The conditions are set for continued deterioration in house prices.

Irvine Home Address … 79 MIDDLEBURY Ln Irvine, CA 92620

Resale Home Price …… $514,999

I've been waiting for something to happen

For a week or a month or a year

With the blood in the ink of the headline

and the sound of the crowd in my ear

You might ask what it takes to remember

When you know that you've seen it before

Where a government lies to her people

Jackson Browne — Lives in the Balance

The conditions which have the most immediate impact on house prices are the current price levels, housing demand, and available supply. If prices are too high, if demand is too low, and if available supply is too high, prices will move lower as the market seeks a new equilibrium.

The banks have been working to manipulate the market through constricting supply. Lenders have convinced the government and the shoeple that building an enormous shadow inventory is a good thing as long as it temporarily keeps prices elevated. Few loan owners disagree, but those looking for affordable housing find the situation untenable, and many of those potential buyers choose not to buy while potentially deflationary conditions persist.

Prices are too high

So are prices really too high? What is the evidence?

House prices historically have only kept pace with inflation.

Another look at similar data…

We are closer to the bottom than to the top, but based on historic trends both inflation adjusted (top chart) and in nominal terms (bottom chart) prices are simply too high.

Demand is low

It has been a while since realtors have blathered on about "pent up demand," but as a reminder, Desire is not Demand:

Most people want a house. About 65% of Orange County residents own their homes, but probably 95% of residents wish they did. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit. True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not have savings and if they cannot qualify for a loan, they create no measurable demand. When realtors make the assertion that there is pent up demand, they are correctly surmising that there is an increasing number of people who want real estate who cannot obtain it, they are totally incorrect in their idea that this demand is merely sitting on the fence waiting to enter the market at a time of their choosing.

So when I say demand is low, I mean the ability of people to put forth sufficient dollars to purchase properties at today's prices is lower than historic norms. Is there any data to back this claim?

The government and the banking cartel has injected the housing market with excessive stimulation through low interest rates and tax subsidies, yet demand is at historic lows.

The above charts are national numbers, but the local numbers are not any better….

So why is demand so low? Two reasons: (1) unemployment is very high and it isn't projected to get much better any time soon, and (2) the large number of foreclosures has tainted the potential buyer pool with bad credit.

Without a dramatic economic recovery, demand is not going to increase, and few economists are predicting a vigorous economic recovery.

High levels of supply

What evidence do we have that supply is high?

The most troubling part of the elevated inventories is the accumulation of shadow inventory. In order to hold current price levels, banks slowed their foreclosure rates, embarked on amend-extend-pretend, and allowed a great deal of squatting by delinquent borrowers. The above chart is a conservative estimate from First American Core Logic. Other estimates are not so rosy.

When you compare the above chart with the one from First American Core Logic, the most obvious difference is the measure of shadow inventory. The chart above assumes very few of the currently delinquent mortgages will be cured whereas the First American data assumes a healthy cure rate brought about by an improving economy. The real answer is probably somewhere in between, but the situation is probably much worse than First American Core Logic would lead you to believe.

What we really have is a huge pent-up supply.

So why are the banks building this huge shadow inventory? They don't have much choice if they wish to remain solvent.

Banks will eventually need to write down this bad debt because prices will not recover as long as the debt overhang exists. If banks had to write down their debt to current values today, they would likely be insolvent, and many would be bankrupt.

Japan had a similar set of circumstances when their real estate bubble burst in 1989. It didn't turn out well for them either.

Months of supply points to lower prices ahead

The statistic most cited when examining the balance between supply and demand is the months of supply, the number of months it would take to clear the inventory as current sales rates.

Months of supply has been elevated all year, and back in August it hit the highest level ever recorded. When this indicator exceeds six months, prices generally fall. It first broke above six months in mid 2006 as the market peaked. The months of supply fell off quickly in 2009 as banks stopped foreclosing and began their policy of amend-extend-pretend, but the indicated spiked again with the expiration of the tax credits and it has remained elevated as prices have rolled over in a second leg down.

If the asking price is high enough, it isn't a short sale.

I often giggle to myself when I see a WTF asking price followed by a statement that a property is a standard sale. Well, sure it is a standard sale if the seller asks enough to pay off the Ponzi loans they took out.

• Today's featured Ponzi bought this house on 9/30/1998 for $215,000. She used a $171,600 first mortgage and a $43,400 down payment.
• On 5/17/2001 she obtained a $50,000 HELOC.
• On 9/3/20003 she refinanced with a $223,300 first mortgage.
• On 5/14/2004 she obtained a $100,000 HELOC.
• On 11/10/2005 she refinanced with a $375,000 first mortgage.
• On 12/18/2006 she refinanced with a $392,500 first mortgage.
• On 10/31/2007 she obtained a stand-alone second for $50,000.
• Total property debt is $442,500, so this is a standard sale, assuming she doesn't have to drop her WTF asking price much.
• Total mortgage equity withdrawal is $270,900 including her down payment.

