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.

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.

39 thoughts on “Fix the Housing Market: Let Home Prices Fall

  1. winstongator

    Say a $50k pre-tax salary affords the $112k in 98. The $300k over 9 years is $33k/yr, assume a 20% tax rate and that ‘feels’ like another $42k in pre-tax income.

    There are lots of markets besides Vegas where owning is cheaper than renting. Even during the bubble, it was in many non-bubble places.

    The real fallacy in the logic of the ‘more housing stimulus’ crowd is that they are trying to get back to the bubble ways, not realizing how unsupported by fundamentals they were. If people can afford to buy, in my area, they are. They are not worried about the capital appreciation, somewhat because they realize they can rent their home and break even or do a little better. The areas that are obsessed with housing as an investment are the areas with the most volatility (I’m not saying don’t worry about the price you buy at, but realize that something is amiss when you’re paying 3x what someone renting would pay). You can look at where the ‘affordability’ products were most prevalent. The option-arm was 75% concentrated in the sand-4. Option is a good term because it is really an option that would only pay out if home prices kept going up.

    If the price to own keeps going down, then there will be downward pressures on rents also. This will probably have some downward influence on general prices, which the fed is 100% determined to stop.

    1. DarthFerret

      If the price to own keeps going down, then there will be downward pressures on rents also.

      Wages, rents, and prices are all intertwined, with interest rates being the fourth component having an effect on prices but not necessarily on wages or rents. If wages go down, so do rents and prices eventually (gov’t intervention notwithstanding).

      When I was living in an Irvine condo from Jan 2007 – Jan 2010, we negotiated a $200 reduction in our rent in mid-2009. When we moved to rent an SFR at the beginning of this year, we got it for $150-250 less than comps within the past year. Much of this was undoubtedly due to falling wages as well as delusional renters trying to catch falling knives and pay an extra $30-40K in order to claim their $8K tax credit.

      All of these factors have an effect on each other.

      For those lucky enough to keep their job and not suffer wage or benefit decreases, deflation can actually be helpful.


  2. Swiller

    As a homeowner I say GREAT!!! Let home prices tumble, they should have never reached these crazy levels that have either denied the logical, smart, and long term families from purchasing, enabled/rewarded the foolish gamblers/scammers or enslaved the ones who can barely afford the home but purchased out of the fear of never owning.

    I say let them home prices tumble and get good, hard working american families back in homes for realistic terms. Finally, maybe it will be allowed to collapse and self correct itself.

    1. wheresthebeef

      Swiller, your logic sounds good; however, when you throw in politics and Wall St./banking cartel/NAR/CAR into the mix then things get a little murky. No politican wants an all out housing collapse on their watch, their only job is to get re-elected. Additionally, Wall St. and the banks would further lose their shirts if another big decline happened. I’m sure the politicans would come in and “save” the day again with another tax payer bailout. I agree that prices just need to correct and I am seeing that with my own eyes currently. This isn’t a plunge off a cliff, this will be a slow, steady decline for years to come.

      On another note, I looked at a open house yesterday (a short sale townhouse in Redondo for 500K). The place was vintage 1970s and needed some serious work. I chatted with the showing agent and he said the previous owner refinanced several hundred K out of the property to buy a place in Palos Verdes. He then rented his townhouse for a few months before coming to the conclusion he didn’t like losing money each month. So in nutshell, for two years bad credit this guy gamed the system to get his dream house in Palos Verdes while leaving the tax payer holding the bag on his “investment” that didn’t pan out. I guess his investment did pan out…it netted him free money to move up to the hill. This behavior disgusts me. Either game the system or get left behind in this society.

      1. Shevy

        This guy may not have it as rosy as it seems. When it’s not a purchase money there is a possibility of future collection, especially if he has money and equity in another asset. I would not want to be in his shoes.

        1. wheresthebeef

          Shevy, regarding POSSIBILITY of future collection…I’ll believe when I see it. IR profiles people everyday who have taken enormous amounts of money out of their property before letting it go back to the bank. I seriously doubt these deadbeats will be on the hook for a dime. If collection agencies would clamp down on them and go after assets and garnish wages…you would hear the sob stories of big bad banks beating up the little guy. I’m sure all idiot politicians would have none of that and enact some law to waive the losses for good. Sometimes gaming the system requires a little risk, it’s a game of chicken. So far the gamers look like they will come out on top.

