Government efforts to prop up the market have only served to reduce sales volumes and eliminate an important component of the move up market.

Irvine Home Address … 4 HAGGERSTON AISLE Irvine, CA 92603

Resale Home Price …… $749,000

Some folks drive the bears out of the wilderness

Some to see a bear would pay a fee

Me, I just bear up to my bewildered best

And some folks even see the bear in me

So meet a bear and take him out to lunch with you

And even though your friends may stop and stare

Just remember that's a bear there in the bunch with you

And they just don't come no better than a bear

Lyle Lovett — Bears

Every Green Bay Packer fan in Wisconsin knows how to keep bears out of their yard. Put up a goalpost, and bears won't go anywhere near it. (Sorry, Chicago Bears fans. Maybe your offense won't be so pathetic this year.)

Being bearish on housing in California over the last several years has largely put me out of sync with the collective kool aid view of unbridled bullishness. Of course, I had the luxury of being right while the bulls were wrong, and I have made many new friends since I began writing about it.

As we get closer to the bottom, I see markets like Las Vegas that excite me greatly and make me very bullish on owning real estate. If prices fall a little lower here, I might even get lukewarm on Orange County. Lukewarm is probably as bullish as I will get here unless we see a real catastrophe like they had in Las Vegas.

The Bears and the State of Housing

By DAVID LEONHARDT

Published: September 7, 2010

Of all the uncertainties in our halting economic recovery, the housing market may be the most confusing of all.

That's a nice opening, but there really isn't much confusion about it. Prices are too high, and government meddling has caused prices to remain too high. The only confusion is caused by the intentional obfuscation of those who don't want to reveal this simple truth.

At times, real estate seems to be in the early stages of a severe double dip. Home sales plunged in July, and some analysts are now predicting that the market will struggle for years, if not decades.

Others argue that the worst is over. As Karl Case, the eminent real estate economist (and the Case in the Case-Shiller price index), recently wrote, “Buying a house now can make a lot of sense.”

Beware the hidden assumptions and what is not being said. Karl Case made a broader argument for home ownership, he was not saying people should buy because the bottom is in and rapid appreciation is coming back.

I can’t claim to clear up all the uncertainty. But I do want to suggest a framework for figuring out whether you lean bearish or less bearish: do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it’s more like food, clothing and other staples that account for an ever smaller share of consumer spending over time?

If you believe housing resembles a luxury good, then you’ll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren’t terribly overvalued. If housing is a staple, though, prices will rise more slowly — with general inflation, as food tends to.

The difference between these two views ends up being huge, and it’s become the subject of an intriguing debate.

His argument here is not clearly defined. During the bubble, people actually argued that people were putting more income toward housing because it was a great investment. That argument has been thoroughly defeated, so now the argument is being framed as a choice between spending the same percentage of income as past generations — what the author calls luxury good spending — and putting less income toward housing as we do with consumer staples. As he has framed the argument, I agree with his contention that people will tend to put the same amount toward housing; therefore, housing prices should rise with wage inflation.

After digging into it, I come down closer to the luxury good side, which is to say the less bearish one. To me, housing does not rank with unemployment, the trade deficit, the budget deficit or consumer debt as one of the economy’s biggest problems. But you may disagree.

Yes, I am going to disagree. It isn't that those other items are not important, but both unemployment and consumer debt are related to the housing market. Most of the unemployment is in the real estate sector, and HELOC abuse is at the core of California's debt addiction.

No one doubts that prices rose roughly with incomes from 1970 to 2000. The issue is whether that period was an exception. Housing bears like Barry Ritholtz, an investment researcher and popular blogger, say it was. The government was adding new tax breaks for homeownership, and interest rates were falling. These trends won’t repeat themselves, the bears say.

As evidence, they can point to a historical data series collected by Mr. Case’s longtime collaborator, Robert Shiller. It suggests that house prices rose no faster than inflation for much of the last century.

The bears are right on every count. The government has stimulated the housing market to the degree possible, and couple that with falling interest rates, and you have a recipe for a once-in-a-generation boost in home prices.

The pattern makes some intuitive sense, too. As people become richer, they spend a shrinking share of their income on the basics. Think of it this way: someone who gets a big raise doesn’t usually spend it on groceries. You can see how shelter seems as if it might also qualify as a staple and, like food, would account for a shrinking share of consumer spending over time. In that case, house prices should rise at about the same rate as general inflation and well below incomes.

