Feeble Justifications for Government Manipulation of the Housing Market

The arguments used to justify the government's manipulation of the housing market are very weak.

Irvine Home Address … 401 ROCKEFELLER 412 Irvine, CA 92612

Resale Home Price …… $434,990

When the lights go down in the City

And the sun shines on the bay

I want to be there in my City

Journey — Lights

Housing is dead for the foreseeable future. Perhaps if we get another leg down, pricing may be low enough to sustain modest appreciation, but most likely prices will decline for a few more years then remain flat for quite some time.

The long housing stalemate

Posted by Colin Barr — September 21, 2010

Don't get carried away with Tuesday's housing market surprise. A sustainable recovery is still years away.

Housing starts jumped more than 10% to a four-month high, the government said Tuesday. Permits for new construction also rose, the Commerce Department said. The news comes on the heels of the umpteenth bust-era runup in the homebuilding stocks.

But despite the upbeat signs, Tuesday's results were distinctly mixed. The headline housing starts number was boosted by a large rise in the volatile multifamily category. And the closely watched single-family housing permits number actually fell, for the fifth straight month.

"Although the headline looks good, the details of the report paint a more downbeat picture," writes Bank of America Merrill Lynch economist Michelle Meyer.

What's more, the outlook remains dismal, thanks to years of overbuilding that have left housing markets across the country in various states of oversupply. There is a year's worth of unsold houses on the market right now, which is roughly twice the typical level — and that doesn't even count the so-called shadow inventory that would come onto the market if conditions improved.

Given the reality of those conditions, there is no justification for the government policies we have instituted to date. We have propped up prices by create a massive overhead supply and encouraged squatting on a grand scale. The current pricing is an illusion, so any justification for these policies is just as illusory.

Though there is an impulse nowadays to blame everything on Ben Bernanke and Tim Geithner, another view is that the government's massive efforts to prop up the housing markets – costly though they have been — have actually worked as well as they might have been expected to.

Expectations must be very low considering how bad conditions really are.

Sure, prices are still soft and banks are still stuffed to the gills with bad loans and foreclosed properties. Noncurrent assets and other real estate owned hit 3.3% of bank assets in the second quarter – down a shade from last year but nearly seven times the 2005 level.

But by the same token, the relative stability of prices over the past year has given the banking sector time to find its footing and the rest of the economy a chance to creep forward.

The stability over the last year is a temporary aberration, and the economy is only creeping forward because we have too much capital tied up in non-performing assets. The truth is Government Props Weakened the Housing Market and Delayed the Recovery.

According to this view, the government has succeeded in placing the housing market, once the source of so much economic instability, in position for a long slog back to health.

This will not have anyone turning cartwheels, obviously. Given the weakness of the economy and the slow rate of household formation in recent years, it will take years to absorb all the unwanted houses – a sobering thought when there is no end in sight to high unemployment.

But the good news, such as it is, is that unless there's another shock the housing market isn't about to bring the entire house of cards down again.

"Low rates and Fed mortgage buying have freed up sufficient liquidity to allow the 'shadow inventory' to remain in the shadows," says Andrew Barber of Waverly Advisors in Corning, N.Y.

"With such significant supply overhang, however, the market cannot rise appreciably," he adds. "As long as the Fed's put option is in place it might take something like a double-dip scenario or sudden rate environment shock to spur a sell-off. As such we could see this asset class tread water for a very significant time period."

Treading water isn't much fun, but think back to this time two years ago and tell me it doesn't beat the alternative.

If we had let prices crash to market clearing levels, the groundwork would be in place to have real appreciation. Once prices begin a sustainable rise, people regain their mobility, and the move-up market can return to health as people take the equity from a previous purchase to buy a more expensive home. As long as prices stagnate or decline, resale volume will be very low, and the economy will flounder.

North Korea Towers II

The only difference between these towers and the North Korea towers (Marquee at Park Place) is who was left holding the bag. The North Korea towers were sold out at the peak of the bubble, and both the investors and those who made loans in that building were left to face crashing prices, unpaid HOA dues, and little hope of recovery. The Astoria towers were not completed in time to catch any bubble sales, and Lennar's backer got to eat the losses.

