Like many good proposals for reforming mortgage finance, lowering the loan limits insured by the GSEs and FHA likely will not happen because it will lower house prices.

Irvine Home Address … 5732 SIERRA CASA Rd Irvine, CA 92603

Resale Home Price …… $1,999,900

The grass was greener

The light was brighter

With friends surrounded

The nights of wonder

Looking beyond the embers of bridges glowing behind us

To a glimpse of how green it was on the other side

Steps taken forwards but sleepwalking back again

Dragged by the force of some inner tide

At a higher altitude with flag unfurled

We reached the dizzy heights of that dreamed up world

Pink Floyd — High Hopes

During the housing bubble rally, the grass was greener and the light was brighter. At higher prices with boundless hope, we reached the dizzying heights of real estate wealth, a dreamworld of unlimited appreciation and personal spending power.

Currently our housing market is completely supported by and dependent on government loan guarantees. By offering to assume all risk of loss, the federal government though the GSEs and the FHA is underwriting loans at historically low interest rates. This caused money to flow into mortgage lending at a time when proper risk management was to flee. This kept some of the air in the housing bubble which allowed the government to get control of the market's descent. The question is how do we move forward?

What do we do with a housing market completely hooked on government juice?

Treasury report advocates slashing GSE jumbo loan ceiling

by KERRI PANCHUK — Friday, February 11th, 2011, 9:42 am

Reducing conforming loan limits at Fannie Mae and Freddie Mac will help reduce the GSEs' dominance in the mortgage market by driving jumbo mortgage financing back to the private sector for financing, the U.S. Treasury said in its “Reforming America's Housing Finance Market” report on Friday.

Under the Treasury's plan, a 2008 increase in loan limits that allowed GSEs to temporarily back loans valued as high as $729,750, would expire on Oct. 1, reverting to the previous ceiling of $625,500. In a report from the George Washington University Center for Real Estate and Urban Analysis this week, researchers concluded that the Federal Housing Administration substantially raised its risk when it agreed to insure GSE loans valued as high as $729,000 during the financial crisis. The report advocated a return to 2006 levels when the FHA loan ceiling topped out at $362,790.

The Treasury report also said lowering conforming loan limits on jumbo mortgages and requiring a 10% down-payment for GSE loans will eventually ease the mortgage market back to the private sector while containing systematic risks.

Easing the market back to the private sector is secret code for easing the housing market off interest rate subsidies and loan guarantees. Private lending evaluating and taking risk would be great. Private lending taking risk with assumption of an Uncle Sam bailout would be a catastrophe. Which do you think we would get?

In the Treasury report, the current GSE-model is criticized for allowing Fannie Mae and Freddie Mac “to behave like government-backed hedge funds, managing large investment portfolios for the profit of their shareholders with the risk ultimately falling largely on taxpayers.” To curb some of the risk, the PSPAs, which provide financial support to the GSEs, would require the GSEs to wind down their investment portfolios at a rate of no less than 10% annually.

To brace for risks and shocks in the economy, the Treasury also advocates for a mortgage securitization model where securitizers and originators are required to retain 5% of a security's credit risk when a loan is sold to investors.

In addition, the Treasury would require banks originating loans to have more skin in the game by holding higher levels of capital to withstand economic downturns and to hedge against the risk of default on higher-risk loans.

Write to Kerri Panchuk.

Turning lending over to the private sector would be a great thing; however, as Bill Gross pointed out:

Ninety-five percent of existing mortgage creation over the past 12 months were government guaranteed. The private market was nowhere to be found because they charged too much. It was the cost of private origination and securitization, perhaps more than any other factor, that justified government involvement. Prime, but non-conforming, mortgages (jumbos, insufficient down payments) were being purchased by PIMCO in the hundreds of millions of dollars every week, but at yields of 6, 7, and 8%. If that was the risk/reward tradeoff, compared to FNMA and FHLMC yields at 3.5–4%, how could policymakers pretend that the housing baton could be quickly and cost-effectively passed back to the private market? Few, if any, could afford a new home at those interest rates. If you were a believer in the dominance and superiority of private markets, how could you deny the signal that markets were sending – that the risk was too high given the substantial losses of recent years?

Any turnover of lending to the private sector would need to be phased in to stop mortgage interest rates from spiking and causing the Bernanke Put to prompt the fed to intervene.

Report: FHA should lower loan limits

by KERRI PANCHUK — Thursday, February 10th, 2011, 3:22 pm

The Federal Housing Administration substantially raised its risk when it agreed to insure loans valued as high as $729,000 during the financial crisis, says a new report from the George Washington University Center for Real Estate and Urban Analysis.

“Without question, FHA played a major role in keeping the housing market afloat during the economic collapse of 2008 and 2009, and we need to be careful about cutting back too rapidly,” said Van Order, Oliver T. Carr professor of real estate and chair of CREUA.