          1. JDSoCal

            “If collection agencies would clamp down on them and go after assets and garnish wages…you would hear the sob stories of big bad banks beating up the little guy”

            I think either LA or NY Times already ran such a sob story a month or so ago on short-salers and foreclosurers on the hook for seconds and thirds, boo hoo. Couldn’t believe it.

    2. Shevy

      Exactly, although I rent in Orange County, I own properties throughout the country, educated owners and even investors don’t care what happen to prices as long as rents are stable. Responsible, educated, homeowners and investors buy properties at or below rental parity using fixed financing and although appreciation is nice, really mainly care about rents.

      Realtors,banks, and uneducated home debtors are the only people that are arguing for artificial supports and bad legislation. Unfortunately their voices are pretty loud.

    3. norcal

      I agree. Let sanity rule the housing realm!

      Of course, lower prices mean lower property taxes for municipalities, and where does that leave local services? ON the other hand, a city like Irvine that has been funding roads and sewers with Mello-Roos is proven to be exceptionally creative in creating new types of taxes…..

      Perhaps lower revenues will force cities to fund only their core values. Like education, safety, and cleanliness.

  3. Shevy

    Unfortunately, very few of our elected officials have it right and understand this, or they choose to look the other way. Probably because the noise from the irresponsible, uneducated, and greedy is louder than the noise from those of us that are too busy working. I think it’s crazy when I hear purported professionals on CNN arguing for legislation to prevent prices from dropping and arguing that prices need to be supported at artificially high levels.
    People that don’t read the IHB daily believe IrvineRenters position comes from being a renter, however, he has touched on the huge effect that this poor legislation can have on owners, especially condo owners. The legislators that are creating this legislation are doing it at the behest of misinformed home debtors and bankers. Many condos HOA’s are beginning to have issues with HOA delinquency that greatly affect responsible condo owners. A combination of loan mods given to condo owners who still do not pay their HOA’s and banks refusal to foreclose is creating a growing HOA burden for responsible condo owners. On top of increasing HOA fees, they are going to continue to see the values get hit as a result of the poor legislation that was meant to prop up prices. This legislation will have the opposite affect because banks will stop lending in communities with high delinquency, while delinquency will stay high because banks refusal to foreclose and governments encouragement of loan mods. Instead of making the problem better they are making it worse. At the same time they are running our country into deeper debt and using responsible renters and homeowners taxes to pay for it.
    Irvine renter hit the nail on the head; people will buy homes when it makes sense. How do artificially high home prices benefit society as a whole at all? It creates limited mobility and all of the supports and threats of future credits simply freeze people in uncertainty. Enough already! I know that many on this blog agree, I am for organizing and getting our point across.

    1. Laura Louzader

      You’re post is spot on. Paying condo owners are being absolutely destroyed by extra assessments to offset the loss of assessments from defaulting “owners”. The association’s only hope of collecting these delinquent HOA fees is to get the delinquent owner into foreclosure.This is the scariest thing about buying a condo- the potential liability, due to delinquent assessments, and in a really large tower, you will often see as many as half the units in default. This is especially true in super-glutted markets like Miami or Chicago’s South Loop, which are disaster areas. The extra assessments, which paying owners had no reason to expect, often push other owners over the edge.

      Another way in which higher prices hurt homeowners is, of course, in the matter of property taxes. Municipalities now base your taxes on the latest assessed value instead of the price you paid, which means that an elder who paid her house off and counted on keeping her expenses level, is blown out of it because she can’t keep up with the taxes. The property tax is a brutally regressive tax that pretty much makes a joke of home “ownersip”. What do you really “own” when you must pay your local shake-down (taxing) authority 3.5% of whatever they say your place is worth, to continue to own what you bought and struggled 30 years to pay for?

      1. HydroCabron

        Not to sound callous, but in how many cases has Grandma been forced out of a paid-for home by property tax increases?

        I’m curious, because property taxes are deductible, offsetting the pain of increases a little bit, unless Grandma is well below the standard deduction, which is quite likely. Maintenance, insurance, and utilities put together usually outweigh property taxes by a good amount, so that if property taxes are what puts Grandma over the edge, then she was pretty close to it as-is.

        Not to minimize the problems this causes those on fixed incomes. After all the horror stories I heard back in 1978, I wondered if anyone has hard numbers, either from then in CA, or from other states these days: How many elderly are being squeezed out of their dwellings by property taxes?

        It would seem that Grandma, if not underwater, could just sell and move to a smaller place – stupid to have to do that, but it’s one solution. Or perhaps an owner can elect a fixed tax burden in exchange for an agreement to pay later at time of death or sale, from the proceeds of the appreciation.

