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
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.
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.
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.
Recording Date: 05/09/2008
Document Type: Notice of Sale
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.
Recording Date: 10/23/2009
Document Type: Notice of Sale
Recording Date: 07/20/2009
Document Type: Notice of Default
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.
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
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
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.