgage is a figment of her imagination.

It gave an implicit guarantee to Fannie and Freddie, deregulated the savings and loans (and then bailed them out), had its regulators and lawmakers help create the market in mortgage securities, and so forth. All the while, it gave a giant tax subsidy to mortgage interest that convinced people they were fools not to buy.

No, the National Association of realtors is what worked to convince people there were fools not to buy. They are bullshit artists who will use any tool available. (Graphic below is from 2006.)

As of this writing, are we rethinking any of it? Will the new head of the CFPA crack down on mortgages that offer prepayment options?

I certainly hope not.

Will lawmakers finally break up Fannie and Freddie and cut off the flow of cheap capital they glean from the implicit government guarantee? Will it get the FHA out of the business of propping up the conventional loan market?

I certainly hope so.

Of course not. There is no constituency for such a thing except for a few crazy libertarians.

It is rare that I find an article that annoys me as much as that one. I don't mind that people promote their agendas. I do it. I just prefer it when people do so with rational arguments based on facts and data. The piece of crap this woman wrote reads like something from a tawdry political blog. Many of the best articles I have read on the web have come from the Atlantic. This isn't one of them.

Palladio Properties is at it again

These guys are very active in the Irvine market. Today we have yet another flip.

The previous owners did not buy at the peak, and they did not abuse their HELOC, but they still over borrowed and lost their home.

  • This property was purchased for $952,000 on 6/16/2004. The owners used a $714,000 Option ARM first mortgage with a 1.25% teaser rate and a $238,000 down payment.
  • They quit making payments in early 2008 and squatted for over two years before being kicked to the curb.

Foreclosure Record

Recording Date: 05/18/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/25/2008

Document Type: Notice of Default

https://www.irvinehousingblog.com/wp-content/uploads/images/uploads/01%20Post%20Images%202010-8/Fund%20Party%208-1-2010%20.jpg

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 14 IRON Spgs Irvine, CA 92602

Resale Home Price … $839,000

Home Purchase Price … $708,000

Home Purchase Date …. 6/10/2010

Net Gain (Loss) ………. $80,660

Percent Change ………. 11.4%

Annual Appreciation … 106.3%

Cost of Ownership

————————————————-

$839,000 ………. Asking Price

$167,800 ………. 20% Down Conventional

4.62% …………… Mortgage Interest Rate

$671,200 ………. 30-Year Mortgage

$166,286 ………. Income Requirement

$3,449 ………. Monthly Mortgage Payment

$727 ………. Property Tax

$225 ………. Special Taxes and Levies (Mello Roos)

$70 ………. Homeowners Insurance

$100 ………. Homeowners Association Fees

============================================

$4,571 ………. Monthly Cash Outlays

-$828 ………. Tax Savings (% of Interest and Property Tax)

-$865 ………. Equity Hidden in Payment

$291 ………. Lost Income to Down Payment (net of taxes)

$105 ………. Maintenance and Replacement Reserves

============================================

$3,274 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,390 ………. Furnishing and Move In @1%

$8,390 ………. Closing Costs @1%

$6,712 ………… Interest Points @1% of Loan

$167,800 ………. Down Payment

============================================

$191,292 ………. Total Cash Costs

$50,100 ………… Emergency Cash Reserves

============================================

$241,392 ………. Total Savings Needed

Property Details for 14 IRON Spgs Irvine, CA 92602

——————————————————————————

Beds: 4

Baths: 2 full 2 part baths

Home size: 2,600 sq ft

($323 / sq ft)

Lot Size: 3,755 sq ft

Year Built: 2002

Days on Market: 12

Listing Updated: 40370

MLS Number: S624557

Property Type: Single Family, Residential

Community: Northpark

Tract: Aldc

——————————————————————————

Beautiful home located in Northpark Square. 4 Bedrooms and 1 Den. Granite countertop. Hardwood flooring. New carpet & New paint. Built-in BBQ in backyard. Move-in ready.

Eliminating Government Housing Subsidies Will Improve the Economy

Eliminate the myriad of government subsidies will cause house prices to drop, but it will also release capital to more productive uses.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address … 21 EDEN Irvine, CA 92620

Resale Home Price …… $659,900

Two of us riding nowhere

Spending someones

Hard earned pay

You and me Sunday driving

Not arriving on our way back home

we're on our way home

we're on our way home

we're going home

Boney M. — Two of Us

Government subsidies are spending someone else's hard earned pay. All of us who work are paying for McMansions everywhere through the home-mortgage interest deduction that subsidizes the McMansion owner's loan. It's time we stopped these subsidies, allowed housing prices to fall to their natural market levels, and released trapped capital currently tied up in real estate to more productive uses.