Do you want to pay $468/SF for this tiny house to pay off this lady's debts?

Irvine Home Address … 79 MIDDLEBURY Ln Irvine, CA 92620

Resale Home Price … $514,999

Home Purchase Price … $215,000

Home Purchase Date …. 9/30/1998

Net Gain (Loss) ………. $269,099

Percent Change ………. 125.2%

Annual Appreciation … 7.2%

Cost of Ownership

————————————————-

$514,999 ………. Asking Price

$18,025 ………. 3.5% Down FHA Financing

4.71% …………… Mortgage Interest Rate

$496,974 ………. 30-Year Mortgage

$103,143 ………. Income Requirement

$2,580 ………. Monthly Mortgage Payment

$446 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$86 ………. Homeowners Insurance

$134 ………. Homeowners Association Fees

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

$3,397 ………. Monthly Cash Outlays

-$419 ………. Tax Savings (% of Interest and Property Tax)

-$630 ………. Equity Hidden in Payment

$32 ………. Lost Income to Down Payment (net of taxes)

$64 ………. Maintenance and Replacement Reserves

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

$2,444 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,150 ………. Furnishing and Move In @1%

$5,150 ………. Closing Costs @1%

$4,970 ………… Interest Points @1% of Loan

$18,025 ………. Down Payment

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

$33,295 ………. Total Cash Costs

$37,400 ………… Emergency Cash Reserves

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

$70,695 ………. Total Savings Needed

Property Details for 79 MIDDLEBURY Ln Irvine, CA 92620

——————————————————————————

Beds: 2

Baths: 2 baths

Home size: 1,100 sq ft

($468 / sq ft)

Lot Size: 2,700 sq ft

Year Built: 1998

Days on Market: 52

Listing Updated: 40514

MLS Number: S635678

Property Type: Single Family, Residential

Community: Northwood

Tract: Glle

——————————————————————————

Charming detached cottage home in Northwood Pointe. This is the LOWEST PRICED DETACHED HOME that's a STANDARD SALE in Northwood Pointe. Beautifully maintained with laminate wood floors & upgraded neutral carpet & paint. Gourmet kitchen with sparkling white tile counters & white cabinetry opens to living room & dining area. Living room features a cozy gas fireplace, & built-in media unit. French doors open to a secluded front porch area. The dining nook features built-in seating & shelves. From the kitchen, enter a serene garden w/patio area, & wrap around yard- great for relaxing & entertaining. Custom window coverings accent the home. Located on a quiet interior cul de sac street, with one of the larger lots for this floorplan. Association amenities include heated pool, lighted tennis courts, sport courts, playground areas, BBQ's. Walking distance to award winning schools-Canyon View Elem., Northwood High. Close to Tustin & Irvine Marketplace for dining, shopping, entertainment.

No matter how you look at home price data, it is simply too high to be sustained in Orange County.

Irvine Home Address … 25 TAROCCO 25 Irvine, CA 92618

Resale Home Price …… $282,500

She lives in a fairy tale

Somewhere too far for us to find

Forgotten the taste and smell

Of the world that she's left behind

Keep your feet on the ground

When your head's in the clouds

Well go get your shovel

And we'll dig a deep hole

To bury the castle

Paramore — Brick By Boring Brick

California home buyers live in a fairytale world where house prices go up forever and provide them with endless spending money. It's a seductive tale, and many people put their heads in the clouds (or is it up their a$$), live the fairytale and borrow and spend themselves into oblivion. It doesn't matter how much you pay as long as someone else has to pay the bills.

O.C. home prices still triple U.S. costs

December 1st, 2010, 1:00 am — posted by Jon Lansner

Despite horrific drops in the values of Orange County housing, a local home still practically costs what three typical American homes go for. Yes, one home here or three somewhere near Main Street U.S.A.

That’s one measure of local affordability, on a national scale. Just ponder fresh National Association of Realtors’ home price data for metropolitan areas: A typical Orange County house sold in the third quarter (median selling price: $508,400), cost 2.86 times the median-priced American home (cost: $177,900 in the third quarter!)

It’s equally troubling in a historic context: This Orange County premium remains higher now that it was in 1989 — the peak of the previous run-up in local housing prices.

Let's be clear about what is not happening here: There is not premium for a premium. There is a premium for Orange County real estate compared to the rest of the nation because Orange County residents have higher incomes. However, the premium on the premium paid by Orange County loan owners is causesd by people foolishly over-extending themselves to capture appreciation caused by people foolishly over-extending themselves. It is a self-reinforcing delusion punctuated by periods of steep declines when reality becomes unavoidable.

