Monthly Archives: August 2010

Last Remaining Hopes Crushed, Homedebtors Defend Home Ownership

Assaulted by bad news, a home debtor has launched a public relations campaign to keep the kool aid flowing.

Irvine Home Address … 13 WINDJAMMER 2 Irvine, CA 92614

Resale Home Price …… $299,000

Some things in life are bad,

They can really make you mad.

Other things just make you swear and curse.

When you're chewing on life's gristle,

Don't grumble, give a wistle!

And this'll help things turn out for the best…

And… always look on the bright side of life!

Monty Python — Always Look on the Bright Side of Life

Defending Home Ownership

By Barry Ritholtz – August 28th, 2010, 10:42AM

Jonathan Miller and I have been kicking around an idea for a “Home ownership is a good thing” OpEd.

Apparently, we aren’t the only ones:

• Five Reasons to Stop Worrying About Your Home’s Value (Moneywatch)

• In Defense of Home Ownership (NYT)

None of these hit the issues and topics that we want to cover — but it is interesting that other folks are thinking along the same lines.

Now, if only I could figure out whether these articles are 1) Contrarian pushback against the dominant RE meme; or b) proof that the bottom is not yet here, as people cling to the hope of a RE recovery.

I'll answer that one for you Barry: it is a sign that people are clinging to the hope of a real estate recovery. We are not yet at the bottom.

Why is sentiment so important?

Why are market collapses signified by changes in consumer sentiment? First, we need to distinguish between deflating market bubbles and market swings causing temporarily low prices. The housing bubble was a bubble; prices became elevated from fundamental values, and they are in the process of correcting back to true value. Prices were not temporarily depressed, they were temporarily elevated. In a bubble scenario, prices do not recover.

When market sentiment is still in denial — like most of California's coastal markets are — people cling to the hope of a recovery that is not going to happen. Stories about the double dip may push the market into fear, but it is nowhere near capitulation and despair like the subprime markets are today. As long as there is the delusion that prime markets are somehow going to avoid the deflation of the bubble, there will be an overhanging supply of sellers waiting for a slight improvement to sell their properties, and the distressed debt in the market remains. As long as there is overhead supply and people holding distressed debt, the market will not recover because each attempt simply brings out more sellers and prices get pushed downward.

An understanding of this market dynamic is the primary concept separating traders from academics. Traders understand this. Academics don't. Since the banks get most of their advice from academics, they will consistently make the wrong decisions, the market will not clear, and prices will grind lower until they capitulate and the inventory is finally gone. As we are witnessing today in Las Vegas, everyone must sell, abandon hope, and feel widespread despair before the market bottoms.

In Defense of Home Ownership

By RON LIEBER

Published: August 27, 2010

It’s hard to read the headlines and not conclude that becoming a homeowner is a terrible idea.

This week, the National Association of Realtors announced that existing-home sales in July had fallen an astounding 25.5 percent from the previous year. Sure, there was a federal tax credit in place last summer. But with single-family home sales at their lowest level since 1995 and unemployment still stubbornly high, home prices may fall further.

In the meantime, millions of homeowners are still far underwater, and government programs to help them have fallen well short of their goals. More foreclosures are coming, casting a deeper shadow over home prices. So it’s hardly surprising that the conventional wisdom says that home values will never again rise faster than inflation.

The truth is that home prices cannot rise faster than inflation unless we are inflating a bubble. The only thing surprising is that reasonable people who understand this are being heard right now. Usually, the bullshit from the NAr and the general level of kool aid intoxication in the media makes more noise.

But as with stocks and the weather, it is dangerous to assume any certainty in the housing market. And by wallowing too much in the misery of others, people looking for a new place to live run the risk of thinking every home purchase will end in regret, at least financially.

Many still could, if they buy in hard-hit areas where prices could fall further.

The problem is that people don't know where prices could fall further. The markets commonly labeled as safe havens are the most at risk whereas the markets labeled as hopeless are at or near the bottom.

But a mortgage is still a form of long-term forced savings, after all. This is more important than ever, since fewer people have access to generous pensions than they did during the last big housing slump. A 401(k) or similar plan is no bargain, either, with its erratic returns and employer matches that come and go as the economic winds shift. Social Security is also likely to be less generous, and Medicare will probably cost more.

Besides, owning a home isn’t just about what shows up on a net worth statement — something that bears repeating after all the “investing” that people thought they were doing when buying homes over the last 10 or 15 years. Many of these more qualitative factors, from living free of a landlord’s whim to having access to a good school district or retirement community, haven’t changed and probably never will.

It is possible, as a homeowner, to make very little money but still buy plenty of happiness. So before you swear off real estate, reconsider a few of the basics.

WORST CASES Some buyers may rue the day in 2010 they bought their homes. They may end up like those who bought in 2006 and have lost their jobs. Now those people face the difficulty of moving to pursue employment elsewhere because they owe much more than their homes are worth.

Marke Hallowell and Allison Firmat, who are getting married next month, are well aware of the history. Yet they plan to put 5 percent or less down, using a fixed-rate mortgage backed by the Federal Housing Administration, once they find a condominium in southern Orange County, Calif. (They’ve already been outbid a few times.)

Ms. Firmat is not working, and Mr. Hallowell is a Web developer. Does he worry about mobility problems or making the payments in the event of a job loss, given that he’s the sole breadwinner? “We’re getting such a good deal on interest rates that we could rent our place out,” he said.

Mr. Hallowell and Ms. Firmat say they believe their approach is conservative, at least compared to what they might have done five years ago.

“Nothing is going to change the rate we will have,” Mr. Hallowell said. “Condos like the ones we’re looking at now were unobtainable in the past, unless we went into something with a total balloon payment. There were times I was tempted, but never seriously.”

Indeed, many people who are buying at the moment are locking in mortgage rates of about 4.5 percent. A year ago, they might have paid 5.25 percent on a $300,000 loan for a monthly payment of about $1,657. Today, you could lock in a lower monthly payment of around $1,520 on a mortgage that size, or you might not need to borrow that much, given that prices have fallen in many areas.

FORCED SAVINGS You may make nothing at all beyond inflation over time on a home, but the part of your mortgage payment that goes toward principal is a form of forced savings.

Sure, you might do better by renting and investing the difference between the rent and the total costs of ownership. But at least three things need to go right.

First, you need to actually save the money. Americans have trouble with that sort of plan. Then, you need an after-tax return that’s better than whatever a home would deliver. That’s a task that might not have gone so well over the last 10 or 12 years, and it involves its own future risk, given how little safer investments are returning now. Finally, you must not raid the savings along the way.

LOL! No HELOC abuse? The problem with the whole forced-savings argument is that it is not forced anymore. Unless you live in Texas where they restrict HELOC use — which is why Texas avoided the bubble — then forced savings requires self discipline. In our Ponzi culture here in Southern California, self-discipline is in short supply.

DIFFICULT LANDLORDS A bank can kick you out only if you don’t pay your mortgage. But landlords can drive you away in any number of ways.

Laura Mapp and her husband, Carl Berg, rented from a relative, but it didn’t go particularly well. They found another landlord they liked, but came back from a holiday trip one year to a note saying he wanted to move in himself. They had a month to scram. (The note came with a bottle of wine, at least.)

In yet another rental, they let their landlord know they were looking to buy and inquired about a month-to-month lease. No problem, their landlord said, as long as they used his boyfriend as their real estate agent.

Earlier this year, the couple gave up on landlords and bought a house in the Highland Park neighborhood in Seattle.

This is another specious argument. Landlords rarely if ever throw out a good tenant. In fact, landlords often won't raise rents for fear of losing a good tenant. This article makes it sound like landlords are a capricious lot that likes to exercise their power to make people move. That idea is rather silly.

Look at it another way: how many people have been evicted by their lendinglords over the last 3 years as compared to the number of capricious landlord evictions? Avoiding a landlord is a great idea, but substituting a landlord for a lendinglord isn't much of an improvement. What people should strive for is to pay off a mortgage so they don't need to worry about a landlord or a lendinglord. Of course, that requires sacrifice, so most people opt to service debt, abuse their HELOCs, and take their chances.

THE NICE PART OF TOWN No matter how pretty the neighborhood, prices may still fall further in places like greater Detroit, Cleveland and Las Vegas; outlying areas of Los Angeles, San Francisco and Phoenix; and much of Florida.