The FHA has been filling this role in every period of housing market instability since the Great Depression. in the past, since the FHA underwriting standards are so strict and the paperwork is so cumbersome that the private mortgage market was able to offer competing products and take market share from the FHA. Since the government is not concerned about market share or making profits, having the FHA as a low-volume emergency back up is probably a good thing.

“However, these large loan sizes are unlikely in the long run to assist FHA in reaching its historical constituencies,” he added. “Our research indicates that larger loans are likely to perform worse than FHA’s traditional market, and we are concerned that the rapid increase in FHA’s market share will be hard to manage.”

Of course they will perform badly. These loans were given out to overextended borrowers to acquire property declining in value. Strategic default will be a serious problem for many of these loans.

Researchers who worked on the report say FHA loan limits hovered at $362,790 in 2006, about $400,000 less than today's limit.

With loans valued at or above $350,000 performing worse than smaller FHA-insured loans, the research center is advocating a return to lower FHA loan limits and a renewed emphasis on first-time and minority homebuyers. Researchers who compiled the report found higher loan limits do little for minority homebuyers since 95% of the agency's African-American and Hispanic borrowers opt for loans valued under $300,000.

Write to Kerri Panchuk.

The bursting of the housing bubble forced the GSEs and the FHA to start making loans to upper middle class borrowers who shouldn't require subsidies. Transitioning the housing market back to a private system with the free market determining interest rates will take a long time, and it will not be painless.

Lower loan limits would severely impact markets like Irvine

I wish I knew where this debate on mortgage finance reform is going. I suspect they will talk a lot, the rhetoric may get heated, but in the end they will do little or nothing now preferring to kick the can down the road to another crisis.

However, if they do lower the jumbo conforming limit from $729,750 to $417,000 or below, the meat of the Irvine market would suddenly have to pay jumbo rates. We would be among the first markets in the country to experience the transition from public to private financing. Jumbo rates are somewhere between half-a-point and one point higher than conforming rates. If future buyers are facing higher interest rates, their hopefully higher incomes will not be leveraged as much, and the loan balance will not be larger.

Markets where jumbo conforming loans ($417,000 to $729,750) are prevalent, the market impact will be the most noticeable. If you combine that with the possibility that loans that large will no longer be tax deductible, and borrowing huge sums to take a position in real estate doesn't seem quite so appealing. Future take-out buyers will not be so leveraged.

$30,000 plus 15 years equals $1,700,900?

The owners of today's featured property paid only $299,000 for this corner lot back in 1996. These owners used a $269,000 first mortgage and a $30,000 down payment. It looks like they tore down what was there and built a new home on the lot. Apparently, it was quite the upgrade because now they think this property is worth many times what they paid for it.

They refinanced on 2/2/2003 for $412,000 which likely paid for the upgrade and renovation. The description says this owner is an architect. If so, he is starving right now, and the 4/27/2010 refinance for $578,000 probably went to pay the bills. This isn't the only architect i know trying to sell their house because they aren't making any money. Very sad.

So this starving architect is selling his dream home. It may be sad to lose a dream home, but if we walks away with over a million dollars, he shouldn't cry very long.

Irvine Home Address … 5732 SIERRA CASA Rd Irvine, CA 92603

Resale Home Price … $1,999,900

Home Purchase Price … $299,000

Home Purchase Date …. 2/20/96

Net Gain (Loss) ………. $1,580,906

Percent Change ………. 528.7%

Annual Appreciation … 12.9%

Cost of Ownership

————————————————-

$1,999,900 ………. Asking Price

$399,980 ………. 20% Down Conventional

4.99% …………… Mortgage Interest Rate

$1,599,920 ………. 30-Year Mortgage

$413,628 ………. Income Requirement

$8,579 ………. Monthly Mortgage Payment

$1733 ………. Property Tax

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

$333 ………. Homeowners Insurance

$125 ………. Homeowners Association Fees

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

$10,771 ………. Monthly Cash Outlays

-$1650 ………. Tax Savings (% of Interest and Property Tax)

-$1926 ………. Equity Hidden in Payment

$776 ………. Lost Income to Down Payment (net of taxes)

$250 ………. Maintenance and Replacement Reserves

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

$8,220 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$19,999 ………. Furnishing and Move In @1%

$19,999 ………. Closing Costs @1%

$15,999 ………… Interest Points @1% of Loan

$399,980 ………. Down Payment

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

$455,977 ………. Total Cash Costs

$126,000 ………… Emergency Cash Reserves

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

$581,977 ………. Total Savings Needed

Property Details for 5732 SIERRA CASA Rd Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 5

Sq. Ft.: 5403

$370/SF

Lot Size: 10,160 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Contemporary, Mediterranean, Modern, Tuscan

View: City Lights, Hills, Mountain, Panoramic, Yes

Year Built: 2008

Community: Turtle Rock

County: Orange

MLS#: S646188

Source: SoCalMLS

Status: ActiveThis listing is for sale and the sellers are accepting offers.