That isn't going to happen. Even if kool aid were totally purged from our collective consciousness, people will put the maximum amount lenders allowed toward housing. People like and want nice houses, and they will pay what is necessary to get them.

Here’s the scary thing, at least for homeowners: if this view is correct, house prices may still be overvalued by something like 30 percent. That’s roughly the gap between average household income growth and inflation over the last generation.

It’s also the overvaluation suggested by Mr. Shiller’s historical index. Today, it is around 130, which is way down from the 2006 bubble peak of 203. But it’s still far above the 1890 to 1970 average of 94.

In effect, the bears are arguing that housing was in a multidecade bubble and has now entered a multidecade slump.

He is making a bearish argument I have never heard a housing bear make — and I read them all. As a society, we are not going to suddenly start putting less and less toward housing. That just isn't going to happen. However, the Case-Shiller index will eventually make its way back to its historic relationship with inflation. The only reason we are temporarily stalled at 130 nationally is because we have record low interest rates which makes high prices somewhat affordable. We may be entering a multidecade period of lowered appreciation, but we are not likely to repeat the Japanese experience and witness 15 years of nominal price decreases.

The second, less bearish group of economists doesn’t buy this. This group includes Mr. Case, Mark Zandi of Moody’s Analytics and Tom Lawler, a Virginia economist who forecast the end of the housing boom before many others did. They say they believe that house prices rise nearly as fast, if not quite as fast, as incomes, and that real estate is no longer in a bubble.

Wait a minute. First, nobody forecast the bottom before the NAr. They forecast it every few months. Second, Tom Lawler is not some kind of forecasting genius, he is a guy who made a bad prediction who was made temporarily right by government interference in the market. Further, if his analysis says that housing prices are now in line with incomes, his analysis is faulty for most markets.

This side can also make a case based on history. Mr. Case points out that all pre-1970 housing statistics are suspect. By necessity, Mr. Shiller’s oft-cited historical index is a patchwork that relies on several sources, like Labor Department surveys. These sources happen to paint a more negative picture of past house prices than some other data.

Is Karl Case throwing Robert Shiller under the bus?

For example, the Census Bureau has been asking people since 1940 how much they think their houses are worth, as Mr. Lawler noted in one of his newsletters. The answers suggest that house values rose faster than general inflation — and about as fast as incomes — not just from 1970 to 2000, but from 1940 to 1970, as well.

Likewise, Mr. Case has dug up sales records for houses in the Boston area that were built in the late 19th century and are still around. The records show prices rising 2.5 percentage points a year faster than inflation, which is just about what income has done.

IMO, this shows how much we have understated our measures of inflation. Notice the hidden assumption here is that our measures of wage inflation has been accurate. Further, the character and desirability of the neighborhood may have changed significantly over time as well. House prices track wage inflation very closely over the long term.

Perhaps most persuasive is a statistic that Mr. Shiller sent me when I asked him about this debate. It shows that the share of consumer spending — and, by extension, of income — devoted to housing has not fallen over time. It has hovered around 14 or 15 percent for the last 60 years. The share of spending devoted to food, by contrast, has dropped to 13 percent, from 25 percent.

Yes, that is a very convincing argument. We spend the same percentage of income on housing over time.

These numbers make a pretty strong argument that the post-1970 period is not one long aberration. As societies get richer, they do spend more and more on housing.

No, that is not what the data shows. That sounds like bubble talk. We may spend more nominal dollars, but as a percentage of income, the expenditure is remarkably consistent. His statement sounds like we are spending more as a percentage of income, and that is not accurate.

Some of this spending, Mr. Shiller notes, comes in the form of bigger, more expensive houses. These houses don’t do anything to lift the value of a smaller, older house — which is what matters to individual homeowners. But McMansions are not the only factor.

To see this, you can look at the share of consumer spending devoted to things inside houses, like furniture. As with houses, they have become fancier. But they haven’t become so much fancier that they make up anywhere near as large a share of consumer spending today as in the past. That’s a strong clue that the upgrading of houses themselves isn’t enough to explain the increased spending on housing.

What is? The value of the underlying land. Those Boston-area houses that Mr. Case studied did not change much over time. Yet their value did.

For a house whose location has any value — in a major city or a nearby suburb, where a builder can’t simply put up a similar house down the street — the land is a big part of the equation. Over time, Mr. Zandi says, the value of that land should grow almost as fast as the local area’s economic output or, in other words, with incomes.