Since the Marquee at Park Place was been seeing numerous forced sales by foreclosure, prices have been pounded down to the 200s. The Astoria towers are completely owned by Lennar, so there have been no foreclosures there. They are trying to obtain better pricing, but sales have been anemic, and with so much competition at lower prices, sales are not likely to improve there.

Lennar is facing a difficult choice: (1) lower price and take an even larger loss, (2) hold product off the market and hope prices go back up. Obviously, they are choosing to do the latter.

Perhaps we should rethink the terms "shadow inventory." I think we should call it "dark inventory." Many of the properties in shadow inventory are vacant like these towers. Vacant properties have no lights on, so they cast no shadows.

The Astoria is a microcosm of the shadow inventory problem. If you believe prices are going to fall, you would sell quickly to obtain whatever you could before prices fell further. Of course, that action becomes self-fulfilling. If you believe house prices are going to go back up, you want to release properties to the market slowly to allow some appreciation and still liquidate inventory. The problem with that approach is that your competitors may believe prices are going down, and they will provide lower priced product that steals your sales and pushes prices lower. That is the cartel problem. The sellers in Marquee at Park Place are undercutting the Astoria, lowering market prices, and stealing sales from the Astoria.

At the current rate of sales, the Astoria will be selling in 2030. They are betting that once the mess is cleaned up in the Marquee at Park Place that inventory will dry up and they will finally be able to sell for what they want. It isn't going to happen. These units simply aren't worth that much.

Look at the cashflow values. Even with 4.31% interest rates, these properties still cost more to own than they do to rent. What's the compelling reason to buy one of these? What happens when interest rates go up?

For now, Lennar will likely wait and see, but as time goes on and prices do not recover, the urgency to liquidate will increase. Prices will go down. The financial partners that backed this venture are going to lose a great deal of money.

Irvine Home Address … 401 ROCKEFELLER 412 Irvine, CA 92612

Resale Home Price … $434,990

Cost of Ownership


$434,990 ………. Asking Price

$15,225 ………. 3.5% Down FHA Financing

4.31% …………… Mortgage Interest Rate

$419,765 ………. 30-Year Mortgage

$83,129 ………. Income Requirement

$2,080 ………. Monthly Mortgage Payment

$377 ………. Property Tax

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

$36 ………. Homeowners Insurance

$876 ………. Homeowners Association Fees


$3,369 ………. Monthly Cash Outlays

-$330 ………. Tax Savings (% of Interest and Property Tax)

-$572 ………. Equity Hidden in Payment

$24 ………. Lost Income to Down Payment (net of taxes)

$54 ………. Maintenance and Replacement Reserves


$2,545 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,350 ………. Furnishing and Move In @1%

$4,350 ………. Closing Costs @1%

$4,198 ………… Interest Points @1% of Loan

$15,225 ………. Down Payment


$28,122 ………. Total Cash Costs

$39,000 ………… Emergency Cash Reserves


$67,122 ………. Total Savings Needed

Property Details for 401 ROCKEFELLER 412 Irvine, CA 92612


Beds: 2

Baths: 2 baths

Home size: 1,571 sq ft

($277 / sq ft)

Lot Size: n/a

Year Built: 2010

Days on Market: 44

Listing Updated: 40416

MLS Number: S628969

Property Type: Condominium, Residential

Community: Airport Area

Tract: Cpwas


Brand new Lennar high rise flat in Astoria. 2 bedroom, 2 bath flat with Wonderful Ammenities, Luxury living at its finest with valet parking, beautiful upgrades, gym, wine room, pool, spa and so much more.


41 thoughts on “Feeble Justifications for Government Manipulation of the Housing Market

  1. OrangeRenter

    Two observations:

    1. You chose to profile FHA financing here. FHA is extremely strict on condo financing right now. Projects must be FHA approved (certain % sold; not in control of the developer; etc.). Could one even get FHA financing on this?