——————————————————————————

Stop! You have never seen anything like this magnificent custom home with a unique floorplan that offers the ultimate in privacy, a flexible floorplan, outstanding outdoor entertaining areas built with remarkable finishes. This trend setting home, designed by the owner/architect, offers a huge (1,049 SF) home office with conference room which could also be a separate apartment or in law suite. In addition, the layout offers 2 master suites on the first floor, 2 view retreats, a welcoming 459 sq. ft. outdoor veranda with fireplace and 12' wood beamed ceiling, a huge (813 sq. ft) upstairs wing dedicated to entertaining while capturing the fabulous sunsets, city lights, snow capped mountains and surrounding hillsides. At the heart of the home is the kitchen with exquisite custom mahogany cabinetry designed by renowned Ziething Cabinets w/ gorgeous granite counters and top of the line stainless steel appliances. Over 2,300 sq. ft of travertine stone flooring throughout.

The second leg down in the deflation of the housing bubble is hitting markets previously thought to be immune from price declines. Affordability is improving for ordinary families as prices fall.

Irvine Home Address … 49 CARVER Irvine, CA 92620

Resale Home Price …… $739,900

I am a new day rising

I'm a brand new sky

to hang the stars upon tonight

I am a little divided

do I stay or run away

and leave it all behind?

Foo Fighters — Times Like These

As the deflation of the housing bubble has proceeded, each state, region, town and neighborhood that once thought they were immune to the laws of supply and demand have succumbed to the Ponzi lending virus. Prices didn't become inflated by strong demand from cash-rich foreigners or ordinary borrowers using sound lending programs. Prices in every market needed to correct back to levels sustainable by incomes. Some markets like Las Vegas took the shortest route — straight down. Markets like coastal California have been enjoying a slow downward glide punctuated by turbulence from the occasional REO going for 45% off.

Before the housing bubble is resolved all markets will tumble, its only a matter of when and how much. The bubble will deflate until local incomes support prices. If the tumble is too great, strategic default pushes prices well below fundamental valuations.

If the tumble is a mere stumble, the market slowly drops on a low-volume slide where only the most motivated buyers prevail.

Perhaps Irvine wage growth will continue to outpace California, the US, and internationally. If that happens, house prices here will appreciate at a pace greater than inflation and buyers here will get to enjoy the HELOC riches that accompanies wage growth and house price appreciation. It pays to buy where high wage earners want to congregate. It also pays to buy in areas coveted by savers.

Of course, if the gravy train of high wage growth and HELOC-producing appreciation could be endangered by a any of a number of factors. We have a dysfunctional California government and regulatory system. We are pressured by wage arbitrage from overseas. Existing high home prices make it difficult to attract workers.

Irvine will always command a premium in Orange County, but how much of a premium can OC or California expect to sustain against the rest of the nation or the world?

Housing Crash Is Hitting Cities Once Thought to Be Stable

By DAVID STREITFELD — Published: February 13, 2011

SEATTLE — Few believed the housing market here would ever collapse. Now they wonder if it will ever stop slumping.

The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune — economically diversified cities where the boom was relatively restrained.

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.

The bubble markets, where builders, buyers and banks ran wild, began falling first, economists say, so they are close to the end of the cycle and in some cases on their way back up. Nearly everyone else still has another season of pain.

Fiserv Case-Shiller: after five years of record declines, slow grinding bottom ahead

The fallacy of a painless housing market recovery

“When I go out and talk to people around town, they say, ‘Wow, I thought we were going to have a 12 percent correction and call it a day,’ ” said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. “But this thing just keeps on going.”

Seattle is down about 31 percent from its mid-2007 peak and, according to Zillow’s calculations, still has as much as 10 percent to fall. Mr. Humphries estimates the rest of the country will drop a further 5 and 7 percent as last year’s tax credits for home buyers continue to wear off.

“We went into 2010 feeling gangbusters, thanks to Uncle Sam,” Mr. Humphries said. “We ended it feeling penniless, with home values tanking.”

The market entered the year in denial fostered by a doomed bear rally. The market ended the year facing the reality of the painful decline it thought it had avoided. The market is moving from denial, through fear, and into acceptance.

The fact that even a fairly prosperous area like Seattle was ensnared in the downturn shows just how much of a national phenomenon the crash has been. The slump began when the low-quality loans that drove the latter stage of the boom began to go bad, but the resulting recession greatly enlarged the crisis. Many people could not get a mortgage, and others simply gave up the hunt.

Now, though the overall economy seems to be mending, housing remains stubbornly weak. That presents a vexing problem for the Obama administration, which has introduced several initiatives intended to help homeowners, with mixed success.

