More calls for allowing the free market to restore housing market balance

A growing chorus of commenters are recognizing that allowing the free market to work will restore balance to the housing market.

Irvine Home Address … 28 TAQUITZ #36 Irvine, CA 92602

Resale Home Price …… $543,700

Swimming in the deep and trying to keep from turning blue,

Danger, danger, hoping not to drown

(Somebody get me out of here)

Makes me wanna die,

I've got the worst hangover from you

Hey Monday — Hangover

Debt is the hangover from the big housing party of the 00s. Like a cloud of pestilence lingering over the markets, the excessive debts borrowers took on during the bubble are making the decade after a time of suffering and borrower's remorse. Unfortunately, nobody wants to take the foreclosure medicine necessary to clear the air.

Regular readers of the IHB will find no surprises in the op-ed piece that follows, but the clear-headed logic of this writing is difficult to find in the mainstream media.

A free-market fix to the nation's housing hangover

The nation's mortgage hangover is particularly bad in the Golden State. It's time to let the free market fix the problem.

By Nicole Gelinas — July 31, 2011

There's a reason California hasn't seen as much of an economic recovery as some states: It has a serious debt problem.

The nation's mortgage hangover is particularly bad in the Golden State. From 2000 to mid-2006, home prices across the nation doubled, outpacing inflation six times. In the Los Angeles area, things were much more extreme: Home prices nearly tripled. Prices in San Diego and San Francisco beat the nation too. And even though home prices have now plummeted, much of the debt that funded the bubble remains and is still hampering the economy.

The crisis has not affected all states equally. Some parts of the country have a lot of homeowners who owe more than their houses are worth, but they also had far lower home prices at the height of the bubble, so the amount each borrower owes is relatively low. In other places, such as New York, fewer homeowners are “underwater.” But because housing costs are high, these homeowners each owe a lot.

California ranks in the top five of both categories. Nearly a third of California homeowners with mortgages — 2.1 million families — owe more than their homes are worth, according to CoreLogic. And each of those borrowers is underwater by an average of about $93,000.

Only a deep and painful crash with a very slow recovery will purge the kool aid from the California housing market. The devastation here is truly remarkable, and the foolishness of both borrowers and lenders is just as amazing..

This all adds up to $196 billion in dead-weight debt in California that isn't backed by property value. If home prices were to fall by an additional 5% — not an unlikely scenario — that figure would rise to $225 billion.

It isn't hard to see why lenders have embarked on the amend-extend-pretend dance. There isn't enough money in our banking system to recognize the losses in California alone.

To put the numbers in perspective: $200 billion is more than twice the $79 billion in general obligation bond debt that Californians owe. State bonds, though, generally pay for something useful, like road repairs. Dead mortgage debt doesn't pay for anything but a forehead-slapping “what were we thinking?

LOL! That is one of the best statments of the situation I have read in a while.

Mortgage debt is nothing but a drain on the California economy. This “investment” produces nothing of value, but the flow of funds out of California does serve to reduce demand for goods and services and keep the economy down.

It would cost California's underwater homeowners more than $12 billion annually over 30 years to pay off this debt, even at today's super-low interest rates. That's money that people can't save for retirement or their kids' education, or can't put into businesses to create jobs.

We are now Japan. Banks can't afford the write down the bad debts, so we let them fake it, and borrowers can't afford to pay down the debts without austerity in every other aspect of daily life. The result will be years of poor economic growth caused by weak consumer spending.

No magic wand can make all this debt go away, nor should it. Some people have good reasons for paying debt on bubble-era valuations.

They have reasons, but they aren't necessarily good reasons with basis in reality.

They like their houses, or they think it would be a moral failing to leave.

That is changing. Strategic mortgage default has become common and accepted in 2011.

Maybe they figure house prices will regain bubble-era heights in less time than it would take to repair credit scores after defaulting.

The double-dip will remove this form of denial.

For people who aren't sure, though, it's past time for Washington to stop prolonging the suffering that comes with uncertainty. How? By letting the free market work.

Hallelujah! Fix the Housing Market: Let Home Prices Fall.