We Can't Afford This House

Christopher Papagianis and Reihan Salam — July 20, 2010

Part 2 —

Admittedly, ending the subsidies would probably depress housing prices overall. Since most homebuyers base their purchase decisions on the monthly after-tax cost of housing, reducing the deduction for mortgage interest would mean that the same monthly payment would buy “less house.” For example, a 25 percent deduction for mortgage interest allows buyers with a 6 percent mortgage to spend an extra $30,000 on a house without seeing any increase in their monthly payments.

There is a much easier way to figure out how much eliminating the home-mortgage interest deduction would cause prices to drop. What is the marginal tax rate of the borrower? Assume that most buyers borrow the most they can afford on a monthly payment basis, and further assume intelligent ones have already factored in the tax savings. If you eliminate the tax savings, people will need to bring their payment down accordingly. This won't have much effect on the lower priced homes because many of those borrowers don't itemize, but in cities like Irvine, elimination of this deduction would cause loan balances to shrink by 25% to 40% to keep the same payment. Since about 80% of the house price is usually financed, this will lower prices 20% or more.

Similarly, an increase in down-payment requirements from the current 3.5 percent to 20 percent would mean that $20,000 of savings could be used to buy only a $100,000 house, rather than one priced at $570,000.

Increasing the down payment requirement won't directly impact prices, but it will have a major indirect effect. For instance, trustee sale prices are 15% to 20% lower than resale prices because the down payment requirement is 100%. Very few people have the entire purchase price in cash, so the limited buyer pool makes prices much lower. The same principal holds when evaluating what would happen if down payment requirements went from 3.5% to 20%: they buyer pool would get so much smaller that bids would be lower and prices would go down, probably quite a bit. The people who can put 20% down can still borrow plenty at low interest rates, but there are fewer of these people, so the law of supply and demand suggests that prices would go down.

A general decline in housing prices would constitute a one-time wealth transfer from current homeowners to future ones — but this would be well worth it if phased in over a period of years.

That isn't really true. A general decline in housing prices would constitute the evaporation of the illusory wealth that current home owners believe they have but really don't. The housing bust didn't witness a transfer of wealth, and further price declines necessary to get off the government stimulus won't either.

In 2007 (the last year of the bubble), households’ primary residences accounted for only 31.8 percent of total family assets. While primary residences make up a larger share of the assets of lower-income than of higher-income households, housing subsidies are less significant for the former because their tax rates are lower, which makes the value of deductions smaller. Because the value of subsidies provided by the FHA and the GSEs accrues to the borrower on a per-dollar-of-debt basis, their reduction is unlikely to be felt as strongly by lower-income households. The well-off take out bigger mortgages, pay more interest, and have bigger income-tax bills against which to apply a deduction: The median house value for households in the 40th through the 59th income percentiles is just $150,000, compared with $500,000 for households in the top income decile.

According to the Office of Management and Budget (OMB), the mortgage-interest deduction is expected to cost $637 billion over the five years ending in 2015. The exclusion of capital gains on primary residences is expected to cost another $215 billion over the same five years, with the deductibility of state and local property taxes on owner-occupied homes adding $151 billion. In total, these subsidies will reduce federal revenue by well over $1 trillion over a decade during which the federal government is expected to run a $9 trillion deficit. A gradual phase-out of these subsidies is therefore not only smart economics, but a fiscal necessity.

The financial argument is difficult to ignore. We spend a great deal of money inflating house prices in places like Irvine, and we obtain no observable benefits from the investment — unless you consider Irvine Ponzis something you want to see more of.

Over the years, tax experts have also zeroed in on how some of these subsidies are distributed. Under the status quo, 80 percent of the benefits from the mortgage-interest deduction go to the top 20 percent of households in terms of income. The deduction helps only those taxpayers who itemize deductions on their tax returns, which is much more common among high earners, and the value of the subsidy rises as one moves up the tax brackets. Further, as Joseph Gyourko and Todd Sinai of the University of Pennsylvania have documented, the subsidies are unevenly concentrated, with net benefits going to only 20 percent of states and 10 percent of metropolitan areas. Not surprisingly, over 75 percent of these benefits go to three high-cost metropolitan areas: New York City–Northern New Jersey, Los Angeles–Riverside–Orange County, and San Francisco–Oakland–San Jose.

A better approach would be to provide a flat tax credit to all homebuyers. This would preserve an incentive for people to buy a home but would not provide a larger incentive for people who buy bigger homes or take on outsized debts. The size of the credit could be reduced over time. Under this sort of policy, the federal government could aid middle- and working-class homebuyers at a small fraction of the cost of the current mortgage-interest deduction.