I don't think this guy understands that land value is a residual effect. Land value doesn't make prices go up. Prices going up increases land value. Changes in land value are always the result or the effect of changes in price. It is never the other way around.

The best advice for homeowners and would-be buyers may be to think of a house not as an investment, first and foremost, but as a place to live. If there is a good chance you will move in the next three years or so, you should probably rent. The hassles of buying and the one-time costs are just too big. Plus, house prices are not low in most places today.

Shevy and I tell people this every day. We have killed deals and talked many people out of buying because they were planning to move.

The ratio of median house price to income is about 3.4, compared with a prebubble average of about 3.2. Given the economy’s weak condition and the still high number of foreclosures, prices may well fall more in the next year or two. They look especially high in places where rents are comparatively cheap, like San Diego and San Francisco. And maybe income growth will remain weak for years, holding down home-price growth.

Those statements are all true as well. Notice he specifically called out some of our California markets where it is still much cheaper to rent.

But if you can imagine staying much longer than a few years, you should take some comfort in the fact that the bubble seems mostly deflated. Sometime soon, prices should begin rising again. They may not quite keep up with incomes, but they will probably outpace the price of food and clothing.

Now, if only it were possible to be as sanguine about the economy’s other problems.

With exception of the beach communities in California and their high-end cousins, the bubble is mostly deflated. There are only two kinds of markets in a bubble bust: (1) those where prices have crashed, and (2) those where prices have not crashed yet.

How the government props weakened the market and delayed the recovery

When prices go down, the first segment of the market to disappear is the move-up market; or to be more specific, that segment of the market that must sell their own home to buy another. Over the last four years very few sales have taken place where the buyer's offer was contingent upon selling an existing home. This key move-up component of the market is absent when prices are moving lower, partly because there is less equity to move and owners submerge, but mostly because sellers refuse to accept an offer they know is going to be mired in the buyer's feeble attempts to sell their property at above market prices to pay for the next property. Unemployment gets much of the blame for our anemic sales rates, but the lack of a contingent-upon-sale market accounts for much of the malaise as well.

When the government and lenders tried to engineer a bottom, stories began to surface about the resurgence of a move-up market where buyers already had equity from their purchases at the bottom they were moving into the next house. Of course, these stories were nonsense, but this component of the market is necessary for normal function, so everyone involved in engineering a bottom (Obama administration, Federal Reserve, NAr, NAHB, and so on) was eager to tout the equity gains from those who bought at their illusory bottom.

The fact is that house prices have not appreciated enough since the engineered bottom to cover the commission on a resale. Further, sellers are still not accepting offers where the sale is contingent on the buyer's sale. That segment of the move-up market is still dead.

Since prices are still too high, and since the contingent-sale move-up market is dead, the market is weaker than is should be, and rather than bottoming this winter — which it likely would have without all the intervention — the market is poised to sputter for another two or three years while it gropes for a bottom built almost entirely upon first-time homebuyers.

If the powers-that-be had done nothing, prices would almost certainly be lower today, and the market picture would look very grim (think Las Vegas), but the market always looks the worst at the bottom. It's only through widespread market despair that we find a true bottom. The sooner we reach bottom, the sooner the contingent-sale market recovers and the sooner the whole market regains its strength and vigor.

Everyone who supported the government props was wrong. Of course, none of them will admit it, and few will even recognize the truth, but meddling in the market clearly has made matters worse, and it cost us billions in taxpayer dollars as well.

A Grade D HELOC abuser

In the post HELOC Abuse Grading System, I described a Grade D HELOC Abuser this way:

The transition between a grade C and a grade D is somewhat subjective, but it is hinged to an idea; once borrowers start knowingly increasing their loan balance to spend appreciation as a matter of habit, once they start expecting appreciation and HELOC money as a reliable source of income, they have moved from what some may consider legitimate use of HELOCs to Ponzi Scheme financing and ultimately a foreclosure implosion. This Ponzi borrowing limit is an invisible threshold borrowers do not realize they have crossed, but once they accept using debt to pay debt as a concept, they have crossed over to the Dark Side.

The top of the range of D graded HELOC abusers is the limit of each borrowers self delusion when it comes to how much appreciation they feel comfortable spending without losing their homes. People who earn a D still planned to keep their homes, they were merely misguided by their own ignorance and the incessant Siren's Song of kool aid intoxication. These are the sheeple; like the rats St. Patrick cast into the sea, each borrower followed the Piper to their underwater mortgage and a watery foreclosure.