To be fair, this “Orange County premium” peaked at 3.42 American homes for one Orange County house in 2004. A 19% drop in local prices vs. a 3% drop nationally in the ensuing six years help narrow the local-vs.-national pricing gap.

So, the big question: Is the premium “worth it?” The math suggests that O.C.’s weather, culture and usually above-average salaries — and usually a good job market — supports pricier local housing.

Yes, local imcomes support higher prices, but only to the degree that incomes are higher than other areas. The rest is foolishness and kool aid intoxication.

And since 1982, local housing on average has costs double — eh, 2.38 times to be exact — to buy here compared to that mythical median-price American house.

Current economic weakness, no less some major challenges and the local and state level, bring the size of the premium deserved by Orange County housing into question for the future. Remember, one way to increase demand for housing is to be an attractive draw for out-of-towners seeking new employment of lifestyle.

Who is going to come to Orange County and pay these bloated prices? What high-paying business is going to expand here given the high home prices, high commercial rents, high state taxes, and dysfunctional state government that continually enacts business-unfriendly legislation? And what high wage earners are going to come here so they can pay more taxes and spend 40% or more of their income to live in a house half as nice as what they left behind?

Despite claims to the contrary put forth in the comments, house prices here are not justified by local incomes….

O.C. homes: 4th costliest vs. income

November 22nd, 2010, 9:30 am — posted by Jon Lansner

The price of entry to Orange County remains high.

Metro	Price	Income	Ratio
Honolulu	$621,000	$83,600	7.4
San Francisco	$725,000	$101,000	7.2
New York-NJ	$420,000	$64,700	6.5
O.C.	$530,000	$83,600	6.3
Santa Cruz	$502,000	$84,000	6.0
Los Angeles	$353,000	$61,200	5.8
San Jose	$575,000	$100,400	5.7
San Luis Obispo	$380,000	$69,800	5.4
San Diego	$390,000	$74,100	5.3
Oxnard	$413,000	$86,300	4.8
Nation	Price	Income	Ratio
U.S.	$177,000	$62,000	2.9
Metro	Price	Income	Ratio
Springfield, IL	$116,000	$74,100	1.6
Utica-Rome, NY	$90,000	$57,800	1.6
Grand Rapids, MI	$91,000	$58,900	1.5
Elmira, NY	$85,000	$58,600	1.5
Battle Creek, MI	$81,000	$56,900	1.4
South Bend, IN	$70,000	$53,600	1.3
Decatur, IL	$73,000	$57,600	1.3
Saginaw, MI	$61,000	$49,500	1.2
Detroit	$52,000	$52,000	1.0
Monroe, MI	$63,000	$63,900	1.0

Here’s another measure showing that despite steep price declines, Orange County homes are still costly compared to the rest of the nation — especially when local incomes are figured in!

FiServ’s recent home-price outlook contained intriguing stats on 212 markets and the relationship between the median selling price of homes (for second quarter 2010) in major metropolitan areas across the nation and the local household median incomes from 2009.

What did FiServ find?

• In Orange County homes sold for 6.3 times the median family income.
• That’s a little more than double the nationwide median of 2.9 years worth of income vs. median home prices.
• Orange County ranks as the fourth-highest cost ratio of the 212 markets tracked.
• California dominated the 10 costliest list with 8; only Honolulu (No. 1) and New York (No. 3) were from outside the Golden State.
• Where’s the “cheapest” housing by this measure? Five of the 10 at the bottom are from Michigan — including Detroit at one year’s salary for a home!

Orange County residents put twice as much of their wage income toward housing than do people living in the rest of the country. Why is that? They do because they think they will get rich owning California real estate. It is foolishness on a grand scale.

Some have argued that housing is scarce, therefore, people are bidding up prices to get whatever is available. If that were true, rents would be correspondingly high. Rents do not support local pricing.

O.C. homes SoCal’s priciest vs. renting

December 2nd, 2010, 4:48 pm — posted by Jon Lansner

Orange County homes are far pricier than most of the housing in Southern California when compared to respective rents in the 7-county area.

County	Ratio	Year Change
O.C.	302	+6%
Santa Barbara	297	+19%
Ventura	259	-2%
San Diego	235	+3%
L.A.	210	+5%
Riverside	183	+15%
San Bernardino	141	+13%
All SoCal	212	+8%

That’s the conclusion of fresh statistics from the Real Estate Research Council of Southern California that involved the age-old buy-or-rent debate.