Washington has attempted to intervene since the start of the crisis, but the interventions have only prolonged the pain. And elected officials have been reluctant to do the one thing that would make a difference: forcing lenders to accept responsibility for their bad lending practices.

In 2008 Washington relaxed accounting rules which allowed lenders to mark their holdings to fantasy prices. Lenders embarked on the amend-extend-pretend dance and sought ways to shift the losses to taxpayers and the federal reserve.

Take the 2009 home buyer tax credit, which dangled an $8,000 credit to first-time home buyers. The bust had just exposed the consequences of reckless borrowing, so what did Washington do? It encouraged more people to take on debt to buy homes that were still overvalued, and encouraged the banks to fund that indebtedness.

Bear rally buyers paid $30,000 to $40,000 more for properties in order to obtain a $8,000 tax credit. Now these buyers are underwater and trapped in their homes. I advised buyers against purchasing during this time period despite the constant bottom-calling from bulls. Renters who headed my advice are happy today.

And let's look at the Federal Reserve Board's actions. By keeping interest rates at close to zero percent since 2008, the Fed has allowed banks to borrow nearly for free. All that cheap money has kept banks from having to cut their losses by either seizing and selling off properties that are underwater or reducing loan amounts so that people can stay in their homes. Instead, they have strung out their bad loans. But that can't go on forever.

Actually, banks have been writing down their debts slowly and methodically. At the rate they are going, it will take another decade to write down the bad debts unless house prices rise by magic — or brute force of printed money.

Another Washington program, the Home Affordable Modification Program, was supposed to encourage banks to modify loans for underwater homeowners. But the modifications that lenders offered seldom addressed the problem. Many offers involved extending teaser interest rates, or tacking on defaulted amounts to the end of a mortgage's life.

Loan modifications are Option ARMs by another name. We all know how well the Option ARM worked out the first time, so there is little reason to believe loan modification programs will fare any better. The real purpose of these programs is to buy time for the banks and placate voters who want to believe Washington is trying to cure their self-inflicted wounds.

Washington has not used its leverage to push lenders to write down the amount owed. Instead, the biggest beneficiaries of Washington's modification program have been mortgage “servicers,” the folks who handle paperwork for lenders to modify loans.

To see how bizarre the government's strategy is, consider this: Recently, federal regulators exacted a $108-million settlement from Countrywide, once the nation's largest mortgage lender. The money is because Countrywide, now owned by Bank of America, has behaved incompetently, at best, in servicing defaulted mortgages.

Yet over the last year, through the Home Affordable Modification Program, federal taxpayers have spent nearly $132 million in “incentive payments” to Countrywide and its investors and borrowers to reward the company for its superficial mortgage adjustments.

The government is finding any way it can to funnel money to the banks to keep them solvent. This practice will likely continue until banks are solvent again.

The Federal Housing Administration too has done its part to keep the bubble inflated, nearly doubling the size of mortgages eligible for a government-insured lending program, to $729,750, up from $417,000, starting in the fall of 2008.

This move is the only thing which sustained the housing market in coastal California since 2008. There was no jumbo loan market, and without this move, transaction volume would have fallen to near zero, and prices would have crashed hard. Now that the conforming limit is coming down and the jumbo market is at least present, house prices will need to adjust to the new equilibrium of fewer buyers using more expensive financing. With all the squatters in high-end homes who need to be foreclosed on, the coastal markets are the most at risk.

People can put as little as 3.5% down for such loans, meaning that a slim decrease in house prices traps them underwater too.

It's time to end these market-distorting charades. If President Obama won't say so, one of his White House rivals should seize the moment.

No politician is going to enthusiastically embrace lower house prices and the pain that will entail. They have no choice but to allow it to happen, but none of them will encourage it if they want to get elected.

House prices need to find their lows. That would give buyers confidence to jump back in at prices they could afford without sacrificing their futures to debt. To help prices find their new normal,

So far buyers have been willing to sacrifice their futures to debt. It is a way of life in California most believe they can overcome by taking on even more debt.

banks need to modify loans by reducing the amount owed.

No, they don't. No principal reduction program works without serious moral hazard issues.