This writer is a safe-haven fool. Detroit and Cleveland won't come back because their economies are a shambles. However, Las Vegas, Phoenix, Riverside County, most of Florida, and the San Francisco suburbs are going to recover, and the low prices there represent buying opportunities. The "nice part of town" hasn't endured its price correction yet, so those markets are in danger.

If you’re looking elsewhere, consult The Times’s rent-versus-buy calculator, halfway down the page at nytimes.com/yourmoney.

Their rent-versus-buy calculator is crap compared to the IHB calculator. Theirs was likely produced by the NAr.

But if you want to live in the Fox Hill Farm development in Glen Mills, Pa., you’ll have to buy because renters are not allowed, said Bob Kuhn, who lives there. The same may be true of other communities for older people.

And there may not be many family-size rentals — or at least any financial edge to be gained by renting — in suburbs or urban neighborhoods with excellent public schools.

This is nonsense and scare tactics. You can rent beautiful properties in the best neighborhoods in Irvine, and right now, those rents are below the cost of ownership. (High-end rental deal of the day: 31 Plumeria)

After many years of building their down-payment fund and a couple of years of watching the listings in the Eagle Rock and Mount Washington areas of Los Angeles, Garret and Alison Williams realized that prices simply were not falling much there.

That is the worst reason to buy.

By the time they were ready to pounce this year, they had a big enough down payment and interest rates had fallen so far that renting didn’t make much financial sense, even if they could have found a rental big enough for them and their two small children.

Had we rented, we would be paying more than we’re paying for a mortgage,” said Ms. Williams, who had lived in the same two-bedroom rental for 12 years before she and her family moved into their new house in Eagle Rock earlier this month. “I don’t see how we could really regret having made the move when it’s so much better for us on so many levels.”

I question whether or not this family was getting a house equivilent to a rental if prices had not corrected yet. Perhaps their new mortgage payment is lower than rent, but they are moving into an inferior property.

I am bullish on ownership under certain conditions, and first among those is acquiring the property for a price below rental parity. In fact, I can flip from bearish to bullish quickly if prices fall below rental parity. We should start seeing more properties like that soon. I would prefer to purchase at the top of the interest rate cycle and refi on the way down, but that may be years from now, and if prices are below rental parity, I probably will not wait until 2015 for interest rates to hit 7%.

The bottom line is this: absent appreciation in excess of inflation, home ownership is a financial burden. There are emotional benefits to owning, but obtaining these benefits comes at a price. If the price is right, home ownership is wonderful, and if the price is wrong, home ownership can be a crushing weight or ball and chain.

It's worth noting that not everyone thinks our obsession with home ownership is a good thing:

Promoting Homeownership Is Not Only Un-American: It Contributed to the Housing Bubble

Posted on 08/29/10 at 2:53pm by Professor Mark J. Perry

From the Forbes.com article "The Un-American Dream":

"For nearly a century it has been the policy of the U.S. government to increase American homeownership. Its efforts include (but aren't limited to) bouts of easy money from the Fed, the mortgage-interest deduction, the exclusion of capital gains on primary residence sales, direct and indirect subsidies from the Department of Housing and Urban Development, and artificial liquidity pumped into the mortgage market via government sponsored entities Fannie and Freddie.

Policymakers assure us that the next generation of government housing programs will be "carefully designed" (bring on the next five-year plan, Comrade!). But the real question is why the government should be doing anything to promote homeownership.

"I do believe in the American Dream," said President Bush in 2002. "Owning a home is a part of that dream, it just is. Right here in America, if you own your own home, you're realizing the American dream." Bush was echoing a theme that reaches back at least to Herbert Hoover: When the government encourages homeownership, the story goes, it strengthens individuals and communities and thereby fosters the American Dream. They're wrong. A government crusade to promote homeownership is un-American.

America's distinction is that it was the first nation founded on the principle that you have a right to pursue your own happiness without government interference. But the government's homeownership crusade means it gets to decide how you should live, and stick-and-carrot you into living that way.

Here's the real lesson: The American Dream is not some government-subsidized house foisted on you by George W. Bush or Barney Frank. It's the undiluted freedom to decide how you want to live–and, if you want to own a home, it's the freedom to work, save, establish credit, and earn one. In America, the government's job is to protect our freedom to pursue our values, not to dictate what our values are. Its homeownership policy should be the same as its toaster oven policy: laissez-faire.

Government intervention in housing runs deep, and it can't be eliminated overnight. But the government should make its long-term goal to fully extricate itself from the housing market. It can then start gradually dismantling Fannie, Freddie, tax preferences for homeowners, and every other government housing program."

MP: You can add the government's role in promoting fixed-rate 30-year mortgages, and subsidizing FHA mortgages that only require a 3.5% down payment to the list of policies that the government has used to increase homeownership.

The chart above shows how the political promotion of homeownership in the U.S. may have contributed to the housing bubble. The blue line is the quarterly homeownership rate from the Census Bureau (data here) going back to 1991, which went from 64% in the early 1990s to a record high of more than 69% in 2004. During that same time period, the Federal Housing Finance Agency's (FHFA) Home Price Index (data here) doubled from 100 in 1991 to 200 in 2005, before reaching a peak of more than 222 at the height of the real estate bubble in 2007.

In the aftermath of the real estate bubble's crash, the homeownership rate has fallen to a 10-year low of 66.9% (QII 2010) and the FHFA home price has fallen back to 2004 levels. Promoting homeownerhip is not only un-American, but it helped create an unsustainable real estates bubble, which turned the "American dream" into an "American nightmare" for millions of Americans by turning "good renters into terrible homeowners."

Another hard-working condo

Day after day when I look at how much money people took out of their properties, I am astounded. I get the sense these houses worked harder than the people did. It certainly provided many with a substantial side income.

  • Today's featured property was purchased on 10/26/1998 for $169,500. The owner used a $161,025 first mortgage and a $8,475 down payment.
  • On 8/8/2000 he obtained a stand-alone second for $21,800.
  • On 11/13/2001 he refinanced the first mortgage for $210,937, and he got a $33,750 HELOC.
  • On 1/14/2003 he refinanced with a $191,250 first mortgage.
  • On 9/24/2003 he obtained a $279,000 first mortgage.
  • On 11/15/2004 he got a HELOC for $83,000.
  • On 1/12/2006 he refinanced the first mortgage for $372,000.
  • On 3/8/2006 he obtained a $53,000 HELOC.
  • On 6/20/2006 he got a Option ARM for $425,000.
  • On 4/2/2007 he refinanced with another Option ARM for $412,000 and obtained a $35,000 HELOC.
  • Total property debt is $447,000.
  • Total mortgage equity withdrawal is $285,975.
  • Total squatting time is 8 months so far, but the NOT has not been filed yet. He has more time coming.

Foreclosure Record

Recording Date: 04/26/2010

Document Type: Notice of Default

Interesting fact: The resale price of this house may end up being less than the previous owner's mortgage equity withdrawal.

Irvine Home Address … 13 WINDJAMMER 2 Irvine, CA 92614

Resale Home Price … $299,000

Home Purchase Price … $169,500

Home Purchase Date …. 10/26/1998

Net Gain (Loss) ………. $111,560

Percent Change ………. 65.8%

Annual Appreciation … 4.8%

Cost of Ownership

————————————————-

$299,000 ………. Asking Price

$10,465 ………. 3.5% Down FHA Financing

4.50% …………… Mortgage Interest Rate

$288,535 ………. 30-Year Mortgage

$58,435 ………. Income Requirement

$1,462 ………. Monthly Mortgage Payment

$259 ………. Property Tax

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

$25 ………. Homeowners Insurance

$316 ………. Homeowners Association Fees

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

$2,062 ………. Monthly Cash Outlays

-$134 ………. Tax Savings (% of Interest and Property Tax)

-$380 ………. Equity Hidden in Payment

$17 ………. Lost Income to Down Payment (net of taxes)

$37 ………. Maintenance and Replacement Reserves

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

$1,603 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,990 ………. Furnishing and Move In @1%

$2,990 ………. Closing Costs @1%

$2,885 ………… Interest Points @1% of Loan

$10,465 ………. Down Payment

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

$19,330 ………. Total Cash Costs

$24,500 ………… Emergency Cash Reserves

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

$43,830 ………. Total Savings Needed

Property Details for 13 WINDJAMMER 2 Irvine, CA 92614

——————————————————————————

Beds: 2

Baths: 1 full 1 part baths

Home size: 1,125 sq ft

($266 / sq ft)

Lot Size: n/a

Year Built: 1980

Days on Market: 114

Listing Updated: 40417

MLS Number: S617532

Property Type: Condominium, Townhouse, Residential

Community: Woodbridge

Tract: St

——————————————————————————

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

APPROVED SHORT SALE! Charming 2 bed, 1.5 bathroom home in Irvine Somerset tract. Ideal quiet location adjacent to greenbelt and amenities. Tremendous value!