Mixed success? Which program specifically had any success whatsoever?

CoreLogic, a data firm, said last week that American home prices fell 5.5 percent in 2010, back to the recession low of March 2009. New home sales are scraping along the bottom. Mortgage applications are near a 15-year low, boding ill for the rest of the winter.

It has been a long, painful slide. At the peak, a downturn in real estate in Seattle was nearly unthinkable. In September 2006, after prices started falling in many parts of the country but were still increasing here, The Seattle Times noted that the last time prices in the city dropped on a quarterly basis was during the severe recession of 1982.

Two local economists were quoted all but guaranteeing that Seattle was immune “if history is any indication.” A risk index from PMI Mortgage Insurance gave the odds of Seattle prices dropping at a negligible 11 percent.

If history is any indication, there are always a fool who makes a statement saying their market is “immune” because it is “different.” Or is it that markets have reached a permanently high plateau?

These days, the mood here is chastened when not downright fatalistic. If a recovery depends on a belief in better times, that seems a long way off.

Those who must sell close their eyes and hope for the best. Those who hope to buy see lower prices but often have lighter wallets, removing any sense of urgency.

Those that have no hope simply walk away and never look back.

Arne Klubberud and Melissa Lee-Klubberud paid $358,000 for a new, 960-square-foot townhouse on trendy Capitol Hill a few weeks after that Seattle Times article was published. Now, with one child and with hopes for more, they need more space. They just put the townhouse on the market for $300,000.

“Obviously, this is not the ideal situation,” said Ms. Lee-Klubberud, a 32-year-old lawyer. They are hoping to take advantage of the sour market to buy at a good price, but first, they must sell for an amount that is acceptable. “Everyone has their limits,” she said. “We have ours.”

On a dark, dank Sunday, a handful of people came to look at the three-level unit. One of them was Katherine Davis, who had just sold her house in the far eastern suburbs. It took 14 months, during which she had to drop the price several times. The equity she had accumulated over the decades disappeared quickly.

Perhaps the equity bestowed on her by the housing bubble disappeared quickly, but if she owned for decades and paid down her mortgage, she will still end up with the equity she would have had if there were no housing bubble. What she is really letting go of is her imaginings of riches not to be.

“At first, I thought it would be nice to come out of this with $200,000, but I adjusted my expectations,” Ms. Davis said. She ended up with less than half of that. Her goal is to buy a small place in the city, but not yet. “Selfishly, I’m hoping the market continues to drop,” she said.

Increasing numbers of sellers are simply surrendering.

This is market capitulation. I know I have used the psychology chart often lately, but these man-on-the-street stories illustrate these stages, and now that several markets are reaching capitulation and despair, these stories put real-life examples behind the abstract concepts.

Put yourself in the shoes of these borrowers as you read their stories. The circumstances they face and the emotions they feel about those circumstances are the essence of capitulation and despair.

Megan and Ryan Dortch tried to sell their one-bedroom Eastlake condo for $325,000 two years ago. They rejected an offer of $295,000 as inadequate. A year later, they relisted it for $289,000, then $279,000, which was less than they paid. Without a sale at that price, they could not afford to buy a place big enough for them and their new baby.

They have given up on real estate. They are renting out their old apartment at a small loss every month, and living in a rented house. “I don’t expect the market to get better,” said Ms. Dortch, 31, a customer service consultant.

Neither does Gene Burrus, another frustrated seller who became a landlord. “Rent is so cheap it doesn’t make sense to buy now,” he said. He might reconsider if 10 or 15 percent more comes out of the market.

Take a deeper look at Mr. Burrus's despondency. He needs house prices to go up, but he also recognizes that buying makes no sense. House prices will not be going up because there won't be stampedes of buyers and loose credit. He is wise enough to recognize that the herd reacting to the same information also recognizes it is a poor time to buy putting him on the wrong side of the trade. He is screwed, and he knows it. The moment he realized it was capitulation. Now he is feeling despair.

Redfin, a real estate brokerage firm based in Seattle, says foot traffic began picking up in the last several weeks. Mortgage rates are rising, which could nudge those who need to buy to make a deal now for fear rates will rise even more.

But whenever the market finally does pick up, all those accidental landlords will want to unload, putting another burden on the market. “So many sellers are waiting in the shadows,” said Redfin’s chief executive, Glenn Kelman. “The inventory is going to expand and expand and expand. I don’t see any basis for significant price increases.”

While almost every economist is expecting another round of price declines for the next few months, many see a leveling off in the second half of the year. Fiserv, the company that produces the monthly Case-Shiller Home Price Indexes, analyzed prices in 375 communities. About three-quarters of them will be stable by December, Fiserv calculates.