When that doesn't make sense, banks should foreclose on delinquent owners promptly and legally. The current high number of bad loans in limbo guarantees economic chaos.

Nicole Gelinas is a contributing editor to the Manhattan Institute's City Journal.

Yes, foreclosures are essential to the economic recovery.

A retail flip

The IHB had its beginnings in September of 2006 profiling retail flips gone bad. By early 2007, the flipper who paid retail prices and attempted to sell quickly for a profit disappeared from the market.

Retailing flipping is very hard because it's very difficult to buy a property far enough under value to obtain a margin. It's hard when buying wholesale at the auction.

This is the first retail flip I have seen in over four years. Given the razor thin margins and the double-dip in home prices, I doubt this seller will pull it off.


This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707


Irvine House Address … 28 TAQUITZ #36 Irvine, CA 92602

Resale House Price …… $543,700

Beds: 3

Baths: 3

Sq. Ft.: 1826


Property Type: Residential, Condominium

Style: Two Level, Mediterranean

Year Built: 2002

Community: Northpark

County: Orange

MLS#: P789348

Source: SoCalMLS

Status: Active

On Redfin: 12 days




Proprietary IHB commentary and analysis

Resale Home Price …… $538,800

House Purchase Price … $481,000

House Purchase Date …. 6/27/2011

Net Gain (Loss) ………. $25,472

Percent Change ………. 5.3%

Annual Appreciation … 70.1%

Cost of Home Ownership


$538,800 ………. Asking Price

$107,760 ………. 20% Down Conventional

4.53% …………… Mortgage Interest Rate

$431,040 ………. 30-Year Mortgage

$93,930 ………. Income Requirement

$2,192 ………. Monthly Mortgage Payment

$467 ………. Property Tax (@1.04%)

$50 ………. Special Taxes and Levies (Mello Roos)

$112 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$294 ………. Homeowners Association Fees


$3,115 ………. Monthly Cash Outlays

-$366 ………. Tax Savings (% of Interest and Property Tax)

-$565 ………. Equity Hidden in Payment (Amortization)

$181 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves


$2,453 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$5,388 ………. Furnishing and Move In @1%

$5,388 ………. Closing Costs @1%

$4,310 ………… Interest Points @1% of Loan

$107,760 ………. Down Payment


$122,846 ………. Total Cash Costs

$37,500 ………… Emergency Cash Reserves


$160,346 ………. Total Savings Needed


30 thoughts on “More calls for allowing the free market to restore housing market balance

  1. Shevy

    It’s about time they recognize that they need to let the housing market take care of itself. You’ve only been saying that for circa 5 years.

  2. Steve Moyer

    Take it from this 28 year investment real estate guy: If you buy real estate right now — residential or commercial — you are nothing but a nut job. And you’ll lose your money.

    1. Partyboy

      How much worse do you think the market will get? Is this advice applicable to all areas or are there pockets where you think residential real estate is within 10% of where the bottom will be?

      It seems to me that OC is still too high (although the income there is greater than most places) but my area (Temecula/Murrieta) is priced fairly appropriately when compared to the average household incomes. Any thoughts?

      1. george8

        If I have steagy job and live in Temecula/Murrietad, I certainly would buy now, especially the distressed newer built home.

    2. awgee

      My wife and I are getting ready to buy a house to live in. I understand better than most that real estate prices will continue to depreciate, and I do not much care. I guess we are nut jobs.

      1. Shevy

        There are many areas, even in Orange County that are at or below rental parity. For someone that can purchase a home below rental parity, is planning on holding long term, is only making less than 2% on their money in the bank, and wants a home for their family, I don’t think that it’s fair to judge as long as that person is educated on the market and not being sold a lie. Awgee clearly knows and understands the market better than 99% of agents and definitely better than the average buyer.

        I’m buying properties out of state despite the fact that I think there is still some potential for depreciation. I don’t think it’s possible to call the bottom exactly. That said, for me if I can buy below replacement cost, at an 8%+ cap rate and get a loan at circa 4%, unless there is a dramatic downturn in rents or really high vacancy I will be ok. The cash on cash returns are great and I’m not seeing either really high vacancy or depreciation in rents in the areas that I’m purchasing.