Fix the Housing Market: Let Home Prices Fall

The general public is waking up to the reality that the artificial bottom the government produced is not curing the housing market's ills. It's time to let house prices fall.

Irvine Home Address … 86 EAGLE Pt 45 Irvine, CA 92604

Resale Home Price …… $250,000

And just…

Let her cry..if the tears fall down like rain

Let her sing…if it eases all her pain

Let her go…let her walk right out on me

And if the sun comes up tomorrow

Let her be…let her be.

Hootie & The Blowfish — Let Her Cry

I was sitting in a meeting not long ago with a group of homebuilding industry insiders. During our discussions, the topic of future home prices came up, and I was astounded to hear the assembled group say they wanted to see the market props removed so that house prices could fall to a level that clears the market. The people who make a living from real estate are finally waking up to the idea that artificially high house prices is hindering sales, making acquisition decisions problematic, and ultimately delaying the recovery of the homebuilding industry. My only comment was "Halleluia." I preached that gospel for 3 years to no avail, and suddenly people came to the same conclusion on their own.

There comes a point when you have to give up resisting and let nature take its course. Like physicians in an emergency room that try every procedure and stimulant, there comes a time when you just stop because you have done all you can and nothing more is going to make a difference.

Time to let home prices fall?

Many expect another wave of foreclosures to further deflate prices. The government could offer new incentives — or let market forces rule.

By Tom Petruno Market Beat

August 28, 2010

You can't force someone to buy a house.

But as a society we've long tried to make homeownership an offer you couldn't refuse.

The crazy part is that the market has its own mechanism to incentivize ownership: a price disparity between ownership and rental. The reason I am so bullish on Las Vegas is because prices have fallen so low that the cost of ownership is a small fraction of rents. You can find properties there that rent for $1,000 a month that cost about $600 a month to own with conventional financing. As the cost of ownership falls relative to rents, the incentive to own increases. The market will correct its own imbalances through price if given the chance.

And since the real estate mega-bubble burst three years ago, the government has tried even more tricks to get people to sign home purchase contracts.

Now, a grim reality has set in: Despite the still-rich basket of tax breaks for residential property owners, and the lowest mortgage rates in a generation, the pool of willing or able buyers is dwindling.

The housing market's new woes expose the limits of government's ability to end the real estate bust, while also raising the odds that policymakers could resort to more dramatic moves to try to support the market.

This is my greatest fear: the government may do something really stupid that totally screws me in favor of equity-stripping squatters who borrowed imprudently to obtain real estate they could not afford and crowded me out in the process. If past borrower behavior is rewarded with continued government bailouts, we will se much more of it, and the housing market will become a massive government Ponzi scheme.

Reports this week on home purchases in July were beyond dismal. Sales of existing homes tumbled 27% from June and 25% from a year earlier. New-home sales slumped to an annualized rate of just 276,000 units, down 32% from July 2009 and the lowest since at least the early 1960s.

Some of the fall-off undoubtedly reflected the spring expiration of the latest federal housing gimmick — tax credits of $8,000 for first-time buyers who met certain income requirements, and $6,500 for repeat buyers.

But it can't be a coincidence that the summer plunge in housing demand occurred as faith in the year-old economic recovery continued to wane.

"It's not a housing issue anymore — it's an overall economic issue," said David Crowe, chief economist for the National Assn. of Home Builders.

Historically, housing has led the way in recoveries. "But this is a case where housing is going to follow the economy, not lead it," Crowe said.

Mr. Crowe is right on both counts. The lending cartel doesn't foreclose on the squatters because they know that while the economy is in recession, there are no buyers for their product, and liquidation would crush prices. Ordinarily, housing would lead out of a recession because as employment picks up, so does the demand for houses. Unfortunately, housing was the cause of this recession, and the demand for housing will be limited by the fact that so many former homeowners do not have the credit to buy. Plus, we have too much inventory to reabsorb. Unemployment in the housing sector will also be a long-term drag on the economy.

You need a job to afford a home, unless you're rolling in cash, and everyone knows that the U.S. has created precious few net new jobs since April — just 80,000 over the last three months in a nation of 310 million people.

The national unemployment rate remains stuck at 9.5%, and even among workers who have jobs more than one-quarter live in fear of being laid off, according to a Gallup poll this month.

How do you stoke housing demand given that backdrop?

The question is not how do you do it, the question really is "why should we stoke housing demand?" What is the benefit versus the cost?

Congress figured the tax-credit giveaway would encourage buyers, and it did to an extent. The credit helped boost sales of existing homes to an annualized rate of 5.79 million units in April, up from about 5 million in January and February.

But the risk of offering any giveaway with a deadline (in this case, April 30) is that it will artificially inflate activity for a limited period and simply steal from future sales.

"We conferred an $8,000 benefit on people who were going to buy a house anyway," asserts David Resler, chief economist at Nomura Securities in New York.

Though government intervention may be well-meaning, each new effort "completely clouds whether there has been any fundamental improvement in the housing market," he said.

Far from being clouded, the message is clear: the fact that sales fell off a cliff after the expiration of the credit reveals that there was no fundamental improvement in the housing market.

And if you didn't buy in time to get the credit, you may well figure that if you wait long enough Congress will bring it back. So why rush to buy now? The 2010 credit, after all, was an extension of one that expired last November.

What do we gain by pulling demand forward? The tax credit did not get more people to buy, it just created the incentive to buy earlier. Do we really want to produce another spike and bust with an enormous cost and no benefit?

Over the last two years, federal attempts to help brake the housing market's plunge have been monumental, of course.

The U.S. has nationalized the biggest sources of mortgage credit ( Fannie Mae and Freddie Mac), pushed home loan rates sharply lower via Federal Reserve purchases of mortgage-backed bonds, and offered to pay banks to get them to agree to loan modifications for struggling borrowers.

A new program will offer no-interest loans of up to $50,000 for unemployed homeowners to help them make their mortgage payments until they find work.

The Obama administration "has taken a broad set of actions to help stabilize the housing market and help American homeowners," Treasury spokesman Mark Paustenbach said.

Help American homeowners? Liar. The measures were taken to help American banks. It's impact on homeowners has been negative. First, we have put a large number of people into homes at inflated prices, and now many of them will fall underwater. Second, those that were being "saved" are merely being sentenced to increased debt servitude in order to keep our banking system solvent. So neither previous owners or new buyers have benefited from this program. The banks are obtaining a huge benefit at the expense of the government and homeowners.

Those programs surely get some credit for the uptick in home prices over the last year. The S&P/Case-Shiller index of home prices in 20 U.S. cities bottomed in April 2009 after plunging 33% from its peak in July 2006. The most recent report, for May, showed the index up 4.7% from a year earlier.

Government policy has been aimed at slowing or stopping the decline in prices, for obvious reasons: A further drop in home values would push more owners underwater, meaning their homes would be worth less than their mortgage balance. An estimated 21.5% of single-family homes with mortgages were underwater in the second quarter, down from 23% a year earlier, according to Zillow Real Estate Market Reports.

Why is that reason obvious? A further drop in prices would create more strategic default which would cause the banks more pain, but it doesn't impact homeowners, except perhaps those who are counting on HELOCs to support their lifestyles.

Our policy makers are basing their decisions on faulty assumptions. They all assume lower house prices are bad, and they aren't. Affordable housing that permits mobility of the population is a great societal benefit. Bloated house prices that drain the population of its resources and limits mobility is a curse, not a blessing.

A continuing rise in house prices would mean that more homeowners who can no longer afford their mortgages might be able to sell for enough to cover their loans, thus avoiding adding to the mountain of homes already in foreclosure. About 4.6% of all loans outstanding were in the foreclosure process at the end of June, according to the Mortgage Bankers Assn.