The council’s math compared median selling prices by county from DataQuick and average asking rents from RealFacts. For the third quarter, Orange County home-sale prices were 302 times local monthly rents — a cost ratio 42% higher than the regional average and the highest of the seven SoCal counties tracked.

Orange County has been the region’s priciest place to own a home by this math since the first quarter of 2008 when Santa Barbara County was tops. In the third quarter, Santa Barbara was second priciest by this measure, with its median sale prices 297 times typical monthly rents.

By this math, renting looked a bit better in the third quarter vs. the previosu three months as the ownehsip cost index rose 6% in Oraneg County and 8% regionwide.

Yet, clearly, tumbling home-sale prices has helped narrow the buy-to-rent gap in recent years. Since the cyclical peak for this ownership-cost ratio five years ago, the Orange County buy-to-rent ratio has fallen 34% while the regional ratio is off 41%.

So Orange County loan owners pay far more for housing as a percentage of their incomes, and they pay far more than is justified by the local rents. So what happens when reality catches up the fantasies of appreciation?

High-end homesellers cut prices sharply

December 1st, 2010, 12:36 pm — posted by Jon Lansner

Sellers of Orange County’s upper-crust properties are doing the deepest discounting.

Recent stats from HousingTracker.net — which tracks prices of homes listing for sale in brokers’ MLS system — show:

• At the 75th percentile — the midpoint by price of the upper half of homes listed – Orange County’s asking price in November ran $694,833 – that is down 2.9% vs. the previous month and off 9.8% vs. the year earlier. This marker for Orange County’s higher-priced homes has fallen on a year-over-year basis for eight consecutive months.
• At the 25th percentile — the midpoint of the lower half of homes listed – the asking price in November ran $299,940 – that is -2.2% vs. the previous month and 0.1% vs. the year earlier. This marker for Orange County’s cheaper homes has risen on a year-over-year basis for a year. (Arguably, an 0.1% gain isn’t much of an advance!)
• The changing fortunes of these two niches puts the pricing gap between top and bottom at 122% — or $365,840 — the thinnest difference in listing prices between high and low ends since April 2008.
• This gap was at its peak at 167% — or $500,000 — as recently as August 2009. Since then the “bottom” pricing — the 25th percentile — has been flat while the top’s asking prices — the 75th percentile — dropped 16%!

By the way, the actual median listing price — the 50th percentile — for November was $432,600, down 3.2% in a month and down 3.8% in a year.

The downward trend in asking prices for high-end properties is unmistakable. It will also continue for the foreseeable future because prices are way, way too high. Once the banks get around to foreclosing on the squatters in more expensive homes, inventory will swell further and prices will continue their descent.

Condo values and volatility

One of the more obvious signs that real estate was in a bubble was the price change and price levels of condominiums. Condo values are historically the most volatile. These are typically undesirable or semi-desirable properties, but once kool aid intoxication takes over and lenders fuel the flames with cheap debt, prices really catch fire.

All real estate is valuable in a housing bubble because appreciation rewards everyone. Since condos are relatively inexpensive, it is an easy way for the small-time specuvestor to play the game. The demand for these assets rises to the limit of lender folly during the boom, and it falls to its utilitarian value during a bust. Since people prefer larger detached properties, condos have limited utility, and prices fall precipitously.

It is truly astonishing what people were willing to pay for old, fee-laden, and cramped condos in Irvine. Today's featured property was purchased for $410,000 on 3/23/2006. It was probably a bargain at the time considering it has two bedrooms. There were some one-bedroom units that sold for over $400,000 in Irvine at the peak. The owners used a $328,000 first mortgage, a $82,000 HELOC, and a $0 down payment.

They quit paying the mortgage sometime in early 2009.

Foreclosure Record

Recording Date: 08/20/2009

Document Type: Notice of Default

Since this property is empty, the bank is in no hurry to foreclose. Instead after almost 500 days on the market, it dances to the tune of amend-extend-pretend.

Irvine Home Address … 25 TAROCCO 25 Irvine, CA 92618

Resale Home Price … $282,500

Home Purchase Price … $410,000

Home Purchase Date …. 5/23/2006

Net Gain (Loss) ………. $(144,450)

Percent Change ………. -35.2%

Annual Appreciation … -8.1%

Cost of Ownership

————————————————-

$282,500 ………. Asking Price

$9,888 ………. 3.5% Down FHA Financing

4.55% …………… Mortgage Interest Rate

$272,613 ………. 30-Year Mortgage

$55,535 ………. Income Requirement

$1,389 ………. Monthly Mortgage Payment

$245 ………. Property Tax

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

$47 ………. Homeowners Insurance

$370 ………. Homeowners Association Fees

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

$2,051 ………. Monthly Cash Outlays

-$128 ………. Tax Savings (% of Interest and Property Tax)