  4. alan


    Youv’e got it wrong. The housing bailout was done only to save the big banks from total collapse. The FED DOES NOT care about homeowners, that’s a smokescreen.

    Just like the real force behind Prop 13 were large corporations who wanted to limit their tax burden. Saving grandma was from losing her home to higher taxes was just a smoke screen. How much tax do you think Hollywood, Disney or Macy’s has saved from Prop 13 over the years, a lot more than grandma.

      1. Swiller

        100% agree. Prop 13 is welfare for the rich, it just *happens* to keep property taxes down (for those whom never move…yeah right)

        1. tonye

          Actually, there are many of us who do NOT move very often.

          We’ve been in our house for 23 years and many of our neighbors have been here longer. When we needed a bigger house, we rebuilt in place.

          In fact, I think that in my part of TR, the average home owner has been in place for at least 15 years.

          1. Swiller

            I totally believe you Tonye….that’s because back in 1987, housing was still somewhat “affordable”, and if people stretched, they could actually buy a home that would meet their needs for life.

            Due to the latest bubble, if most of those homeowners sold and left TR, they would never be able to afford to move back in due to the incredible increase in price/fees/taxes.

            TR (the old TR) has been my favorite past of Irvine since I first moved here. It’s much too bad that the have’s and the have-nots are so far apart now. Only the upper class can afford to buy in TR now. It would be nice to see the WTF pricing of TR fall to something resembling reality.

  5. irvineshadow

    purely theoretical question 🙂 :

    if the govt were on a title of a home, could they wave their 3rd amendment rights and give consent to quarter troops?


    1. Chris

      Nope. The govt will force the troops to take out a Ginnie Mae loan 🙂

      BTW, Ginnie Mae bond fund has done wonders for me for the past several years.

  6. Kirk

    Liar. The measures were taken to help American banks.

    Bingo. All the government is doing is trying to slow the bank failures. Many of the recent home buyers are taking one for the team.

    What do we gain by pulling demand forward?

    You answered your own question if you think saving the banks will save us. But, I suspect you are like me and are wondering if allowing banks like Citibank to collapse will really bring down the whole economy or not. I honestly don’t know. I’m quite sure it would be horrific in the short term, but maybe it would clear the way for new banks to emerge and ultimately speed up the recovery.

    Do we cut out the cancer or just keep trying the chemo?

    1. scottinnj

      I read the summary of the meeting with the ‘senior treasury officials” and a number of financial bloggers (Yves Smith, Interfluidity, Felix Salmon, etc – IR should be on the list!). In the Interfludity summary Waldman is very clear that Treasury didn’t see programs like HAMP as ‘extend and pretend’ it is ‘extend and don’t even bother to pretend’. In other words the objective of the policies were not about the home market, keeping middle class homeowners in their homes (though it would be nice if that happened). Rather it was all about muddying the waters of foreclosures to have a controlled crash. In short it helped banks muddle through what may have been a fatal shock. It sounds like they know the plane lost power at 30k feet, they are trying to control the landing and hope they have Sullenberg at the controls when it lands in the ocean

      1. Kirk

        Sounds right – except that their boss, Obama, is pretending that he is helping homeowners. Then again, so did Bush on an even greater scale.

        To be fair to Obama though, in certain markets that $8,000 will cover the decline in prices, but not in Orange County.

        1. scottinnj

          Its all about helping the banks. I think you’re right that Obama is pretending though to be fair I think a McCain/Palin administration would have done something similar and also pretended they were helping homeowners.

    2. breakingBad

      “Do we cut out the cancer or just keep trying the chemo?”

      Perhaps it’s too late to ask such a question. The reality is the cancer has already hijacked the brain and made it decide that the whole body should protect cancer cells at all cost and let it grow unchecked and gradually kill off all the organs and tissues and body parts in the end.

      “Cutting out the cancer” has never been brought up as a solution. A couple of fake chemo sessions were just for a show. Since its diagnosis three years ago the tumor has spread and taken over every function of the body.

      1. Kirk

        Nah, I don’t buy that. We’ve shrunk the tumor and now have more options available to us.

        I’m not as doom and gloom as everyone else in regards to the general economy.

        But, don’t get me wrong. Orange County house prices are going down. Irvine will drop at least another 20% for mid-market within 2 years if we don’t have another home buyers tax credit or equivalent stimulus.

        Housing is not the general economy. It is just one of many sectors of the economy.