Yet the collapse in home sales in July suggests that prices overall are likely to begin sliding again. Despite average 30-year mortgage rates under 4.4%, many would-be buyers who can get financing must not believe that prices are attractive enough to justify taking the plunge.

Given the 4 million existing homes on the market – an inventory that could double based on the number of homes in foreclosure – buyers clearly have the upper hand now.

Dean Baker, co-director of the Center for Economic Policy and Research in Washington, believes home prices still are overvalued by 15% to 20% in many areas.

For government to stand in the way of a further price decline is unfair to the next generation of buyers, he said. "The people who get hurt the most are those who are overpaying for houses today," he said.

Is it really fair for Baby Boomers to ask the generations that follow to pay for their mistakes? Isn't that what is really happening here? The boomers bought houses, spent the appreciation, and now they are asking us to buy their overpriced homes and pay off their debts. And the buyers today will get none of the appreciation benefits that boomers enjoyed during the bubble.

Robert Shiller, co-creator of the S&P/Case-Shiller price indexes, said that although he doesn't forecast prices, "I think the scenario of declining home prices for years to come is underemphasized by people."

The NAr certainly is underemphasizing the deflation scenario. Now is a great time to buy, right?

That's an argument for allowing the housing market to hit bottom sooner, so that a genuine recovery also can begin sooner.

The risk is that another downward spiral in home prices would feed a deflationary mind-set, meaning the sense that prices for all sorts of goods, services and assets can only go lower. That could cause many consumers to severely rein in spending, leading to another recession, or worse.

That idea is rather silly. Lower house prices will result in a disparity between the cost of rents and the cost of ownership that will create an incentive for renters to buy. Deflation is only a cycle until prices drop to cashflow levels where people have a new reason to buy.

But a new decline in home values also could force the banking system, and the government, to finally deal realistically with a root cause of the economy's woes: the gigantic debt load consumers took on over the last two decades.

The Obama administration's program to persuade banks to modify troubled home loans has met with relatively little success. And few banks over the last year have been willing to take the step of permanently reducing struggling borrowers' mortgage debt to keep them in their homes.

Banks are not going to reduce principal. Once they start giving away free money, the entire banking system becomes a welfare system, and everyone will sign up for as much free money as they can get.

The initial wave of subprime mortgage foreclosures caused a torrent of losses for the financial system. Writing down millions more mortgages could cause another wave of red ink.

Christian Weller, an economist at the Center for American Progress in Washington, argues that debt reduction on a huge scale is inevitable. "Right now the pain is with the consumer," he said. "We should force the banks to take some of that pain."

Another idea, endorsed by Pimco bond guru Bill Gross, is for Fannie Mae and Freddie Mac to allow even underwater homeowners to refinance their mortgages at current low rates, reducing their monthly payments. No bank on its own would refi a home with negative equity. But the government already bears the risk of default by these borrowers on their Fannie and Freddie loans. Refinancing wouldn't raise that risk.

I may address Bill Gross's idea at length in an upcoming post. I think the idea is foolish. First, it only benefits a segment of homeowners who are locked in at higher mortgage interest rates. This idea does nothing for renters, for owners who were able to refinance because they wisely managed their debts, or for owners who purchased with low rates. Second, the cost will be paid by US taxpayers through increasing losses at the GSEs. The GSEs bought and insured these loans with expectation of a certain income stream. This money is needed to offset losses in its portfolio. If you reduce their income, you merely increase the impact of their losses. In short, it benefits a few people, many of which don't deserve it, and it costs taxpayers plenty.

Richard Green, director of USC's Lusk Center for Real Estate, suggests that lenders and the government should embrace the idea of converting troubled loans into shared-equity mortgages, which forgive a portion of a borrower's principal in return for a stake in any future equity gain when the home is sold.

Do we really want the government or banks on title with us as owners? Do you think owners are willing to split the profits in this way? Would the government have to approve any future refinancing or HELOCs to protect its interest? It think the idea is half-baked, and not very likely to produce a positive result.

All of these ideas, however, are bailouts of one sort or another. "There is no 'fair' answer here," Green concedes.

Well, there is one: Leave housing to market forces, let prices fall until buyers are motivated to come in, and hope that the economy can stand one final cathartic wave to clear the excesses of the bubble.

tom.petruno@latimes.com

Allowing house prices to fall to levels that clear the market is the only solution. Further, the government must phase itself out of the mortgage market and allow private lending to take over. Allowing house prices to fall is the easy part. Getting off the government subsidies will be much harder. In the short term, allowing house prices to fall is all we have. This fall and winter may get ugly.

Cashflow investment of a different kind

I am being facetious in my description. The owner of today's featured property regularly went to the housing ATM for withdrawals, and he withdrew much more than any true cashflow property would have provided him in rent. It is amazing that lenders allowed that, and it is even more amazing that current buyers and borrowers think lenders will do it again. In the end, this owner obtained far more money from the property than he would have obtained as a rental, but now he is losing it. Perhaps the short-term gain was worth it to him.

  • This property was purchased on 10/15/1998 for $112,000. The owner used a $78,400 first mortgage, a $28,000 HELOC, and a $5,600 down payment.
  • On 2/25/1999 the he refinanced with a $111,000 first mortgage and withdrew most of his down payment.
  • On 8/31/1999 he obtained a stand-alone second for $15,600.
  • On 11/27/1999 he refinanced the second mortgage for $40,000.
  • On 5/25/2004 he refinanced with a $269,165 first mortgage.
  • On 12/8/2005 he obtained a $55,000 HELOC.
  • On 12/19/2006 he took out an Option ARM for $333,750 and obtained a $66,750 HELOC.
  • Total property debt was $400,500. Can you believe this once appraised for that?
  • Total mortgage equity withdrawal was $294,100.

Here is where the story gets strange. The owner went into default in late 2007.

Foreclosure Record

Recording Date: 05/09/2008

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/29/2008

Document Type: Notice of Default

According to the property records, Aurora Loan Services foreclosed on the property on 10/7/2008 for $295,680. However, later the former owner is back on title and it appears he was given a loan modification which failed.

Foreclosure Record

Recording Date: 10/23/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/20/2009

Document Type: Notice of Default

Foreclosure Record

Recording Date: 02/25/2009

Document Type: Notice of Rescission

It's looks like the lender worked a deal with this owner to keep him in the property and may have rescinded the trustee sale. Within months, the owner was back in default, and the property was again scheduled for foreclosure.

On 12/11/2009 the previous owner comes back on title, but then he lapses right back into default.

Foreclosure Record

Recording Date: 04/20/2010

Document Type: Notice of Sale

It looks as if the owner has been in default for the better part of 3 years. He may or may not be squatting. I don't know if the unit is still occupied, but the owner has no other address in the records which suggests he is still in there.

This guy put $5,600 into the property. He pulled out $294,100, and he has been living there without making payments for about 3 years.

When he gets his next property, how do you think he will behave?

Irvine Home Address … 86 EAGLE Pt 45 Irvine, CA 92604

Resale Home Price … $250,000

Home Purchase Price … $112,000

Home Purchase Date …. 10/15/1998

Net Gain (Loss) ………. $123,000

Percent Change ………. 109.8%

Annual Appreciation … 6.9%

Cost of Ownership

————————————————-

$250,000 ………. Asking Price

$8,750 ………. 3.5% Down FHA Financing

4.50% …………… Mortgage Interest Rate

$241,250 ………. 30-Year Mortgage

$48,859 ………. Income Requirement

$1,222 ………. Monthly Mortgage Payment

$217 ………. Property Tax

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

$21 ………. Homeowners Insurance

$350 ………. Homeowners Association Fees

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

$1,810 ………. Monthly Cash Outlays

-$112 ………. Tax Savings (% of Interest and Property Tax)

-$318 ………. Equity Hidden in Payment

$15 ………. Lost Income to Down Payment (net of taxes)

$31 ………. Maintenance and Replacement Reserves

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

$1,426 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,500 ………. Furnishing and Move In @1%

$2,500 ………. Closing Costs @1%

$2,413 ………… Interest Points @1% of Loan

$8,750 ………. Down Payment

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

$16,163 ………. Total Cash Costs

$21,800 ………… Emergency Cash Reserves

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

$37,963 ………. Total Savings Needed

Property Details for 86 EAGLE Pt 45 Irvine, CA 92604

——————————————————————————

Beds: 3

Baths: 2 baths

Home size: 1,088 sq ft

($230 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 74

Listing Updated: 40415

MLS Number: S622690

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Othr

——————————————————————————

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

great property . great location

That is a textbook example of an "I don't give a crap" description.