-$356 ………. Equity Hidden in Payment

$17 ………. Lost Income to Down Payment (net of taxes)

$35 ………. Maintenance and Replacement Reserves

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

$1,620 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,825 ………. Furnishing and Move In @1%

$2,825 ………. Closing Costs @1%

$2,726 ………… Interest Points @1% of Loan

$9,888 ………. Down Payment

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

$18,264 ………. Total Cash Costs

$24,800 ………… Emergency Cash Reserves

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

$43,064 ………. Total Savings Needed

Property Details for 25 TAROCCO 25 Irvine, CA 92618

——————————————————————————

Beds: 2

Baths: 1 full 1 part baths

Home size: 995 sq ft

($284 / sq ft)

Lot Size: n/a

Year Built: 1983

Days on Market: 493

Listing Updated: 40455

MLS Number: P696563

Property Type: Condominium, Residential

Community: Orangetree

Tract: Othr

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

SHORT SALE APPROVED FOR $295,000 BUT 2ND LIEN HOLDER IS STILL CRUNCHING NUMBERS ON WHAT THEY WILL ACCEPT TO RELEASE LIEN. MOTIVATED SELLER. Beautiful, bright and airy 2- bed / 1.5 Ba COndo, Upper-Corner unit. Great Location, walking distance to Irvine Valley Community College. SUBMIT ALL REASONABLE OFFERS. SELLER WILL GIVE EACH OFFER SERIOUS CONSIDERATION.

2ND LIEN HOLDER IS STILL CRUNCHING NUMBERS ON WHAT THEY WILL ACCEPT TO RELEASE LIEN — That is the story will all short sales. Short sales are primarily a negotiation between the delinquent borrower and the second lien holder. It's the main reason short sales take forever and rarely transact.

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

The much anticipated second leg down in house prices is official. Will we hit bottom this winter?

Irvine Home Address … 8 INDIGO Irvine, CA 92618

Resale Home Price …… $1,049,000

Time is getting closer

I read it on a poster

fanatical exposers

on corners prophesized

I just come back to show you

all my words are golden

so have no gods before me

I'm the light

Alice Cooper — Second Coming

Back in July I wrote All Signs Point to Lower House Prices. Well, here we are….

2nd Leg of Home Price Declines Underway

By: Dirk van Dijk, CFA November 30, 2010

In September, home prices continued to slip, and the declines were very widespread. The Case-Schiller Composite 10 City index (C-10) fell 0.67% on a seasonally adjusted basis, and is up just 1.52% from a year ago. The broader Composite 20 City index (which includes the cities in the C-10) fell by 0.80% on the month and is up 0.55% from a year ago.

In August, the year-over-year gains were 2.50% for the C-10 and 1.61% for the C-20, so it looks like the year-over-year gains are rolling over. Of the 20 cities, only one (Washington DC, and it was only up 0.05%) posted a gain on the month, while 19 saw prices fall. Year over year, five metro areas saw gains and 15 suffered losses.

In August, there were also 19 down and just one up. It thus looks like a new downtrend in housing prices is under way.

It is difficult to argue with data. Prices are falling again — and not simply because they always drop a little bit at the end of the year — prices are falling all over the country on a seasonally adjusted basis.

Consider Seasonal Adjustments to Prices There is a seasonal pattern to home prices, and thus it is better to look at the seasonally adjusted numbers than the unadjusted numbers. Most of the press makes the mistake of focusing on the unadjusted numbers.

While the 0.55% rise in the C-20 year over year in isolation is not the end of the world, it hardly makes up for the damage that was done in the popping of the housing bubble, and it is also unlikely to last. From the April 2006 peak of the housing market, the C-10 is down 29.83%, while the C-20 is off by 29.56%.

Calculated Risk has created a great chart compiling house prices calculated by the Case-Shiller method back to the mid 1970s. It clearly illustrates the two previous bubbles largely concentrated on the coasts as well as the Great Housing Bubble.

As you can see from the chart, the Federal Reserve attempted to halt the house price decline before it reached its natural bottom. Perhaps they prevented an overshoot to the downside and saved many banks from going under. If they did, it was at an enormous cost that will ultimately be borne by taxpayers.

The Case-Schiller data is the gold standard for housing price information, but it comes with a very significant lag. This is September data we are talking about, after all, and it is actually a three-month moving average, so it still includes data from July and August.

Existing home sales have been weak since the home buyer tax credit expired (see "Used Home Sales Fall"). In the process, the inventory-to-sales ratio has been extremely high, at 10 months, although that is down from the June peak of 12.5 months. That is what we saw during the implosion of housing prices that took place in 2007 or 2008. Housing prices are going to fall again in the coming months.