    2. If it weren’t for the ridiculous HOA (800+/mo.!), I’d totally but this 🙂

    1. IrvineRenter

      The analysis spreadsheet I use defaults to FHA below a certain price point. I suspect FHA financing may be available in there because the HOA is not in default. The builder still owns most of the unit, and they are paying their own HOA dues. It isn’t until HOA delinquencies go over 25% that it becomes difficult to get FHA or GSE financing.

      The HOA is definitely what hurts these units. If you take $600 a month off the cost of ownership, the purchase price becomes much more reasonable.

      1. rkp

        IR-why do you use the minimum down payment vs the conventional 20%? You have written about the need for conventional financing and I imagine you advocate people saving a bit for their housing.

        1. IrvineRenter

          I am trying to reflect the reality of how people are actually buying at these lower price points. 20% down is certainly better, but few first-time buyers have saved that much money, so the lower price points are dominated by 3.5% down FHA buyers.

          1. mike

            not surprising, but sad and irresponsible to get a loan for $400k+ and not even have $88k for the down payment.

            $88k should be easy to save.
            $2100/month mortgage payment+$900HOA = $3000/month. save this sum over 30 months(2.5 years) prior to getting the mortgage and you have your $88k.

          2. mike

            hmm, i think the $3,369 monthly cash outlay is a more realistic number to use. you’d have the down payment in only 26 months (2 years 2 months)

          3. rkp

            agree its sad but agree with IR’s point of it being a reality

            however, when discussing rental parity, do you assume 3.5% down or 20% down? it makes a big difference right? also, if using income in appraisal, would the loan monthly cash outlay be less than or equal to the income?

          4. ripcord

            So, Mike, is your fictional buyer living at home with their family for 26 months to save up 88k? That would royally suck; I’d rather rent forever.

            A married couple living in coastal OC with a kid would need a two-bedroom apt, about $2k or so in Tustin. Then they could save roughly 1k per month if all the extra went to the down payment. They would take 88 months or over 7 years. I don’t think saving 20 percent down is easy in Irvine, especially if you have a family.

            A single guy or gal with a really good job could do it in a few years, but most families could not. It costs a lot to live in OC, you know.

          5. rkp

            I disagree. I come from a saving culture and I see how much my friends spend and how easy it is to save if they tried. A married couple with a kid renting for 2k a month and wanting to buy a 400k place should be making 70k a month after taxes at the minimum. Rent + living should be 48k (2k rent+2k living) so they should be able to set aside $20k+ per year. 4-5 years of saving and they have their downpayment. Frankly their rent and monthly living is way to high so I think they can save 88k faster. People just don’t know how to save…

          6. Renter1

            I don’t think a lot of households have a $150k pre-tax income. Also $2k living is very tight for a family. The daycare alone is $1k per month. Add on food ($500), 2 cheap cars ($500), very basic travel/vacation ($300), clothes/insurance/beauty/entertainment/etc ($300), cable/web/phone ($200) and you get very close to $3k for a fairly basic, no frills lifestyle. Even if you made $150 k, you only save $10k per year. The only solution is to move to a cheaper state, will lower rents and without income tax. That’s my plan.

          7. wheresthebeef

            Most people are horrible savers. Regarding our fictious young family living in OC, once you add up all the monthly expenses listed above and add in savings for retirement, student loans, existing credit card debt…there isn’t a whole lot left over to save for a downpayment. Even saving $1500/month would take almost 5 years to save the 84K. Few people are willing to sacrifice like that and put their lives on hold for 5 years to save that magic downpayment.

          8. FoolishRenter

            With reoccuring monthly expense like that there very little chances of saving enought for a 20% down. Time to get real and live within one means. The only one that I might agree with is $500 for food. Who needs cable when free digital TV is available. With a one income family, I rarely break $150k per year, but save about $30k. That even with $12 to 15k for donations. Granted not many expensive vacations in the last 20 years, running the cars until they are in the ground, buy only when on deep discount sales (harder now with the low inventory at the stores). I know many who make much less than me, but save more.

            At the grand opening, the agent said the first year’s HOA was included in the price. So, they should have no defaults on the HOA. If the units are not complete, then they may also qualify for mostly owner occuppied, since those other units are not yet available.