IHB News 8-28-2010

I have an extremely overpriced Turtle Rock home for you to giggle about this weekend.

Irvine Home Address … 4 SUNPEAK Irvine, CA 92603

Resale Home Price …… $2,745,000

One foot on the brake and one on the gas, hey!

Well, there's too much traffic, I can't pass, no!

So I tried my best illegal move

A big black and white come and crushed my groove again!

Go on and write me up for 125

Post my face, wanted dead or alive

Take my license n' all that jive

'cause I can't drive 55!

Sammy Hagar — I Can't Drive 55

IHB News

The flipping fund closes in 3 weeks. I reported two weeks ago that firm commitments were over $1,000,000. Now that number stands at $1,425,000. I still believe I will reach $2,000,000. There are still 19 Sophisticated investor spots available.

I had been falling behind in my library updates, so Zovall developed an automated system that keeps me up-to-date at all times. For those of you wanting to find a post in the archives, it is now much easier to locate what you are looking for.

Writer's Corner

I cleaned out my office at work this week. I am still doing hourly work and helping with business development, but I no longer go to an office every day. I don't know what my future will be with the land development industry. I enjoy design work, but over the last 3 years, I haven't done very much of it — and neither has anyone else. I am still seeing no green shoots in the homebuilding or development industry.

It's sad really. You spend your adult life gaining experience and increasing the depth and scope of your knowledge in a given profession, and suddenly that skill is no longer in demand. Perhaps if demand picks up, I may go back to that work, or at least do some hourly work on interesting projects. For now, I am focusing my energy on establishing a fund and creating a new professional life. I am not the only one in my industry that has been compelled to find other methods of making a living.

This new venture is very exciting. I am still mourning what may be the passing of my past career, but I am very excited about this new challenge. I feel like a sportscar that has been kept in the garage too long. In fact, last week I had a dream that I was driving a lime-green Lamborghini. I remember taking it out and fumbling with the gears and feeling a bit lost in a sea of gauges. I didn't get it up to top speed, but after a few minutes of driving, I felt like I was in control of the vehicle, and the power was exhilarating.

In my dreams, I have noticed that vehicles I drive are often symbolic of how I view my own life. I don't want to own a lime-green Lamborghini, but as a symbol of refined power with unique style, I can't think of a more appropriate automobile. If my subconscious views my new life this way, it stands in stark contrast to the sense of helplessness I felt at times during the recession. I guess part of me is more excited about the future than consciously I realize. I want to thank all the fund subscribers who have expressed their confidence in my ability to make this venture a success. I am looking forward to hitting top gear.

Housing Bubble News from Patrick.net

Fri Aug 27 2010

Pierce the Housing Bubble! (nytimes.com)

House Prices May Drop Another 25% (theatlantic.com)

Another Record Low for Housing (economix.blogs.nytimes.com)

Burning Down the House; New House Sales Consensus 330K, Actual 276K, Record Low (Mish)

Rosenberg Explains Why Not One New House Priced Over $750,000 Sold In July (zerohedge.com)

Housing market continues to decline (csmonitor.com)

Lack of Jobs, Foreclosures May Keep U.S. Housing Depressed (bloomberg.com)

New Foreclosure Numbers Reverse MBA Survey's "Bright Spots" (cnbc.com)

Experts Say Housing No Longer Builds Wealth (irvinehousingblog.com)

An unsupportable American dream (nationalpost.com)

The Housing Bubble: The Economists Should Have Known (newgeography.com)

After Housing Bubble, the Dark Side of Houseowner Dreams (time.com)

Treasury Admits Program for Struggling Houseowners Just a Ploy to Enrich Big Banks (alternet.org)

The Fed's Monetary Insanity (atimes.com)

Great Firewall of China Blocks Posting To Patrick.net (patrick.net)

Commercial Property Owners Choose to Default (online.wsj.com)

Living For Free: No Mortgage Payment In 32 Months And Not Kicked Out Yet (dailybail.com)

Free Trial of Patrick's Property Finder


Thu Aug 26 2010

July new house sales fall to slowest pace on record (sfgate.com)

New-House Sales Declined Sharply Last Month (nytimes.com)

Existing-House Sales Sink to Lowest Level Ever Recorded (irvinehousingblog.com)

Slightly lower prices and rates can't slow fall in house sales (finance.yahoo.com)

Why nobody wants to buy a house (marketwatch.com)

Are slow housing sales always a bad thing? Hell no! (blogs.forbes.com)

It's okay to walk away (finance.yahoo.com)

Inventory Explodes Past the Worst of the Housing Crash (housingstory.net)

House Sales: Distressing Gap between new and used (calculatedriskblog.com)

The Newest Rip-Off in Housing: Builder's resale fee, forever (market-ticker.org)

Fed's Evans Says U.S. Recovery Uncertain as Housing Not Out of the Woods (bloomberg.com)

Federal Reserve Can't Do Much More to Boost Job Growth, Economy (dailyfinance.com)

Hard-nosed Fed sends global markets reeling (telegraph.co.uk)

Why does a tiny Tel Aviv flat cost as much as a house in Florida? (haaretz.com)

Foreclosures on rise in Oregon (spotlightnews.net)

Home is where the hurt is in today's housing market (suntimes.com)

Congress got loans from Countrywide in exchange for corrupt lawmaking (washingtonpost.com)

Fannie Mae Eases Credit To Aid Mortgage Lending (From 1999 – nytimes.com)

Free Trial of Patrick's Property Finder


Wed Aug 25 2010

Overpriced-house Sales Plummet – Which Was The Statistical Blip? (bayarearealestatetrends.com)

Existing overpriced-house Sales Plunge 27%, Worse than Every Economist Forecast (Mish)

Overpriced-house sales plunge 27 pct. to lowest in 15 years (sfgate.com)

Overpriced-house Sales at Lowest Level in More Than a Decade (nytimes.com)

Houses will still sell, but only at LOWER PRICES (poughkeepsiejournal.com)

Frightened Sellers Who Missed the Market Lower Prices in a Panic (irvinehousingblog.com)

Will Growing Rental Trends Undermine US Overpriced-house Sales? (realestatechannel.com)

The Renting Alternative Will Undermine Housing Bubble For Years (businessinsider.com)

Double-dip in housing prices may be around the corner (money.cnn.com)

Mortgage Fraud Is Rising, With a Twist (finance.yahoo.com)

Woman Wall Street Hates Most Is Suited for Job (bloomberg.com)

Economists blew the bubble (bostonherald.com)

Judges Taking Tougher Line on Bank Bailouts (blogs.nytimes.com)

The other trillion dollar bailout (mybudget360.com)

How To Be Homeless In America (patrick.net)

Free Trial of the Landlord's Property Finder


Tue Aug 24 2010

Let the Housing Market Normalize! (paul.house.gov)

How houseownership fetish hurt American dream (washingtonpost.com)

15 Signs US Housing Market Headed For Complete And Total Collapse (businessinsider.com)

Housing Fades as a Means to Build Wealth (nytimes.com)

Housing Is No Longer An Attractive Investment, Now What? (theatlantic.com)

Now they tell us experts say housing is a lousy investment and always will be (finance.yahoo.com)

The Shills Are Still Shilling Housing (market-ticker.org)

The Ones That Gave & Took Away Your Equity (blog.youwalkaway.com)

House sales collapse in the Triangle (newsobserver.com)

Even high-end properties can't escape foreclosure wave in Palm Beach County (palmbeachpost.com)

Happy 5th Birthday Housing Crash! (bayarearealestatetrends.com)

Housing Slide in US Threatens to Drag Economy Into Recession (bloomberg.com)

Housing already in double-dip (cnbc.com)

Housing inflation ramped up starting in the 1990s (doctorhousingbubble.com)

Australia's real estate bubble (ibtimes.com)

Debt's Deadly Grip (nytimes.com)

House resale fees: latest rip-off (money.cnn.com)

Foreclosure process doesn't stop during short sales (rgj.com)