I noted this in Home Price Drop Sudden and Dramatic.

Month-to-Month Data a Bitter Pill

It is hard to find much of a silver lining in the month to month data. Only Washington DC posted an increase, and that was anemic at just 0.05%. Only three other cities kept the decline to less than 0.5%: Las Vegas down 0.21%, Denver down 0.30% and L.A. down 0.43%.

On the other hand, there were five cities that posted month-to-month declines of over 1.5%. The Twin Cities were the hardest hit, plunging 2.21%, followed by Cleveland with a 2.00% decline. Portland was down 1.72%, Detroit fell 1.61% and Phoenix fell 1.55%. Those are similar in magnitude to the monthly declines we were seeing three years ago during the first wave of the housing price implosion.

I doubt the upcoming price declines will approach the depth of the previous drop, but it interesting that the decline is picking up speed and it now rivals the rate of decline from three years ago.

Results by Region

On a year-over-year basis, the strongest cities are in California, which was an early poster child for the housing bust. However, even there the year-over-year gains are starting to erode. San Francisco leads the way with a 5.43% rise, followed by San Diego, up 4.94%. LA was in fourth place with a 4.32% year-over-year increase.

DC was in third place with a 4.40% gain. Boston was the only other city with a year-over-year gain, and it was up just 0.39%. As recently as July, the year-over-year gains in California were 11.06% in SF, 9.26% in SD and 7.5% in LA.

There were nine metropolitan areas where the year over year declines were more than 2.5%. Chicago fared the worst with a 5.63% decline, followed by 4.36% in Tampa. It is not going to take global warming to put that entire city underwater — the housing market has already accomplished that.

Charlotte, which early on seemed relatively immune from the housing bust, is down 3.72% year over year. Portland is down 3.63%, and Detroit is off 3.15%. In other words, significant year-over-year declines are happening in just about every corner of the country.

Declines in the areas which did not rally during the bubble are most likely the result of deteriorating employment in the local economies in those areas. Without the bubble rally to facilitate over-borrowing and to create distressed loan owners, other factors must be driving the declines.

The graph below tracks the cumulative declines for each city over time. If the red bar is shorter to the downside than the yellow bar for a city, it indicates that prices in that city have risen since the start of this year.

In every city prices are below where they were in April 2006, but there is a huge variation. Las Vegas is the hardest hit, with prices down 57.57% from the peak, followed by Phoenix down 53.65%. Three more cities are down more than 40%, Miami (down 47.92%), Detroit (off 45.19%) and Tampa (with a 43.53% decline).

At the other end of the spectrum are Dallas (down only 6.26%), Charlotte (off 8.13%) and Denver (down 10.25%). (Note: the percentage declines I am quoting are from when the national peak was hit, the numbers in the graph are relative to that city’s individual peak, so there is a little bit of difference.)

No Support for Home Prices

The homebuyer tax credit was propping up home prices, but now with that support gone, prices are resuming their downtrend. People had until June 30 to close on their houses, and they had to agree to the transaction by April 30. That pulled sales into those months that might otherwise have happened in July or August. The credit was up to $8,000, so almost nobody would want to close their deal in early July and simply leave that money on the table.

The tax credit is a textbook example of a third party subsidizing a transaction. When that happens, both the buyer and the seller will get some of the benefit. The buyer gets his when he files his tax return next year, the seller gets hers in the form of a higher price for the house.

Since the tax credit is now over, that artificial prop to housing prices has been taken away. Sales of existing houses simply collapsed in July, after the credit expired, and have remained depressed ever since. The extremely high ratio of homes for sale to the current selling pace is sure to put significant downward pressure on prices.

There is still quite a bit of “shadow inventory” out there, as well. That is, homes where the owner is extremely delinquent in his mortgage payments and unlikely ever to make up the difference, but that the bank has not yet foreclosed on or foreclosed houses that have not yet been listed for sale.

Take a good hard look at the second graph (also from this source) and tell me what you think is going to happen to housing prices over the next few months. A normal market has about six months of supply available. During the bubble, the months of supply generally ran closer to four months, and prices were soaring. It was not until inventories climbed above the six month mark that prices started to fall.

The really collapsed as the months of supply moved into the double digits. The extensive government support for the housing market — including the tax credit, but also the Fed buying up $1.25 Trillion in mortgage paper to artificially depress mortgage rates — helped boost sales and bring the months of supply back down. Now that support is over, and the months of supply far exceed the worst we saw during the heart of the bust (Note: the graph is not updated to include the September data).

Calculated Risk created another interesting chart showing the relationship between months of supply and the monthly price change in the Case-Shiller. He inverted the price change data so the correlation is more obvious.