“We’re at a period near the bottom but with more volatility than we normally see at this point,” said David Stiff, Fiserv’s chief economist. “This sort of double dip is unprecedented for housing.”

Maybe that is why belief in a bottom is as elusive now as fears of a top were in 2006.

“We would love to have a house,” said Dan Cunningham, a 41-year-old renter. “I have more than enough for a down payment. I’m preapproved for a loan. But I have to have confidence it’s not going to lose another 20 percent.” He plans to wait until he sees prices rising before making any offers.

If Dan lives in an inflated market like ours, his caution is warranted. Although I don't expect a 20% drop here, our prices are inflated, and a decline in prices at the mid to high end is ongoing.

If Dan lives in a deflated subprime-dominated market, then his caution is not warranted unless he is buying an above-median priced house. If Dan is looking at a $150,000 property in Phoenix, he doesn't have much to worry about.

For CalculatedRisk's take on the situation, please read Housing: For many cities “another season of pain”.

A little Ponzi

It doesn't take hundreds of thousands of dollars in HELOC abuse to make a borrower insolvent. Sometimes only a modest increase in debt can be too much if someone becomes unemployed.

The owner of today's featured property bought back in 1999 for $375,000. His mortgage information is not available. He made a number of small refinances, and on 1/9/2007 he refinanced with a $372,000 ARM. His mortgage debt doesn't exceed his original purchase price, an accomplishment from what I observe. He quit paying in late 2008, and he is still there.

Foreclosure Record

Recording Date: 04/28/2009

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 03/25/2009

Document Type: Notice of Default

It shouldn't be surprising that houses like this one populate shadow inventory. Banks book missed interest payments as income. They would prefer the borrower actually repay, but from an accounting standpoint, they treat it the same, if they can assume 100% recovery at foreclosure.

On properties like this one that have 40% equity or more, they will allow this debtor to be delinquent forever. The debtor is basically cannibalizing their own equity. With no payment at all, the compounding interest and penalties are like an Option ARM on steroids consuming about 1.5% of equity per month. This guy has been delinquent about 25 months, so that 40% equity is nearly gone.

Irvine Home Address … 49 CARVER Irvine, CA 92620

Resale Home Price … $739,900

Home Purchase Price … $375,000

Home Purchase Date …. 8/13/1999

Net Gain (Loss) ………. $320,506

Percent Change ………. 85.5%

Annual Appreciation … 5.8%

Cost of Ownership

————————————————-

$739,900 ………. Asking Price

$147,980 ………. 20% Down Conventional

4.99% …………… Mortgage Interest Rate

$591,920 ………. 30-Year Mortgage

$153,029 ………. Income Requirement

$3,174 ………. Monthly Mortgage Payment

$641 ………. Property Tax

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

$123 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,939 ………. Monthly Cash Outlays

-$776 ………. Tax Savings (% of Interest and Property Tax)

-$713 ………. Equity Hidden in Payment

$287 ………. Lost Income to Down Payment (net of taxes)

$92 ………. Maintenance and Replacement Reserves

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

$2,830 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,399 ………. Furnishing and Move In @1%

$7,399 ………. Closing Costs @1%

$5,919 ………… Interest Points @1% of Loan

$147,980 ………. Down Payment

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

$168,697 ………. Total Cash Costs

$43,300 ………… Emergency Cash Reserves

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

$211,997 ………. Total Savings Needed

Property Details for 49 CARVER Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2438

$303/SF

Lot Size: 5,115 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Cape Cod

Year Built: 1980

Community: Northwood

County: Orange

MLS#: S646433

Source: SoCalMLS

Status: Backup Offers Accepted

On Redfin: 7 days

——————————————————————————

Great opportunity in the village of Northwood. Corner lot with great curb appeal. Freshly painted inside and out. Newer roof, brand new A/C and heating, new carpet and more. Desirable floorplan with open floorplan. Four bedrooms upstairs and large bonus. Master with walk-in closet and spacious master bath. Three car garages and large private yard. No assoc. dues and no mello-roos. Steps from park, and mintues from schools, shopping and freeways. Priced to sell.

It's a simple question, why are home prices still falling. The answer is a little complicated, There'a a book on the subject.

Irvine Home Address … 5111 DOANOKE Ave Irvine, CA 92604

Resale Home Price …… $700,000

It's crazy I'm thinking

Just knowing that the world is round

And here I'm dancing on the ground

Am I right side up or upside down

And is this real or am I dreaming

Dave Mathhews Band — Crush

Before we can address the question of why home prices are still falling, we need to address why they fell in the first place. The causes of the initial crash have not been addressed for bubble borrowers, and the repercussions for their earlier borrowing simply cannot be wished away, nor will this financial wound heal itself with the passage of time as most are planning on.

Why did house prices go up?