Brokers See a Rise in Clients' Hostility (nytimes.com)

Free Trial of the Landlord's Property Finder


Mon Aug 23 2010

One Couple's New American Dream: Rent, Don't Buy (npr.org)

Seven Reasons Why You Shouldn't Buy a House (dailyfinance.com)

N. Calif house sales drop 23 percent in July (sfgate.com)

SF Bay Area and Calif. continue to lose jobs in July (contracostatimes.com)

Big California Earthquake May Come Sooner Than Expected (aolnews.com)

Texas actually not immune from housing crash (Mish)

Mansion squatters return in a big way (seattletimes.nwsource.com)

Housing Double Dip Is Not Just Tax Credit Hangover (cnbc.com)

Your House Might Be Underwater for Years (bloomberg.com)

Housing affordability through LOWER PRICES not even considered by govt (theautomaticearth)

Ireland to make house sale prices public by law (Irish with subtitles – tg4.ie)

Government Robs Working Renters to Subsidize Unemployed Homedebtors (irvinehousingblog.com)

Banks want federal guarantee of mortgage profits (contracostatimes.com)

How Pimco Is Holding the American Houseowner Hostage (minyanville.com)

Treasury yields fall to 17-month lows amid economic woes (money.cnn.com)

Interest rates 'may hit 8pc' in two years (telegraph.co.uk)

Commercial Real Estate Price Index declines 4% in June (calculatedriskblog.com)

Rising pay, benefits drive growth in military towns (usatoday.com)

"National Security Letter" Makes You Disappear (sott.net)

'John Doe' Who Fought FBI Spying Freed From National Security Letter After 6 Years (wired.com)

Irvine Home Address … 4 SUNPEAK Irvine, CA 92603

Resale Home Price … $2,745,000

Home Purchase Price … $1,679,000

Home Purchase Date …. 1/2/2008

Net Gain (Loss) ………. $901,300

Percent Change ………. 53.7%

Annual Appreciation … 18.3%

Cost of Ownership

————————————————-

$2,745,000 ………. Asking Price

$549,000 ………. 20% Down Conventional

4.50% …………… Mortgage Interest Rate

$2,196,000 ………. 30-Year Mortgage

$536,471 ………. Income Requirement

$11,127 ………. Monthly Mortgage Payment

$2379 ………. Property Tax

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

$229 ………. Homeowners Insurance

$269 ………. Homeowners Association Fees

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

$14,004 ………. Monthly Cash Outlays

-$1716 ………. Tax Savings (% of Interest and Property Tax)

-$2892 ………. Equity Hidden in Payment

$915 ………. Lost Income to Down Payment (net of taxes)

$343 ………. Maintenance and Replacement Reserves

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

$10,654 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$27,450 ………. Furnishing and Move In @1%

$27,450 ………. Closing Costs @1%

$21,960 ………… Interest Points @1% of Loan

$549,000 ………. Down Payment

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

$625,860 ………. Total Cash Costs

$163,300 ………… Emergency Cash Reserves

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

$789,160 ………. Total Savings Needed

Property Details for 4 SUNPEAK Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 4 full 1 part baths

Home size: 4,782 sq ft

($574 / sq ft)

Lot Size: 8,000 sq ft

Year Built: 1996

Days on Market: 70

Listing Updated: 40416

MLS Number: S621933

Property Type: Single Family, Residential

Community: Turtle Rock

Tract: Cust

——————————————————————————

HUGE PRICE DROP. Live at the pinnacle in the hills of Turtle Rock. Beautiful custom home, tastefully remodeled in the last 3 years. On a coveted street where homes rarely come of the market, this jewel estate enjoys panoramic views of rolling hills of Shady Canyon by day & twinkling city lights by night. Classic exterior architecture is complemented with elegant interiors. The one of a kind floorplan is ideal for multi-generational living and provides flexibility with 3 potential master suites, including one downstairs! The grand entry foyer greets you w/a sweeping staircase, 2 story high ceilings adjoining to the immpresive formal great room. Entertain in the huge family room which includes an oversized built-in bar w/granite counters and seating for 6, walk in wine closet, built-in entertainment center, even room for a game table! A chef's dream kitchen has it all & includes 2 islands. Dine in the sunny nook or intimate dining room. Ideal dwnstrs home office/den. Even 4 fireplaces!

immpresive?

HUGE PRICE DROP? LOL! This property is at least a $1,000,000 overpriced. It desperately needs a huge price drop.

realtors Treated as Lackeys and Maids Grovel for 6%

A little Friday schadenfreude for you. Apparently, realtors have to work for their 6% these days.

Irvine Home Address … 37 PLYMOUTH Irvine, CA 92620

Resale Home Price …… $649,000

There's a new game

We like to play you see

A game with added reality

You treat me like a dog

Get me down on my knees

Depeche Mode — Master and Servant

Schadenfreude: joy in the misfortune of others. We all know we shouldn't do it, but sometimes we just can't help ourselves. As I noted in The Reservoir of Schadenfreude:

Schadenfreude is not a spiritually uplifting response. Most religious traditions would counsel us against it. In Buddhist teaching, people are taught to cultivate feelings of compassion for the misfortune of others — feeling empathy and sadness for the slings and arrows of outrageous fortune when they impact another. The near enemy of compassion is pity: it masquerades as compassion, but it has an element of separateness which detracts from the sense of Oneness with all things. Joy is good: Sympathetic joy, the joy in the happiness of another, is another pillar of a spiritual existence. However, joy in the misfortune of another — schadenfreude — is not a skillful behavior leading to happiness. Even knowing that, many of us feel this joy anyway. Why is that?

Because it feels good! Why do we eat garbage that we know isn't good for us? Because it tastes good! Schadenfreude is one of life's guilty pleasures, and today, we get to enjoy a healthy does at the expense of realtors.

Client to Broker: Clean My Windows!

By CHRISTINE HAUGHNEY

Published: August 23, 2010

Even in the strongest economies, New Yorkers of sound mind find that talking with a real estate broker can result in rolled eyes, raised voices and a New York version of “taking it outside” by threatening litigation. But now, as the sales market whimpers along in the languid last days of summer, some brokers say they have never been met by so many demands from their clients, or so much hostility.

Victoria Shtainer, a Prudential Douglas Elliman broker, said one current client had asked her to arrive two hours before open houses to clean for her. Another client, a group of corporate executives from Texas, insisted on being driven around the city at various times for five weeks.

“The behavior goes from good to bad very quickly,” said Chris A. Randolph, a Barak Realty agent who has worked with two recent clients who gave him the brunt of their anger. One client would only grunt and acted so morose in front of brokers that they called Mr. Randolph to ask what they had done to offend his client.

“I feel like the waitress where I get blamed for everything that happens,” he said.

Pressure comes from all sides. Renters want the perks their friends negotiated. Buyers, hearing about drops in prices, think they should pay far less than the asking price. Sellers are angry because they are not getting the prices they once expected, and are wondering why, when the Internet has made it easier to market their own apartments, they should have to pay a 6 percent commission, or whether brokers ought to be doing more to earn it — for instance, cleaning.

The pressure from both sides of the transaction is what makes brokerage challenging. If it were easy, we wouldn't need realtors at all…. I won't pursue that thread much further.

And brokers who remember when their advice was eagerly welcomed are having to adjust their egos as clients take all of these feelings out on them.

Since realtors are trained to tell both buyers and sellers whatever they want to hear, it isn't surprising that realtors became accustomed to having their poor advice eagerly welcomed. It isn't until the general public realizes that realtors are self-serving and their advice is bullshit that people no longer find it valuable.

“They treat us like we’re starving and we need to do them all kinds of favors to possibly make some money,” said Michele Conte, a Corcoran Group broker who was recently asked by one former client to help her sell her apartment without a commission. She agreed to help, in hopes that the former client might eventually hire her.

Of course, these complaints are unlikely to bring tears to the eyes of the numerous New Yorkers who have dealt with unsavory brokers. The New York Department of State is receiving, on average, about 80 complaints a month about brokers. That is down from 100 a month last year and 110 in 2006, but it is not clear whether brokers are behaving better or whether the slower market means fewer opportunities for them to butt heads with clients.

A decline in complaints is undoubtedly the result of fewer transactions. Has anyone noticed an increase in the quality of realtors lately?