As you can see, when months of inventory goes up, prices go down. The only way prices hold up is if sales rates remain very low. If banks continue to hold out for top dollar, the inventory will never clear out.

The tax credit was not a very effective means of stimulus, but it did help prop up prices, and that is a pretty important accomplishment, even if it proves to be ephemeral.

Was it really? Why was it so important to temporarily prop up prices? Let's recap what was really accomplished:

• create false hope among debtors,
• prevent prices from bottoming,
• delay the recovery of prices and the economy,
• keep homebuilding in the doldrums,
• keep a few zombie banks in business,
• keep prices artificially high to price out would-be buyers,
• and add billions to the bill for taxpayers.

What about that list is positive?

The credit cost the government about $30 billion. A large part of that money went to people who would have bought anyway, but perhaps would have done so in July or August rather than May or June. To the extent it rewarded people for doing what they would have done anyway, it did nothing to stimulate the economy.

Also, turnover of existing houses really does not do a lot to improve the economy. It is the building of new houses that generates economic activity. And it is not just about the profits of D.R. Horton. A used house being sold does not generate more sales of lumber by International Paper or any of the building products produced by Berkshire Hathaway or Masco. It does not put carpenters and roofers to work. New homes do.

While housing prices are important to the economy, the level of turnover in used houses is not. Home equity is, or at least was, the most important store of wealth for the vast majority of families. Houses are generally a very leveraged asset, much more so than stocks. Using your full margin in the stock market still means you are putting 50% down. In housing, putting 20% down is considered conservative, and during the bubble was considered hopelessly old fashioned.

As a result, as housing prices declined, wealth declined by a lot more. For the most part, we are not talking vast fortunes here, but rather the sort of wealth that was going to finance kids' college educations and a comfortable retirement. With that wealth gone, people have to put away more of their income to rebuild their savings if they still want to be able to send the kids to college or to retire.

The decline in housing wealth is a very big reason why retail sales have been so weak. With everyone trying to save, aggregate demand from the private sector is way down. If customers are not going to spend and buy products, employers have no reason to invest to expand capacity. They have no reason to hire more workers.

The cycle of deflation is difficult to stop once it gets started. Bernanke is right to be concerned. However, he is foolishly optimistic in his belief that he can do something about it. He can print a lot of money — which he is doing right now — but he will have to print a lot more to get consumers to change their behavior.

Underwater Mortgages Lead to Foreclosures

Also, as housing prices fell, millions of homeowners found themselves owing more on their houses than the houses were worth. That greatly increases the risk of foreclosure. If the house is worth more than the mortgage, the rate of foreclosure should be zero. Regardless of how bad your cash flow situation is — due to job loss, divorce or health problems for example — you would always be better off selling the house and getting something, even if it is less than you paid for the house, then letting the bank take it and get nothing.

By propping up the price of houses, the tax credit did help slow the increase in the rate of foreclosures.

No it didn't. The rate of foreclosure is completely artificial as the banks are doing the amend-extend-pretend dance. Right now, it takes 492 days to process a foreclosure.

Still, 23% of all houses with mortgages are worth less than the value of the mortgage today. Another five percent or so are worth less than five percent more than the value of the mortgage. If prices start to fall again, those folks well be pushed underwater as well.

On the other hand, it is not obvious that propping up the prices of an asset class is really something that the government should be doing. After all, it is hurting those who don’t have homes and would like to buy one.

It pisses me off every day to see my government working against my best interest with my tax dollars, particularly in a blatant giveaway to greedy and stupid bankers and greedy and stupid loan owners.

Support for housing goes far beyond just the tax credit. The biggest single support is the deductibility of mortgage interest from taxes. Since homeowners are generally wealthier and have higher incomes than those that rent, this is a case of the lower middle class subsidizing the upper middle class. Also, even if they are homeowners, people with lower incomes are more likely to take the standard deduction rather than itemize their taxes. The mortgage interest deduction only applies if you itemize.

It is also worth keeping in mind in the current debate over extending the Bush tax cuts for just 97% of the population as Obama has proposed, or for 100% of the population as the GOP insists on, that the $250,000 per couple threshold is for adjusted gross income, not the top-line income. Thus, a couple with income of $274,000 (in wages) but who pay $2000 a month in mortgage interest, would not see an increase in their taxes at all.

Housing Prices to Find a Lower Floor

The real problem though is that, now that the tax credit is over, prices will find their more natural level. Fortunately, relative to the level of incomes and to the level of rents, housing prices are now in line with their long-term historical averages, not way above them as they were last year.