        Moreover, I will be even more aggressive when comments like, “Take it from this 28 year investment real estate guy: If you buy real estate right now—residential or commercial—you are nothing but a nut job. And you’ll lose your money.” are even more prevalent. The time to buy is when no wants wants to buy real estate.

        That said, I agree, there are still a lot of areas that have been held up artificially, particularly a lot of the high end and cap rates are still extremely low even for multi-family in Orange County.

        1. awgee

          I am not quite sure what to do with said idea that I am going to lose my money if I buy a house. I do not usually think that I am going to “lose money” when I buy a car, or movie tickets, or dog food, or pay my daughter’s tuition. I usually think that I am SPENDING money. When my wife and I buy a house we will be SPENDING money, and lots of it. I have no idea what rental parity will be, nor will I calculate it. It does not even occur to me to figure it out. What is rental parity on my daughter’s tuition? I dunno. I do actually have one concern. We are making about 20% to 30% annualized return on our investments, so when we buy a home, the opportunity cost will be huge. That is kind of a drag, but my wife has gone along my scheme now for 6 years. It is about time I buy her the house of her dreams. Or at least buy her a house that she can make into her dreams.

          People thought we were nut jobs when we sold our home. Odds are pretty good that if I had told anybody what we invested the proceeds from that sale in, they would have thought we were nut jobs. And people will probably think we are nut jobs for buying a house even though we know prices will continue to fall.

          Hm-m-m-m, do I care what anybody thinks?

          1. nefron

            Really? 20% to 30% annualized returns on your investments? You must be investing on a different planet than the rest of us.

          2. awgee

            When I first read your comment I became indignant. So I figured it out. 23% annualized over the last 6 years.

            Same planet. Really. You don’t like it. Too bad.

            You don’t believe me. IR and I first met in 2006 I think, maybe 2007, and I told him then how I had invested the proceeds from the sale of our house. He will back me up, I think.

          3. wheresthebeef

            Congrats Awgee, those are some nice returns. You are definitely one of the few people who did it right. Sold at the top of the bubble and made money investing while the dust settled.

            I’m not quite as lucky, but I’m sitting on several 100K right now just waiting for the perfect place and time to buy. Renting the last few years has actually been a blessing in disguise. I’m renting on the cheap and banking tons of money. I’m really gun shy to throw it all in the market when I know I will need that money in the next year or two.

            After owning two previous houses I know exactly what I want this time and plan on literally staying in the house until I croak. I’m in no rush what so ever, I doubt we’ll get the “buy now or be priced out forever” threat anytime soon. 🙂

          4. winstongator

            Gold? Up 174% in the past 5 years, 22% annualized returns. Silver’s returns have been even better – up 219% total over the past 5 years.

          5. Swiller

            Part of the problem is 20-30% returns from foreign labor, which cuts jobs from America, but lines the pockets of the baby boomers. That’s right awgee, who the f cares as long as the boomers get max return on Wall St.

            F main st, I’m buying a house m f’ers!!!

            Can’t wait till the collapse again on the stocks…too bad it doesn’t STAY at 7,000 this time.

            Hmmm, do I care what anybody thinks?

          6. irvine_home_owner

            “You must be investing on a different planet than the rest of us.”

            Yeah… Planet Reality.

            (sorry… couldn’t resist)

    3. HydroCabron

      Take it from this 28 year investment real estate guy: If you buy real estate right now—residential or commercial—you are nothing but a nut job. And you’ll lose your money.

      The wife and I are following certain properties here in Denver. It’s funny to drive out to a row home or half duplex in a middle class but slightly run-down neighborhood, take in the $600K+ price and divide it by 3, in line with historical price-to-income ratios. Then we look around the neighborhood, and then look at one another, and ask “Do we think the median household income in this neighborhood is over $200K? No? How about $150K? Highly unlikely. $100K? Sure – it’s possible. Since the median household income in Denver is $59000, let’s generously assume we’re looking at $120K around here, so this place is over 5x local median income.”