This particular owner has managed to avoid foreclosure, mostly due to the fact that he bought in an area where the banks decided squatting was preferable to lowering prices.

• This property was purchased on 8/29/1997 for $308,000. The owner used a $246,300 first mortgage and a $61,700 down payment. He waited a few years to get his down payment back and start down the road to HELOC abuse.
• On 8/14/2001 he obtained a $75,000 HELOC.
• On 4/18/2003 he refinanced with a $340,000 first mortgage, and he got a $50,000 HELOC.
• On 7/18/2005 he refinanced the first mortgage for $425,000 and obtained a $50,000 HELOC.
• On 2/20/2007 he got an Option ARM for $491,000.
• Total mortgage equity withdrawal is $244,700.

He still stands to walk away with a check for about $150,000 after paying off the debt.

You have to figure he will do this again in his next house, if he is given the chance.

Irvine Home Address … 4 HAGGERSTON AISLE Irvine, CA 92603

Resale Home Price … $749,000

Home Purchase Price … $308,000

Home Purchase Date …. 8/29/1997

Net Gain (Loss) ………. $396,060

Percent Change ………. 128.6%

Annual Appreciation … 6.6%

Cost of Ownership

————————————————-

$749,000 ………. Asking Price

$149,800 ………. 20% Down Conventional

4.34% …………… Mortgage Interest Rate

$599,200 ………. 30-Year Mortgage

$143,648 ………. Income Requirement

$2,979 ………. Monthly Mortgage Payment

$649 ………. Property Tax

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

$62 ………. Homeowners Insurance

$448 ………. Homeowners Association Fees

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

$4,139 ………. Monthly Cash Outlays

-$704 ………. Tax Savings (% of Interest and Property Tax)

-$812 ………. Equity Hidden in Payment

$236 ………. Lost Income to Down Payment (net of taxes)

$94 ………. Maintenance and Replacement Reserves

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

$2,953 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,490 ………. Furnishing and Move In @1%

$7,490 ………. Closing Costs @1%

$5,992 ………… Interest Points @1% of Loan

$149,800 ………. Down Payment

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

$170,772 ………. Total Cash Costs

$45,200 ………… Emergency Cash Reserves

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

$215,972 ………. Total Savings Needed

Property Details for 4 HAGGERSTON AISLE Irvine, CA 92603

——————————————————————————

Beds:: 3

Baths:: 3

Sq. Ft.:: 2045

$0,366

Lot Size:: –

Property Type:: Residential, Condominium

Style:: Two Level, Traditional

Year Built:: 1991

Community:: Turtle Rock

County:: Orange

MLS#:: S631397

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

——————————————————————————

Welcome to a quiet & private location within the newest townhome community in Turtle Rock. This popular floorplan hasn't been available for sale in 4 years! Fabulous $50,000 remodeled kitchen is at the heart of this home and has been designed by a chef – redesigned space includes maple cabinetry w/ custom pulls, lots of deep, full extension drawers, dual pantries, granite counters w/ stainless steel trim, Viking gas cooktop, built-in Sub-zero frig, double ovens, wine refrigerator-it's impressive. Soaring ceilings and fireplace in living room. Separate dining room with access to outdoor patio. Separate family room open to kitchen. Master suite w/ private balcony and soaring ceilings, walk-in closet w/ organizers, bright master bath. Upstairs loft which could be used for a home office/study/reading area, and second bedrooms each with volume ceilings. It's light and bright. Steps away from community pool and nearby park. Tucked away in the hills of Turtle Rock yet 10 min. close to it all!

The Obama Administration's open policy of keeping house prices high benefits loan owners at the expense of renters and first-time buyers.

Irvine Home Address … 14691 FIR Ave Irvine, CA 92606

Resale Home Price …… $615,000

I kept the right ones out

And let the wrong ones in

It's amazing

With the blink of an eye

You finally see the light

Oh it's amazing

Aerosmith — Amazing

One housing bubble phenomenon was that the right ones — prudent people who knew what they could afford — were kept out, and the wrong ones — kool aid intoxicated fools — were let in. That mistake was bad enough, but now our own government is frantically working to repeat this mistake. Rather than doing something corrective, like letting house prices fall, our government is going to extreme lengths to keep the right ones out and keep the wrong ones in. Perhaps the administration is finally seeing the light, and in an amazing turn, they might actually let house prices fall.