            As for time on the market as an indicator for being overbuilt, I think the number of vacant units are more accurate. A investor buy lots of vacant unit will decease the time on the market, but their still not enough people to live in them.

            The traffic noise was too much for me. RE agent had background music to cover the noise.

          9. Saving downpayment

            Those numbers are very close to what our expenses are but don’t forhet health insurance where many employers don’t pay for health insurance of family members so that comes out of the paycheck as well, so add at least $500 to cover family members. Add some $ for car insurance, registration, and maintenance – all necessary – and you end up with at least $4,000 monthly expenses which means a family needs to make at least $70,000 a year to be left with that much money. Now, if you have two family members working and each is making say $70,000 a year, then it’s possible to save maybe $2,000 / month after the added expense of child care depending on whether you have one or two kids…. It’s not easy for most people but not so hard for some.

          10. toshi

            I agree with the others that saving 88K is a lot harder in reality than it is in some idealized situation. Even if you have a good income and you live well within your means, things aren’t always so simple. You may get laid off and lose a few months worth of income. You may need to buy a new car. Or, you may decide that you want to further your education. Lot of things happen.

            Among my friends who have bought homes in recent years, almost all of them received sizable contributions from their parents for their down payments. I think most of these parents have wholeheartedly embraced the “housing is always a great investment” mantra, and in many cases, they were the ones who were pushing their reluctant kids to buy a house.

            A friend of a friend bought a house about a year ago and he had lived at home for several years (even shared a car with his mom) in order to save for a big down payment on this boring 500K tract house in the burbs. While I think he should be commended for his prudence, I wish he would have stopped to think about whether or not this house was really worth half a mill.

      2. FoolishRenter

        I expect 0% HOA deliquency with the builder paying the first year’s HOA as part of the purchase price.

        I friend just purchased a new Irine house. The builder required 20% down. Likely to prevent squatter from lowering the price of the other houses. HOA will have leverage with enforcement. The HOA has no leverage with zero or negative equiltiy squatters. Is the HOA going to do foreclose on someone with no equility? 🙁

  2. rkp

    My friend just rented out his 2B+loft 1200 sq ft place in avenue 1 for 2000 a month. From pure rent per sq ft, the astoria unit should rent for $2618. obviously rent doesn’t go up linearly but I think this could rent for $2300-2500.

    1. IR_Fan

      avenue 1 and this place are vastly differently. I used to live in watermarke and have a coworker who lives in Avenue 1. Also saw these units.
      No comparison between the two.

      1. rkp

        I imagine astoria is much nicer. Ave 1 is overrun by
        college students. Hence the rent of 2300-2500. Do
        you think it can rent for more?

        1. Perspective

          That’s fitting considering it feels like a college dorm when you’re walking through the hallways.

    2. FoolishRenter

      Usually rents can be higher with students cause the rent is shared and wear and tear seems to be higher.

      A co-worker was renting a TIC 2 bd apt or $1600 in Irvine. The renting of 3/4 bd duplex/fourplex or houses for a good price seems to be the luck of the draw. Seems like $2500 to $3200 is a very popular range.

  3. Foreign Cash Buyer

    $2,545 ………. Monthly Cost of Ownership

    is not much at all considering The Essex Skyline in Santa Ana is renting smaller units for well over $3,000 a month.

    1. Planet Reality

      Don’t try to suggest this is at rental parity or that Irvine inventory is only 860.

      Instead invest in the slam dunk Las Vegas trustee sale market.

      1. no worries

        PR, posts like this sound very childish.

        If you have a point to make, just make it.

        I enjoy when you spot properties selling near rental parity, and point them out. I don’t yet believe that’s the general scenario, but some properties seem to cross that line (for various reasons).

  4. tenmagnet

    These Condo tower projects don’t seem to work in Irvine.
    No surprise that the developer is losing money.
    It’s like swimming against the tide.

  5. lee in irvine

    Can anyone imagine what would happen to Orange County real estate prices if the gov’t completely got out of the mortgage business?

    1. Perspective

      That could be said for the price of anything, really, no?

      Can you imagine how low tuition would be if the government didn’t provide its own loans and subsidize private student loans?