      How many idiots are left in the market?

  3. jb

    When I told my grade schooler that we would have lost $100 grand had we stayed in the place that we sold 14 months ago, he said ” Does that mean that the new buyers lost $100 grand?” At least he sees that. I saw some old neighbors last weekend who just rented out their place since they’d rather wait for the market to recover (!)

      1. Jb

        I don’t think they are accidental. They seem to really believe that we are in a temporary dip. I have seen a few people like that.

  4. Pwned

    Expecting the federal government – after everything they’ve done for the last decade to fuel this madness – to suddenly throw up their hands and say “OK guys, we give up – you’re on your own!” is wishful thinking. Some politicians may say otherwise but when it comes down to it, they’ll do whatever their bankster “clients” demand.

    More likely, I see the US becoming more a country of renters in the coming years than it already has. Bubble areas will keep slowly inching lower, with shadow inventory taking as long as possible to clear out. Boomers will grow old in their too-big homes that they pay virtually no property taxes on. The majority of people buying houses will be wealthy fools or not-so-wealthy fools who are either given money or inherit from their parents.

    Sure, prices will drop and more people will fall underwater, but that will just lead to less mobility for them. I don’t see a massive wave of strategic defaults coming, as the banks will randomly foreclose to keep the homedebtors on their toes. Maybe in a couple years you can pick up a house in SoCal for $600k that’s selling for $800k today, but you’ll still be over-paying. And in many areas of SoCal, you’ll be living in a neighborhood dominated by fixed-income elderly residents with awful public schools and crumbling local infrastructure.

    Renting will be the way to go, and those of us with savings will have to carefully invest outside of SoCal housing for many more years.

    With the Fed’s announcement that it’s keeping interest rates at near zero until at least 2013, and horrible gridlock in DC, I wouldn’t expect any rational decisions to be made anytime soon.

  5. irvine_home_owner

    Has it not bottomed now for other OC cities? Or how about the IE?

    Seems like newer 3CWG homes in south county cities are getting down to the $500ks which is probably around 2003 pricing.

    How much lower is the bottom?

    1. Anonymouse


      Like you, I prefer 3CWG properties.

      What parts of south county are you seeing “newer” houses for $500k? Everything I see is north of $750k….

      1. irvine_home_owner

        Mission Viejo
        Aliso Viejo

        And let me clarify, $500ks doesn’t necessarily mean $500k and newer to me is 1990 or higher (although now looking back… a 20 year-old house is probably not “newer” any more).

        There are few in those cities in the mid to upper $500k range. If you go farther out like RSM or Foothill Ranch, you can find low $500k one (saw one listed in RSM for $499k).

  6. nefron

    I question if it’s political suicide for a candidate to say, “Let the foreclosures begin.” It might lose them votes in California, but what about the rest of the country? Maybe to a larger portion of the country, where there are many few underwater homeowners, it’s only a minor issue.

  7. Renter in SD

    “Actually, banks have been writing down their debts slowly and methodically. At the rate they are going, it will take another decade to write down the bad debts…”

    Fascinating comment – is there a chart that shows this?

  8. confused

    Is 2002-2003 pricing really the bottom? OC real estate was already in solid bubble territory at that point. And in fact, one can argue that practically anyone who bought a house in Newport, CDM or Laguna pre 2003 is still up close to 100%. If they bought pre 2000 it may be closer to 200%. What crash? The 800k NB home in 1999 went to 3.5m in 2006 and is now 2.8m.

    These zip codes are filled with people who literally could not afford to buy their current house at even now current prices. And if they have HELOC’d and spent it, they cannot sell because they could not afford the tax bill on the capital gain.

  9. NickStone

    I agree that prices will ultimately go down to 1999 prices. The math never lies. However, I must admit, when prices seem stuck at elevated levels, I wonder if either I am wrong… or that I won’t realistically be able to buy a house in OC for 20 years. Time will tell.

    1. irvine_home_owner

      Are we talking nominal 1999 prices?

      Because in the late 80s bubble… I don’t think prices ever got back to nominal pre-bubble pricing.

      So why would it be different this time around?

Comments are closed.