One broker who complained to this reporter about a demanding client provided e-mails that showed her own comments were actually more hostile. “It is not your way or no way,” one of the messages said.

How stupid is that? Turning over incriminating emails without realizing it isn't very bright.

Still, brokers want it known that they are members of the human race who need to eat and will bleed if pricked.

I suppose this is where we stop to feel compassion… not.

Sarah Parsons, a Halstead agent, said that in the 11 years she had worked as a broker, she had never encountered so many unrealistic clients as in the past year.

One buyer demanded that she limit his co-op board interview to 30 minutes. Another demanded that she negotiate 30 percent off the price of a distressed apartment in Williamsburg, Brooklyn, then grew angry at her when he had trouble getting financing. She says more sellers are micromanaging her as well.

“The buyers got more demanding, and the sellers got more frightened,” Ms. Parsons said.

Elyse Goldstein, an Upper East Side psychologist, said she had heard from brokers that clients were taking out their frustrations on them.

“When people are anxious, it stirs up their primitive defense mechanisms,” Dr. Goldstein said. She added that New Yorkers were faced with “disillusionment about what they can buy,” which she said “freaks them out.”

Ms. Shtainer, a broker who is also a lawyer, said she had been enlisted by executives of a Texas company that wanted to buy two furnished apartments for as much as $5 million — a deal that could have brought her up to $100,000, after she divided the commission with the selling brokers and with her firm.

So she acceded to demands that she considered to be excessive: that she pick them up at the airport when they came to visit, that she drive them around, that she photograph every detail of apartments they visited and that she speak with them in conference calls late into the night.

She said the executives had alienated sellers by moving slowly during negotiations and demanding that a furnished apartment include the seller’s personal effects like a coffee maker, a fax machine and pillows.

Then, after all that, they fired her.

And for the client who wanted her to arrive two hours before the open house to scrub the windows and tables? Ms. Shtainer came only one hour early, but she scrubbed.

“I have three kids to feed,” she said.

Why am I annoyed with realtors?

I am involved with real estate transactions, so why do I find realtors so distasteful? For the record, I am not a realtor. I have MLS access as an independent broker. I chose not to become part of their organization because it is too rotten to reform from within.

Bank in January I wrote Urgency Versus Reality: realtors Win, Buyers Lose, the Ideal Home Brokers manifesto. In short, I am bothered by realtors because they have a disregard for the truth. It isn't that they are liars — although some of them knowing dispel inaccurate information — it is that they just don't care. When a realtor tells a buyer that prices are going up, they may be right, but right or wrong they really don't care, they only want to tell the buyer what the buyer wants to hear to facilitate a sale. I think this behavior is deplorable, and I am openly hostile toward those who engage in it.

So every once in a while, when I see a juicy article like the one above, I will take my shots at realtors. Perhaps after three years of greatly reduced incomes, I should feel more compassion for their plight. I need to hear the NAr come out an apologize to everyone they pushed into buying homes they could not afford with emotional ploys and ridiculous financial claims. I need to see them stop their endless bullshitting and attempts to create a false sense of urgency in buyers. I need to know they are truly sorry that their actions lead people into the foreclosure meat grinder. Then I may feel their pain. Until then, I will feel the schadenfreude I shouldn't allow myself, and I will make no apologies for it.

She was there for the money

The property records do not reflect that this property was purchased by the current owner in 2004. The sales price and initial mortgage information is not provided. There was a sale in 1998, but that owner sold to the current owner on 8/26/2004. In any case, the woman who bought this property was an equity stripping spender.

  • On 3/4/2005 she borrowed $35,000 from a private party — and probably had a great private party with the money.
  • On 7/21/2005, the money she borrowed long gone, she refinanced the first mortgage for $535,000.
  • On 5/8/2006 she refinanced again with a $676,000 first mortgage.
  • On 11/7/2006 she found a subprime lender to give her another $16,305.
  • She defaulted in late 2009.

Foreclosure Record

Recording Date: 08/11/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/14/2010

The property is scheduled for auction on September 9, 2010.

I would consider this one

If there were a realistic chance of this short-sale property selling, I would consider buying it. At 4.51% interest rates, the payment is lower than rent — unless someone can show me a link to a 2,500 SF 4/2 with a pool that rents for less than $2,600. If anyone can find a better rental, please post the link, I am looking.

This property as priced with our current interest rates is clearly below rental parity. Properties selling for less than rental parity are the kind of deals we can expect to see more of over the next few years, particularly as prices roll over in the fall and winter of 2010-2011.

Irvine Home Address … 37 PLYMOUTH Irvine, CA 92620

Resale Home Price … $649,000

Home Purchase Price … $295,500

Home Purchase Date …. 6/9/1998

Net Gain (Loss) ………. $314,560

Percent Change ………. 106.5%

Annual Appreciation … 6.2%

Cost of Ownership

————————————————-

$649,000 ………. Asking Price

$129,800 ………. 20% Down Conventional

4.51% …………… Mortgage Interest Rate

$519,200 ………. 30-Year Mortgage

$126,987 ………. Income Requirement

$2,634 ………. Monthly Mortgage Payment

$562 ………. Property Tax

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

$54 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,250 ………. Monthly Cash Outlays

-$440 ………. Tax Savings (% of Interest and Property Tax)

-$682 ………. Equity Hidden in Payment

$217 ………. Lost Income to Down Payment (net of taxes)

$81 ………. Maintenance and Replacement Reserves

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

$2,426 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,490 ………. Furnishing and Move In @1%

$6,490 ………. Closing Costs @1%

$5,192 ………… Interest Points @1% of Loan

$129,800 ………. Down Payment

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

$147,972 ………. Total Cash Costs

$37,100 ………… Emergency Cash Reserves

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

$185,072 ………. Total Savings Needed

Property Details for 37 PLYMOUTH Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,498 sq ft

($260 / sq ft)

Lot Size: 5,300 sq ft

Year Built: 1978

Days on Market: 11

Listing Updated: 40406

MLS Number: S629181

Property Type: Single Family, Residential

Community: Northwood

Tract: Pl

——————————————————————————

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

Fantastic Opportunity to Live in Northwood! Large 4 Bedroom 3 Bathroom Pool Home with Additional Large Bonus Room Which Could Also Be Used As a 5th Bedroom. Huge Downstairs Master Bedroom with Walk-in Closet and Wet Bar. Elegant Formal Dining Room Plus Bright Breakfast Nook in Kitchen. Home Also Features Marble-Like Italian Ceramic Tile Floors, Vaulted Ceilings, Recessed Lighting, and a Gorgeous Marble Tiled Fireplace with Custom Wood Mantle. Pool, Spa, 3 Car Garage, Concrete Tile Roof, AND… **NO HOA DUES & NO MELLO ROOS!** This One Will Not Last Long. HURRY!!

Title Case, asterisks, ALL CAPS, multiple exclamation points, typical realtorspeak. Need I say more about the false sense of urgency?

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,

Irvine Renter

Experts Say Housing No Longer Builds Wealth

Sentiment toward owner-occupied housing is changing, and people are starting to accept that housing is not the great investment they thought it was.

Irvine Home Address … 18 BAHIA Irvine, CA 92614

Resale Home Price …… $594,900

From the darkness, I walk into the light

From the day, I walk into the night

From the shadows, I will appear

With a message, for all who will hear

For the weak of heart, I will be strong

To the defenders of faith, I will belong

To the last of us, fight till we die

Till the keys, of the kingdom, are mine

Manowar — I Believe

Kool aid intoxication is an unshakable belief in real estate appreciation. As I wrote in Losing My Religion:

Baptism into the real estate religion is a metaphorical drinking of kool aid. The fundamental belief of this religion is a belief in the "higher power" of market forces — real estate values always go up. Once you accept this fundamental belief, the dogma of real estate can take over. The dogmatic practices of real estate include buying at any price and borrowing any sum you can. Since real estate always goes up, it doesn't matter how much you pay because you can always sell later for more money. Value has no meaning. Also, since you can pay back any borrowed sums when you sell, it doesn't matter how much you borrow or under what terms. Fabricating income on a mortgage application to qualify for a larger loan is perfectly acceptable behavior. Debt is something to be serviced not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice. The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.