There is a better and more politically feasible alternative that changing the home-mortgage interest deduction to a flat tax. Rather than changing anything about the deduction, it could be rendered worthless by simply raising the standard deduction.

Whenever we estimate the tax benefits for an Ideal Home Brokers client, we take their estimated marginal tax rate at tax 10% off it. Anecdotally, a those that have run simulations through their tax software report that the cost of losing the standard deduction makes the home-mortgage interest deduction significantly less effective that most assume it is. Someone in the 35% tax bracket only gets about a 25% net tax advantage.

Consider what would happen if the standard deduction were raised to $50,000. The lower-middle class would receive a substantial tax break, and the upper-middle class would see a greatly reduced benefit from itemizing. In fact, this would simplify tax preparation significantly because very few people would bother to itemize. The net effect would be to shift the tax burden from low wage earners to high wage earners, and in the process, it would render the home-mortgage interest deduction worthless.

Raising the standard deduction would be much easier politically than trying to mess with the tax code to eliminate the home-mortgage interest deduction. Most people wouldn't even recognize how their deduction became worthless, and politicians wouldn't be blamed.

Dismantling the GSEs is a more difficult proposition. Taxpayers have already committed roughly $150 billion to the bailout of Fannie and Freddie. The Congressional Budget Office projects that losses could balloon to $400 billion over time, while other analysts suggest the taxpayer hit could be closer to $1 trillion if default and foreclosure rates stay high. The reason these estimates vary so much is that taxpayers can expect three different kinds of losses from the GSEs:

  1. those linked to the $5 trillion of mortgage-backed securities and loan guarantees that they are responsible for;
  2. those that will continue to occur as a result of regular, ongoing operations in a declining housing market; and
  3. those that may result from their being used as de facto government agencies, subsidizing foreclosure-prevention efforts.

Fannie and Freddie function today as off-balance-sheet conduits for taxpayer spending on housing, and there is no mechanism in place to end this practice. What’s particularly disappointing is that Congress is on the verge of sending the president a sweeping financial-reform bill that doesn’t account for Fannie and Freddie, the most expensive part of the bailouts.

There is no chance of anything being done with the GSEs until the housing bust is over, and we are less than 50% of the way there. The various government props has done nothing but delay the inevitable and promote a great deal of market denial. People cannot afford their homes, and these homes — along with the loans that purchased them — must be liquidated. The liquidation process will cause staggering losses, and the GSEs are the only conduit banks have for dumping these losses on the US taxpayer. That is the only reason Congress did not address them in the financial reform package.

A lot of thoughtful proposals for reforming Fannie and Freddie have been issued over the past year. In late May, Donald Marron and Phillip Swagel of Georgetown University put forth one of the more balanced and straightforward plans. The crux of it is to make the GSE guarantees explicit rather than implicit, and to charge an appropriate fee for them. Marron-Swagel would turn Fannie and Freddie into private companies and force them to compete with other firms. These new businesses would have a narrow mission: to buy conforming mortgages and bundle them into securities that are eligible for government backing. The key is that the federal guarantee would be transparent, and offered only in exchange for the firms’ paying the government an actuarially fair price for what would amount to insurance.

This sounds like the kind of idea an academic would come up with. There is no way the government would ever charge a fair-market actuarial price for this insurance. We all know it would be subsidized at pennies of its value, and the government would be on the hook for the next massive bailout once lenders know all the risk has been shifted to them. This idea will not work.

An explicit government backstop might seem an unwarranted interference in housing markets, but recent experience suggests that it is unrealistic to believe that the government will stand aside next time.

To even suggest the GSEs have anything other than an explicit government guarantee is a joke. We tried the implicit guarantee nonsense for about 40 years, and everyone knew the government was going to step in when times got tough. Now that it actually happened, everyone in the market knows the guarantee is explicit. For anyone in the government to even suggest otherwise is a lie more transparent than most lies they tell us.

Some government backstop will always be implicit; better to make it explicit and price it. Once a price is established under the Marron-Swagel plan, the government would have the option of raising it, thereby reducing its support for the market, slowly and over time. The government could also reduce its footprint in the housing market by putting a ceiling on the size of the mortgages eligible to be packaged into government-backed securities. If the loan limit were capped in nominal terms, then future inflation and house-price increases would, over the course of several years, work to reduce the government’s presence in the marketplace.