In other words, houses are fairly priced — not exactly cheap by historical standards, but not way overvalued, either. That will probably limit how much price fall over the next six months to a year to the 5 to 10% range, rather than the 30% decline we saw from the top of the bubble. That, however, is more than enough of a decline to do some serious damage.

This authors assessment is a good one. I concur with what he wrote above.

The Case-Schiller report was weaker than the consensus expected. The second leg down in housing prices is underway, but fortunately will probably be a much shorter leg than the first one.

Still, that is bad news for the economy. Used homes make very good substitutes for new homes, and with a massive glut of used homes on the market, there is little or no reason to build any new ones.

Residential investment is normally the main locomotive that pulls the economy out of recessions. It is derailed this time around, and there seems to be little the government can do to get it back on track.

There is nothing the government can do to increase residential investment, and they shouldn't try. If they simply let the market work without continuing manipulation, the problem will fix itself, and the economy will improve.

Unfortunately for California, what our economy needs is a huge home price rally and lenders stupid enough to give out HELOCs like drugs at a rave. The California Economy Is Dependent Upon Ponzi Borrowers like the one I am featuring today. How will we make up for the loss of hundreds of thousands of dollars in consumer spending per household?

High end Ponzi borrowing

HELOC abuse is not restricted to social class or income level. It is a common misconception that only the poor and subprime borrowers don't know how to manage their money. High wage earners are equally likely to go Ponzi, particularly if they are trying to keep up with the other Ponzis in the neighborhood or in their social circles. Since high end homes are more expensive, the Ponzi borrowing was more extreme there. No matter how much people make, if they are offered free money, they will take all they are given — even if it costs them their house.

• Today's featured property was purchased on 4/29/1999 for $528,000. The owners used a $422,000 first mortgage, a $52,750 second mortgage, and a $53,250 down payment.
• On 5/15/2000, after about 1 year of ownership, these owners refinanced with a $540,000 first mortgage, withdrew their $53,250 down payment, and got an extra $12,000 in spending money.
• On 3/2/2001 they got a private-party loan for $35,000.
• On 3/18/2003 they refinanced with a $650,000 first mortgage and obtained a $32,000 HELOC.
• On 8/31/2003 they refinanced with a $738,750 first mortgage.
• On 3/19/2004 they obtained a $150,000 HELOC.
• On 5/31/2005 they refinanced with a $847,000 Option ARM with a 1% teaser rate.
• On 5/31/2005 they obtained a $121,000 HELOC.
• On 10/25/2006 they got their final HELOC for $250,000.
• Total property debt is $1,097,000 plus negative amortization assuming they maxed out the HELOC.
• Total mortgage equity withdrawal is $622,250.

They spent the house, and now they are likely to be a short sale.

Irvine Home Address … 8 INDIGO Irvine, CA 92618

Resale Home Price … $1,049,000

Home Purchase Price … $528,000

Home Purchase Date …. 4/29/1999

Net Gain (Loss) ………. $458,060

Percent Change ………. 86.8%

Annual Appreciation … 5.9%

Cost of Ownership

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$1,049,000 ………. Asking Price

$209,800 ………. 20% Down Conventional

4.55% …………… Mortgage Interest Rate

$839,200 ………. 30-Year Mortgage

$206,216 ………. Income Requirement

$4,277 ………. Monthly Mortgage Payment

$909 ………. Property Tax

$250 ………. Special Taxes and Levies (Mello Roos)

$175 ………. Homeowners Insurance

$139 ………. Homeowners Association Fees

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$5,750 ………. Monthly Cash Outlays

-$1023 ………. Tax Savings (% of Interest and Property Tax)

-$1095 ………. Equity Hidden in Payment

$355 ………. Lost Income to Down Payment (net of taxes)

$131 ………. Maintenance and Replacement Reserves

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

$4,119 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$10,490 ………. Furnishing and Move In @1%

$10,490 ………. Closing Costs @1%

$8,392 ………… Interest Points @1% of Loan

$209,800 ………. Down Payment

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

$239,172 ………. Total Cash Costs

$63,100 ………… Emergency Cash Reserves

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

$302,272 ………. Total Savings Needed

Property Details for 8 INDIGO Irvine, CA 92618

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Beds: 4

Baths: 3 baths

Home size: 3,600 sq ft

($291 / sq ft)

Lot Size: 6,175 sq ft

Year Built: 1999

Days on Market: 104

Listing Updated: 40490

MLS Number: S629131

Property Type: Single Family, Residential

Community: Oak Creek

Tract: Kenw

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According to the listing agent, this listing may be a pre-foreclosure or short sale.

Gorgeous open concept luxury home nestled on quiet cul de sac in highly sought-after gated community. Huge kitchen opens to family room. Spacious master suite. Upstairs bonus/loft area. WOW!