A financial bubble is a temporary situation where asset prices become elevated beyond any realistic fundamental valuations because the general public believes current pricing is justified by probable future price increases. If this belief is widespread enough to cause significant numbers of people to purchase the asset at inflated prices, then prices will continue to rise. This will convince even more people that prices will continue to rise. This facilitates even more buying. Once initiated, this reaction is self-sustaining, and the phenomenon is entirely psychological. When the pool of buyers is exhausted and the volume of buying declines, prices stop rising; the belief in future price increases diminishes. When the remaining potential buyers no longer believe in future price increases, the primary motivating factor to purchase is eliminated; prices fall.

Why did house prices fall?

From the section on visualizing the credit bubble in housing:

…. something strange happens…[when] there is nobody left to make a purchase. (A key indication of the end of a speculative mania is a huge decline in sales, as was witnessed over 2006 and 2007). Transaction volume drops off dramatically, and prices stop their dizzying ascent. Nobody is particularly alarmed at first, but a few of the more cautious sell their assets to pay off their loans. Since there are no more new buyers, the first selling actually causes prices to drop. This is unprecedented: prices have never declined! Most ignore the problem and comfort themselves with the history of rising prices; however, a few are spooked by this unprecedented drop and sell the asset. This selling drives prices even lower. Now those who still own the asset become worried, some continue to deny that there is a problem, and some get angry about the price declines. Some of the late buyers actually owe more than they paid for the asset. They sell the asset at a loss. The lenders now lose some money and refuse to loan any more money to be secured against the asset. Now there are even fewer buyers and a large group of owners who all want to sell before prices drop any lower. Panic selling ensues. Everyone wants to sell at the same time, and there are no buyers to purchase the asset. Prices fall dramatically. This asset which was sought after at any price is now for sale at any price, and there are few takers. People in the market rightfully believe the asset will continue to decline. Owners of the asset have accepted the new reality; they are depressed and despondent.

In any group of people, there are always a few who do not believe the “prices always rise” narrative. Some recognize that asset prices cannot rise indefinitely and cannot stay detached from their fundamental valuations. These people witness the rally and the resulting crash without participating. They wait patiently for prices to drop back to fundamental values, and then these people buy. As these new buyers enter the market, prices stop their steep descent and market participants start to hope again. It takes a while to work off the inventory for sale in the market, so prices tend to flatten at the bottom for an extended period of time; however, just as spring follows winter, appreciation returns to the market in time, and the cycle begins all over again.

What is written above is true of any asset whether it be stocks, bonds, houses or tulips. [1] In this case, it is the local housing market, and the room of new buyers represents subprime borrowers, but the concepts are universal. One phenomenon somewhat unique to the housing market is the forced sale due to foreclosure (stocks have margin calls). Even if the psychological factors at work during the panic could somehow be quelled, the forced sales from foreclosures would drive down prices anyway. True panic is not required to crash a housing market, only dropping prices and an inability to make payments. Subprime lending was one of the leading causes of the Great Housing Bubble, and its implosion exacerbated the market decline.

The crash was allowed to proceed in some markets, and the crash was averted in others by allowing delinquent borrowers to stay in the bank's property. The bank even let them stay on title during the mortgage squatting period.

Why are home prices still falling?

Is this a double-dip housing recession? When will values rise again?

By Karen Datko on Tue, Jan 25, 2011 7:19 PM

This post comes from Marilyn Lewis of MSN Money.

The closely watched Standard & Poor's/Case-Shiller Home Price Index is out: It shows home prices are still dropping.

Overall, real estate values fell 1% between October and November, The New York Times says. According to the S&P survey, prices are just 3.3% above the low reached in April 2009. They've fallen 1.6% from the same time a year ago.

Prices fell from October in 19 of the 20 metro areas watched by S&P. And, compared with the year before, just four of the 20 cities studied saw prices grow: Los Angeles, San Diego, San Francisco and Washington, D.C. In eight of the cities studied, prices fell to new lows: Atlanta; Charlotte, N.C.; Portland, Ore.; Seattle; Tampa and Miami.

“Home prices in the 30 metropolitan cities remained at about 3.0% below the levels attained a year ago,” says a separate analysis by FNC, which makes software used by banks to manage their real estate holdings. Nineteen of 30 cities tracked by the FNC 30-MSA Composite Index saw prices fall an average of 1.8% from October to November.

The worst horror stories from the S&P report, as reported by Forbes, were:

• Las Vegas-area prices have fallen 57.2% since peaking in August 2006.
• Phoenix prices are 53.9% below June 2006 highs.
• Miami prices have fallen 48.6% since December 2006.

The price declines in Las Vegas are truly remarkable. I have pulled comps on several hundred properties in Las Vegas. The nicest areas are still holding out in 2004 and 2005 pricing with very few sales. Most of the above-median market is compressing of its own weight similar to here in Orange County. These houses are generally still priced in the 00s. The median price and below is back to 90s levels. Often at auction I am paying prices last paid in the 80s.