      1. SanJoseRenter


        The government does not support prices for everything.

        For strategic reasons, most governments do support agricultural pricing.

        In the case of housing, we’ve seen what happens when they meddle.

        I don’t know about school loan subsidies, but that seems different conceptually than supporting house prices.

  6. FreedomCM

    I’m not sure about using FHA financing for this purchase.

    As well as I’ve been able to find from the FHA website, two criteria must be met:

    1. less than X% deliquent (25%?)

    2. more than 51% owner-occupied.

    This last point kills any FHA financing in many newer, incompletely sold projects (see FLA and lawyerliz). It also kills many older projects that have original owners renting out their ‘starter’ units (see south coast plaza).

    But of course, I am not a pro.

    Perhaps SGIP could comment?

  7. rkp

    I imagine astoria is much nicer. Ave 1 is overrun by college students. Hence the rent of 2300-2500. Do you think it can rent for more?

  8. Marc

    It might be nicer inside but there is no way that I will live that close to the toxic 405. These units should be priced 30% below Ave One/Watermarke to account for the health hazard and the high HOA.

  9. SanJoseRenter

    San Jose has an analog to North Korea Towers.

    It’s called the Onyx, located one block from eBay Graylands, and was finished after the crash.

    What’s interesting is that although the asking price of $500,000 for a 2/1.5 is similar to North Korea, Onyx has a great location for yuppies.

    Another thing in common is that at nite, the windows are black as coal – hardly an occupied unit.

    The only thing that keeps the Onyx from selling like hotcakes is that pesky asking price.

  10. Swiller

    I’m mad as hell!!! Prisoners should never get to live this well. We get to live like scrubs, but this prison in Irvine proves our incarcerated are treated overly well.

    Is that a green illuminated EXIT sign in the background by the door?

  11. BD

    ….they must be kidding. An HOA of $800 – $1000 / month? They should just throw in a Ferrari for ever with purchase.

    Realtarded… good luck.


  12. George Williams

    Lennar will no doubt take a huge loss on this development: it is located in a highly-trafficked (read noisy) area, school district is Santa Ana, so that rules out those with kids, the HOA’s are riduculous – and they are butt ugly!

    One would think they would have done better research regarding what Orange County residents are looking for in such a dense development.

  13. BD

    I know this means little to most but, have you ever contempated what you can afford monthly on your retirement (IRA, 401K, SS, Other)?

    Most cannot afford 5-600 dollars a month! I’m talking about people with non-gov benefits! Unless you are a retired fire-fighter making 90% of your salery in pension the rest of your life most will be hard pressed to just stay in OC.

    The average American retires with less than $50K in savings… sad.


  14. BD

    Does anyone ever think of paying off their house??

    You really think you are going to be 70 yrs old (40 and a 30 year mortgage) paying 4K a month with mortgage and taxes etc.

    I make a great living but, I don’t see this for myself making 250K+ a year. How do all the others???


    1. groundhogdaze

      BD, I wonder about this as well. When one is retired and not working, how does one sustain themselves if one has to pay thousands in property tax on top of everything else (insurance, hip surgery, etc…)? I’d rather be using that money to go traveling and avoiding needy friends and family who weren’t so prudent and looking for handouts. We reap what we sow and it appears folks are sowing Soylent Green. If you don’t wanna be on the menu, you’d better start running like Logan… Only time will tell if all roads lead to dystopia like the road we are on now seems to.

  15. gepetoh

    Net monthly cost of $2,545 for a 2/2 @1500+ sf in Irvine? That looks pretty consistent (favorable, actually) with what I’m finding for the nicer apartment complexes in Irvine… What am I missing?

  16. toshi

    @IrvineRenter: Why do you refer to these towers as “North Korea Towers”? I’ve seen you blog about them in the past, but I’ve never understood why you called them that.

  17. toshi

    Here in downtown San Diego, we have our own problems with luxury condo towers, but none is more emblematic than the Vantage Pointe. It’s downtown San Diego’s largest condo building with 679 units. Even though it was completed in 2008, they haven’t sold a single unit and it is currently sparsely occupied by renters.


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