  7. FoolishRenter

    The govt will prop-up the housing market until the banks unload enough of their liabilities for the defective loans. Only then will the govt remove the supports to allow the taxpayers to absorb the loss (cash withdrawns, house ATM losses, HEWs). Otherwise the current banking systems and those in power will collapse. For those in power, maintaining their positions is more important than the health of the economy or taxpayers. Remember, record marginal profits are occuring, there’s a weak recovery, but high offical unemployment and every higher unofficial underemployment and “discouraged” workers (not working andquit looking for work, but not officially considered unemployed).

  8. HydroCabron

    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.

    I grow more militant on this point by the day.

    Dump all of it: government backing of loans, the mortgage-interest deduction, and any agency designed to help make housing more “affordable”.

    I doubt that it will ever happen, but the government should get away from the housing market forever.

  9. Bitter Renter

    I enjoyed the subtle “Star Trek” reference with “A Piece of the Action”.

    The guy taking apart his walls looking for equity also made me chuckle.

  10. Chris

    “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.”

    IR, you’re sadly mistaken if you think Irvine is going to fall. Didn’t you read my past comments on Irvine?

  11. Briddick the Bellingham real estate guy

    I completely agree. It’s time to let the market fall out completely. The government is throwing a ton of money in to keeping distressed home owners from foreclosure when really it’s only delaying the inevitable.

    We usually follow California trends up here in WA so it will be interesting to see if there’s a double dip.

    great blog! Cheers,


  12. alice

    Yeah let all markets find their own bottom, values., But not until I get rid of my properties first! Lol!

  13. Danger

    IrvineRenter, with regards to your statement about the Las Vegas market being worth looking at because the rent/buy ratio is right, I don’t think that should be all you consider. Even if the ratio is right by traditional measures, that doesn’t mean that prices can’t still drop significantly from where they are now. The Vegas economy is based on people having enough spare money to give to the casinos, and at the moment that doesn’t seem to be a strong basis on which to go forward. Don’t take this as a criticism of your opinion – I’m sure you know much more than I ever will about the subject, but I would hate for you to lose money after doing so much good work in letting others know about the dangers of knife catching.

  14. theyenguy

    You write: “Dump all of it: government backing of loans, the mortgage-interest deduction, and any agency designed to help make housing more “affordable”. I doubt that it will ever happen, but the government should get away from the housing market forever.”

    The market, not the government, is going to do a dump very soon.

    In my linked article of Tuesday August 31, 2009 entitled Gold, Silver, US Treasuries, And Thailand Soar On Higher Yen As Stocks Resisted Going Of The Brink Into The Abyss, I relate:

    One could call today “a rush to a perceived safe haven of lower interest rates”, as the interest rate on the 20 to 30 Year US Government Bonds, $TYX, fell; and the rate on the US Ten Year Note, TNX, fell, as well.

    Given that the market failed to break today, and given the rush into US Treasuries, we are a historic point of systemic risk.

    The chart of 30-10 Yield Curve, $TYX:$TNX, steepened somewhat, showing that investors embraced the risk of bond default, as a better choice than the risk of being invested in stocks, being that investors rushed into the 20 to 30 Year US Government Bonds, TLT, and even the extremely volatile Zeroes, ZROZ.

    The monthly chart of the 30-10 Yield Curve, $TYX:$TNX, shows the deadly rushing embrace of US sovereign debt that has come with a steepening yield curve. When debt deflation comes to bonds, that is when capital takes flight from bonds, the United States is going to be ground zero for austerity. Perhaps the social turmoil and disruption will be so great that a deployment of global peacekeeping troops will be announced by the President making the statement of Henry Kissinger as reported by ThinkExist a reality: Today Americans would be outraged if U.N. troops entered Los Angeles to restore order; tomorrow they will be grateful! This is especially true if they were told there was an outside threat from beyond whether real or promulgated, that threatened our very existence. It is then that all peoples of the world will pledge with world leaders to deliver them from this evil. The one thing every man fears is the unknown. When presented with this scenario, individual rights will be willingly relinquished for the guarantee of their well-being granted to them by their world government.” – Henry Kissinger in an address to the Bilderberger meeting at Evian, France, May 21, 1992. (In an address to the Bilderberger organization meeting at Evian, France, on May 21, 1991. As transcribed from a tape recording made by one of the Swiss delegates. )”

    So in conclusion to your comment: the bond market very soon is going to dump it all — all US Treasuries, all mortgage debt at the GSEs, all municipal bonds, all emerging market debt, it’s going to be a complete dump.

    I hope you have some gold and silver coins stashed away.

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