Since prices are so low, strategic default is the norm. When nearly 90% of mortgage holders are underwater — prices back to the 90s will do that — everyone in the market has incentive to walk away if they experience payment distress. This creates an endless overhead supply.

Where's this headed?

To understand where this is going, let's break the question down. There really are two questions:

• Will prices keep dropping or is this the bottom?
• If this is the bottom, when is the ride back up going to begin?

Each forecaster takes the same data and describes it a little differently:

• Based on today's report, The New York Times is calling it a “double-dip” housing recession, which makes it sound kind of grim and endless.
• Forbes also likes the “double-dip” descriptor, predicting a double-dip housing recession before spring. (What's a “double dip”? It's if the S&P price index were to hit new lows in both its 10-city and 20-city surveys. Hasn't happened yet, but the S&P price indexes have been dropping for six months straight.)
• S&P/Case-Shiller report founder Karl Case gives it a slightly more optimistic spin: He told Bloomberg that prices could start back up by spring if jobs cooperate.

• But but but I thought the bottom was 2009?
• US Housing Continues Freefall & Is Nowhere Near Bottom
• House prices in US declined for fifth month in a row
• House prices to hit bottom this year, report says
• Fiserv Case-Shiller: after five years of record declines, slow grinding bottom ahead
• High prices, low demand, and large supply means lower prices ahead

Bloomberg reports:

“Prices have gone flat, bouncing around at what I think is essentially a bottom,” Case, a retired professor of economics at Wellesley College, said in a radio interview today on “Bloomberg Surveillance.” “We're really going to have to wait to see what the spring market brings.”

I wonder if Dr. Case sold his vacation home yet? He didn't want to give it away.

In a separate Bloomberg article, Case said:

“There's a good chance of a housing turnaround this year, but it's not going to be enough to give much help to the economy. … We're coming off 50-year lows and we still have to deal with the foreclosure mess.”

Last year this time, home prices were looking good. Weak yes, but rising. They'd bottomed (or so it seemed) — in April 2009. They rose nicely after federal homebuyer tax credits between fall 2009 and late spring 2010. They kept rising until July.

And then, boom, they fell, and kept falling — in some cases even lower than before.

Pardon me while I feign surprise. Whocouldanode?

The bottom engineered by the federal reserve in 2009 was not a natural and durable bottom. The market is like a river, although temporarily diverted, it is flowing to its own course.

However, all's not dark. There are signs of gathering strength, however modest:

• Home construction is showing “stronger activity going forward,” reports Hanley Wood's Market Intelligence report for builders.

I wish homebuilders were doing better. I have many friends who are still suffering and wondering if this recession is ever going to end.

• Sales of existing homes grew, for the second straight month, Market Intelligence said. Sales were up 12.3% in December. But because they'd dropped badly in 2010, the numbers still were less than at the same time the year before.
• The Leading Economic Indicator Index has risen for six months straight, surprising analysts in December by hitting 112.40, a 1.10 point monthly increase, reports Bloomberg.
• The Consumer Confidence Index, also out today, rose to 60.6, up from 53.3 in December.

• Bloomberg reports that the unemployment rate dropped to 9.4% in December after hitting a seven-month high of 9.8% in November.

And, now that mortgage rates are rising, you'd expect fence-sitters to buy while money is cheap. But will they buy in numbers large enough to pull up prices?

Prices are not pulled up by buyers. Prices are pushed up by buyers who increase their bids with cheap money. As I have noted, cheap money is not the answer. Low Interest Rates Will Not Create Demand. Further, money is not getting any cheaper because you will not see 4% mortgage interest rates again in your lifetime.

The real problems going forward are twofold: (1) Supply will exceed demand due to huge foreclosure inventories and a diminished buyer pool. And (2) The cost of borrowing is going to increase making loan balances smaller and preventing borrowers from raising their bids. Even if employment and income numbers improve, the supply and demand imbalance and the increasing cost of borrowing will be persistent problems plaguing the housing market for the next decade.

We may still keep prices inflated and unaffordable. Kool aid intoxication is powerful, but the weight of inventory and the need to liquidate may be enough to crush the financial hopes of even the most ardent appreciation buyer.

The dark tunnel

“The enormous supply overhang of existing homes (particularly factoring in all those in foreclosure or soon to be) promises to keep pressure on prices for some time,” Joshua Shapiro, chief U.S. economist of MFR Inc., told the Times.

And that's the issue: The huge glut of foreclosure properties — homes now in the hands of banks and other homes soon to be in the hands of banks. Not just are there a lot of homes on the market now, but many more are coming. Buyers — lots and lots of them — must chew through this mammoth “inventory overhang” before prices will rise.