People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled "Why Christianity Must Change or Die" in which he devotes a chapter to the Jewish exile to Babylon. It was a cultural crisis of faith where many of the fundamental beliefs of Judaism were challenged. California's religion of real estate is facing a similar crisis. The fundamental belief in endless house price appreciation is being challenged, and all the associated beliefs are similarly being called into question. Right now, most people are still in denial clinging to their faith in the forces of the housing market. Many will come to lament the Day the Market Died, many will continue to cling to Southern California's Cultural Pathology, and many will bargain for a renewal of the The California Social Contract.

Any core religious idea that can be empirically tested will face its ultimate challenge. The collapse of The Great Housing Bubble will prove that real estate values do not always go up, and in fact, real estate values can decline significantly. All of the associated beliefs built on this fundamental premise are equally false. People will be forced to examine the beliefs which guide their purchase decisions and their relationship to debt financing. Like any other crisis of faith, the loss of comforting and secure beliefs is emotionally painful, and the cleansing process will take time. Will kool aid intoxication survive? Probably, but there will be fewer faithful until meaningful appreciation returns and the army of realtors missionaries sets out to convert a new generation.

The article for today's post calls into question some of the basic beliefs Californians have about real estate. Some may lose their religion, but some will decide that despite the obvious contradictions, they still believe.

Housing Fades as a Means to Build Wealth, Analysts Say

By DAVID STREITFELD

Published: August 22, 2010

Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

More than likely, that era is gone for good.

I have written on many occasions about Our HELOC Economy. California is built on a foundation of borrowed money. We continually build Ponzi Schemes, and when they collapse and lenders no longer give us money, the entire economy grinds to a halt.

I believe it will take many years for lenders to repeat their mistakes of the bubble. The Ponzi era may not be gone for good, but unless the government starts backing cash-out refinancing and HELOCs, it is gone for the foreseeable future.

Of course, most current California home buyers don't see it that way. They believe HELOC riches are right around the corner, and banks will be willing to finance the profusion of personal Ponzi Schemes Californians are so fond of creating. It isn't going to happen.

“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

The fact that people believed these delusions amazes me. People were choosing to spend more on housing, but that was only because house prices were going up. More people were not moving to the coasts, but the people that were there were taking their home equity and buying multiple properties to create artificial demand. And despite running short of usable land, we have thousands of land deals all over California where the residual land value is negative right now. Each of these fallacies was promoted to the masses by the NAr to create false urgency to enrich realtors.

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.

“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.

The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.

Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.

“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.

The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.

That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.

“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”

Most people don't think about market conditions when they buy a home. Realistically, people buy and sell because of life's circumstances. This couple was going to buy now regardless of what happened in the market. Their house will decline in value for a while, but if they hold it long enough, they will be hurt less than those who bought from 2004-2008.

Other buyers have grand and even grander expectations.

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.

With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.

I am always astonished by how much people think house prices should go up — or even that house prices should go up at all. Do wages go up at 10% per year? Why should house prices go up any faster than wages? How can house prices go up faster than wages on a sustained basis? How are people supposed to pay for houses once it costs 100% or more of their income? Somehow logic seems to elude the average home buyer. Kool aid intoxication is very strong.

For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.

The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.

Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.

By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.

“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”

Not everyone views the notion of real appreciation in real estate as a lost cause.

realtors will never accept that real estate appreciation is a lost cause, nor will anyone who likes to use this fallacy to generate false urgency in buyers.

Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.

“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”

Housing is special. Irvine is different. How many times have we heard that bullshit before?

All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.

“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”

Wrong. Arizona may not see peak prices for quite some time, but it will recover. Of all the distressed markets out there, Phoenix is one of those most likely to make a comeback. The economy is diverse and the population is growing. I would buy cashflow properties there if I had more contacts. I am more excited about Las Vegas mostly because I have the contacts to get cashflow properties there. The economic story in Phoenix is actually more compelling.

Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.

Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.

Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.

His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”

The fantasies of Mr. Austin are shared by homeowners everywhere. He has been forced to let go of his fantasies whereas Orange County and Irvine home owners are still clinging to theirs.

The contrarian view

I would like to believe that stories like today's reflect a positive and permanent change in buyer attitudes, but there is another way to see it.

Housing must be nearing a bottom..

… Because now I'm starting to see more articles about how housing is a lousy investment and no one should buy a house. Anyone who's been paying attention knows that this statement is just a wrong as home ownership is always better than renting. Both statements are just flat out wrong. But that doesn't stop the pundits.

One sign of a market bottom is a change in sentiment. When an asset class is strongly out of favor with the investment community is often a great time to purchase it.

I believe we are about to see a leg down in house prices, but what happens after that is a mystery. There are far too many variables to predict. I am planning a future post to look at some of these scenarios and try to assess the probability of each. One possible scenario is that low interest rates persist until the inventory is absorbed, and the leg down we are about to see is the last one. This may not be the most likely scenario, but this winter should be (1) the bottom of the recession, (2) the peak of inventory, and (3) the bottom of buyer demand. When conditions are at their worst is often when markets find a durable bottom. Only time (and interest rates) will tell.

No money in, much money out

Houses were a great trading vehicle during the bubble. Lenders were giving houses to people with no money down, and when values went up, lenders gave people this money as well. With that kind of lender behavior, it isn't surprising that houses were in high demand.

  • The owner of today's featured property paid $570,000 on 1/9/2004. He used a $456,000 first mortgage, a $114,000 second mortgage, and a $0 down payment.
  • On 5/8/2006 he refinanced with a $586,000 Option ARM with a 1.25% teaser rate.
  • On 11/26/2007 Wells Fargo refinanced his first mortgage for $604,000 and gave him a $37,750 HELOC. How stupid is that?
  • Total property debt is $641,750.
  • Total mortgage equity withdrawal is $71,750.
  • Total squatting time was about 14 months.

Foreclosure Record

Recording Date: 11/12/2009

Document Type: Notice of Sale (aka Notice of Trustee's Sale)

Click here to get Foreclosure Report.

Foreclosure Record

Recording Date: 08/10/2009

Document Type: Notice of Default

Wells Fargo bought the property back for $663,586 on 6/10/2010. They will lose about $100K on the deal.

Irvine Home Address … 18 BAHIA Irvine, CA 92614

Resale Home Price … $594,900

Home Purchase Price … $663,586

Home Purchase Date …. 6/10/2010

Net Gain (Loss) ………. $(104,380)

Percent Change ………. -15.7%

Annual Appreciation … -42.9%

Cost of Ownership

————————————————-

$594,900 ………. Asking Price

$118,980 ………. 20% Down Conventional

4.51% …………… Mortgage Interest Rate

$475,920 ………. 30-Year Mortgage

$116,401 ………. Income Requirement

$2,414 ………. Monthly Mortgage Payment

$516 ………. Property Tax

$67 ………. Special Taxes and Levies (Mello Roos)

$50 ………. Homeowners Insurance

$50 ………. Homeowners Association Fees

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

$3,096 ………. Monthly Cash Outlays

-$403 ………. Tax Savings (% of Interest and Property Tax)

-$626 ………. Equity Hidden in Payment

$199 ………. Lost Income to Down Payment (net of taxes)

$74 ………. Maintenance and Replacement Reserves

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

$2,341 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,949 ………. Furnishing and Move In @1%

$5,949 ………. Closing Costs @1%

$4,759 ………… Interest Points @1% of Loan

$118,980 ………. Down Payment

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

$135,637 ………. Total Cash Costs

$35,800 ………… Emergency Cash Reserves

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

$171,437 ………. Total Savings Needed

Property Details for 18 BAHIA Irvine, CA 92614

——————————————————————————

Beds: 3

Baths: 3 baths

Home size: 1,599 sq ft

($372 / sq ft)

Lot Size: 4,138 sq ft

Year Built: 1988

Days on Market: 15

Listing Updated: 40415

MLS Number: P747732

Property Type: Single Family, Residential

Community: Westpark

Tract: Pr

——————————————————————————

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

If your client likes sunlight- loves a well lit home- then this is their home. Dozens of windows in this home and house is sunny and bright and cheery. A place to come home to after the end of a day. Upgraded glazed kitchen countertops. Gazebo/patio cover out back to relax. Centrally located near both freeways and near shopping centers. Lushly landscaped for the gardener in you.

Technically, this doesn't deserve the lite-brite graphic, but since the realtor went out of her way to sell sunshine, I thought she still deserved it.