If you really want to lower the government's footprint, lower the conforming limit. Change the formulas. Why do we allow jumbo conforming? Why not cap all GSE and FHA loans at $417,000, and make everything else private-label jumbo loans? If you lowered the conforming limit, over time only low-income borrowers would utilize these loans. And that is why these programs were begun. We lost our way and began subsidizing mortgages of high wage earners and inflated house prices everywhere they congregate.

Likewise, other subsidies, such as the mortgage-interest deduction, can and should be gradually eliminated.

Reforming the housing sector won’t miraculously restore robust economic growth. It will, however, help stanch the bleeding of productive resources into a sector that has been distorted for decades by misguided government subsidies. And over time, that will give workers and entrepreneurs the tools they need to build a stronger and more sustainable economy.

We spend way too much money on housing in the country, and we get little in return for that investment. Think about it. What does a house produce after it is built?

When we invest in factories, the completed factory produces goods and services and employs people. When we invest in infrastructure, the new transportation system increases commerce and stimulates the economy. When we invest in housing, we get a temporary boost from the construction itself, but the house does nothing but require additional resources for upkeep. It produces nothing.

So why are we subsidizing housing?

In California we subsidize housing because our entire economy is a Ponzi Scheme dependent upon rising home values. Rising prices generates local tax revenues that keeps governments afloat, and more important than that, it provides HELOC money to all homeowners who spend this in the local economy. Without this HELOC spending, the California economy sputters, governments teeter on the brink of bankruptcy, and Ponzis everywhere suffer the loss of their borrowed existence. I don't see things changing any time soon because we lack the understanding or the will. California seems to like its Ponzi economy. Someday it will blow up. It may already have.

Poor timing

The owners of today's featured property did not time their purchase particularly well. Like many in the first wave of knife catchers, they likely saw the first decline in prices as a buying opportunity — an opportunity to lose their down payment and destroy their good credit.

  • This property was purchased on 4/3/2007, coincidentally it was the day of the collapse of New Century Financial and the implosion of subprime. They paid $750,000 using a $600,000 first mortgage, a $75,000 second mortgage, and a $75,000 down payment.
  • They were too late for any mortgage equity withdrawal, but they have been allowed to squat for a year.

Foreclosure Record

Recording Date: 06/18/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 10/16/2009

Document Type: Notice of Default

It was trying to save buyers like these that prompted me to begin writing for the Irvine Housing Blog in early 2007. These people were likely in escrow when I first began writing in late February of that year. I doubt anyone involved in the transaction told them this would be their fate.

Irvine Home Address … 21 EDEN Irvine, CA 92620

Resale Home Price … $659,900

Home Purchase Price … $750,000

Home Purchase Date …. 4/3/2007

Net Gain (Loss) ………. $(129,694)

Percent Change ………. -17.3%

Annual Appreciation … -3.6%

Cost of Ownership

————————————————-

$659,900 ………. Asking Price

$131,980 ………. 20% Down Conventional

4.62% …………… Mortgage Interest Rate

$527,920 ………. 30-Year Mortgage

$130,789 ………. Income Requirement

$2,713 ………. Monthly Mortgage Payment

$572 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$55 ………. Homeowners Insurance

$170 ………. Homeowners Association Fees

============================================

$3,510 ………. Monthly Cash Outlays

-$456 ………. Tax Savings (% of Interest and Property Tax)

-$680 ………. Equity Hidden in Payment

$229 ………. Lost Income to Down Payment (net of taxes)

$82 ………. Maintenance and Replacement Reserves

============================================

$2,685 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,599 ………. Furnishing and Move In @1%

$6,599 ………. Closing Costs @1%

$5,279 ………… Interest Points @1% of Loan

$131,980 ………. Down Payment

============================================

$150,457 ………. Total Cash Costs

$41,100 ………… Emergency Cash Reserves

============================================

$191,557 ………. Total Savings Needed

Property Details for 21 EDEN Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 2 full 1 part baths

Home size: 1,915 sq ft

($345 / sq ft)

Lot Size: 4,050 sq ft

Year Built: 1980

Days on Market: 37

Listing Updated: 40362

MLS Number: S621337

Property Type: Single Family, Residential

Community: Northwood

Tract: Ps

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

This property is in backup or contingent offer status.

Popular Floorplan with 3 Bedrooms, 2.5 Baths. Updated Kitchen and Updated Throughout Located on Cul de Sac Street & Backs to Greenbelt. Newer Tile Roof, Block Walls, Long Driveway. Walk to Award Winning Schools(Santiago Hills Elementary, Sierra Vista Middle School & Northwood High School), Close to Association Pool. Low Taxes, No Mello Roos, Association Dues $81/Mo. SMALL DOG WILL BE IN CAGE.