As analysts at Radar Logic explain in their (subscription) newsletter:

If housing demand increases because of improvements in the employment and other sectors of the economy, financial institutions will respond by putting more of the homes in their inventories on the market, and home prices will remain depressed.

On top of that, there's an uncounted but presumably huge group of homeowners who would put their homes on the market right now but are holding off until prices improve. So, given a little price recovery, you can count on this pent-up supply to be added to the market, further stringing out the housing recovery.

How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate.

Prices won't rise until buyers have fewer homes to choose from and they are forced to compete with each other to get a home they want.

“Everything in this report is unfortunately still sagging and still pointing downward. … We still seem to be at best scraping along the bottom,” David Blitzer, S&P Index Committee chairman, told CNBC. Prices could fall three or four more percentage points, nationally, in the next month or two, Blitzer added.

The light at the end

Radar Logic, whose economist Nouriel Roubini was nearly alone in predicting the 2007 housing crash, tells newsletter readers to expect home values to keep falling until spring. After that, it'll take time before they start rising again. The newsletter says:

Given the current supply of homes for sale, the enormous shadow inventory of homes in bank inventories plus mortgages in default and foreclosure, and the millions of at-risk homeowners with negative equity in their homes, we do not expect home prices to increase on a sustained year-over-year basis until 2012.

Prices may not see sustained appreciation for quite some time, but we may have other bear rallies while the overhead supply from the housing bubble is worked off. It is difficult to forecast because so much depends on interest rates, job growth and household formation, and government policies toward real estate. Right now, the market faces many obstacles to sustained price appreciation.

Resisting temptation

Some borrowers refinanced for various reasons during the bubble. Rates were near historic lows (the lows we took out when the federal reserve went to zero) so many borrowers refinanced to lower their payments. At each refinance, the temptation to take a little free money was there. During the bubble, these cash-out loans were aggressively peddled by mortgage brokers who were often making large incentive payments for pushing borrowers into dodgy loans.

At each transaction there must be a willing borrower. Some simply say no. Unfortunately, those that said no are going to have to pay for the losses on those that gave in to their temptation and spent their houses.

Between 1997 and 2004 the owners of todays featured property added somewhat to their mortgage, it went from $197,000 to $210,000. Their mortgage was never larger than their original purchase price — an accomplishment in Irvine from what I've seen. There is a later HELOC but no evidence they used it. The last mortgage they recorded was the smallest of all.

These people at least tread water during most of the housing bubble while many of their cohorts went Ponzi.

Irvine Home Address … 5111 DOANOKE Ave Irvine, CA 92604

Resale Home Price … $700,000

Home Purchase Price … $246,000

Home Purchase Date …. 6/23/97

Net Gain (Loss) ………. $412,000

Percent Change ………. 167.5%

Annual Appreciation … 7.7%

Cost of Ownership

————————————————-

$700,000 ………. Asking Price

$140,000 ………. 20% Down Conventional

4.99% …………… Mortgage Interest Rate

$560,000 ………. 30-Year Mortgage

$144,777 ………. Income Requirement

$3,003 ………. Monthly Mortgage Payment

$607 ………. Property Tax

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

$117 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

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

$3,726 ………. Monthly Cash Outlays

-$734 ………. Tax Savings (% of Interest and Property Tax)

-$674 ………. Equity Hidden in Payment

$271 ………. Lost Income to Down Payment (net of taxes)

$88 ………. Maintenance and Replacement Reserves

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

$2,677 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,000 ………. Furnishing and Move In @1%

$7,000 ………. Closing Costs @1%

$5,600 ………… Interest Points @1% of Loan

$140,000 ………. Down Payment

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

$159,600 ………. Total Cash Costs

$41,000 ………… Emergency Cash Reserves

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

$200,600 ………. Total Savings Needed

Property Details for 5111 DOANOKE Ave Irvine, CA 92604

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 2329

$301/SF

Lot Size: 5,500 Sq. Ft.

Property Type: Residential, Single Family

Style: Two Level, Other

Year Built: 1970

Community: El Camino Real

County: Orange

MLS#: P768305

Source: SoCalMLS

Status: ActiveThis listing is for sale and the sellers are accepting offers.

On Redfin: 6 days

——————————————————————————

Absolutely Stunning Home in a Quiet Neighborhood, Two stories, 4 bedrooms with 2 Master suites and remodel bathrooms, new guard rail for balcony, wood-laminate flooring, Kitchen with granite counter top, Re-faced cabinets, New windows and doors, New A/C unit, new Heatng and A/C ducts, Stonework on the garage, the stairs, and on the balcony. Swimming pool and Spa in the backyard, with new filter and pump. No HOA, No Mello Roose, Excellent School district. Close to Library, park and shoping place. Show and Sell !!!!!!

shoping? Mello Roose?