Grim Housing Choice: Help Today’s Owners or Future Ones

By DAVID STREITFELD

Published: September 5, 2010

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Eager to avoid? Every policy rolled out over the last 3 years from the plethora of Bailouts and False Hopes to the Federal Reserves manipulation of interest rates has been designed to keep inflated house prices high. All of these policies force future buyers to pay for the mistakes of bubble buyers.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

This is not shifting any benefit to future homeowners. If house prices fall, it merely levels the playing field. Prior to the housing bubble, debt-to-income ratios were reasonable in most of the country, and allowing house prices to crash merely restores the previous order.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.

The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

Caught in the middle is an administration that gambled on a recovery that is not happening.

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

I find those revelations troubling and shocking. First, a rising economy was never going to solve the "housing problem." First, the problem with housing is that prices are too high. The problem isn't a lack of demand, or foreclosures or anything else it has been made out to be. The problem has always been that prices were inflated beyond any reasonable valuation metric, and prices needed to fall.

People in the administration guiding housing policy are under the impression that house prices are temporarily depressed and that putting people back to work will bring buyers to the market that will pay higher prices. That isn't going to happen. Even if we had full employment, prices would still have to fall because they are still too high for current incomes. Unemployment is not the primary problem. Unemployment makes the problem acute, and it causes other related economic problems, but the root of it all is that house prices are just too high.

I am shocked the administration does not see this basic fact. Every policy they have unveiled has only served to prolong the misery because the guiding principal — keeping house prices high — is antithetical to the problem. Their solutions all have one thing in common; they make the problem worse. This is an undeniable fact.

That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.

The housing market is not slumping. Do you see the faulty mindset at work here? These people actually believe house prices are too low. They fail to see that house prices were in a bubble and rather than being in a "slump," house prices remain too high.

Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.

Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.

Let's hope the political capital for further meddling in the housing market has already been spent.

“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.

Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success.

If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.

Builders are in even worse shape. Sales of new homes are lower than in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.

The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.

“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.

Ivy Zelman is the author of the Option ARM reset chart we have seen so much of. She has consistently been right about the housing bubble.

Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”

That is the simple truth. Artificially high prices discriminates against renters who would like to buy. Low interest rates offset some of this problem, but payment affordability is no substitute for lower prices.

A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.

We are facing a tsunami of accelerated defaults. Far too many people are holding on because they have the same delusions as the government. Once they realize that prices are rolling over and they aren't coming back any time soon, many more struggling loan owners will accelerate their defaults and home prices will be crushed. As for those that were duped into buying over the last few years because they believed in the stability of the market, well… shame on the government, and shame on the NAr for peddling this lie. Every person Shevy and I have talked to over the last year and a half has been told that lower prices are a real possibility if not a near certainty.

The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.

Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials concede, the credit quality of the borrowers was too low.

The strongest argument I can make for inflation ahead is the fact that the government now backs most of the housing market. With the US taxpayer on the hook, a decline of 20%-30% is unlikely. The government will tell the Federal Reserve to crank up the printing press and force prices higher by stealing from savers through devaluing our currency. If they print enough money, they can make wages go up and stabilize house prices. Of course, this will have a whole host of negative consequences, but with the enormous liability the US government now has with our backstops of the mortgage market, I see inflation as inevitable, particularly if house prices start to really slide.

With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances.

Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data from the research firm CoreLogic.

“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”

This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors.

I am embarrassed for consultants and economists that make foolish statements like that one. Borrowers will stay away until it becomes cheaper to own than to rent, then they will buy. It is really that simple. The kool aid intoxicated pay attention to price movement and momentum, but many buyers look at their current cashflow and determine that it is less expensive to own, so they buy to save money. That is what always puts a stable bottom in home prices.

Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.

William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption,” as well as increase housing prices.

The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus.

Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.

“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.

If the builders and the realtors give up on stimulus, then no coherent voice is calling for it. Under those circumstances, nothing will be done.

That might give the Obama administration permission to take the risk of doing nothing.

Take the risk of doing nothing? OMG! Doing nothing is the cure to the problem! I can't believe the insanity that has gripped our policy makers. The mental disease of the housing bubble persists like a malignant tumor.

Thoughtless or reckless?

In the post HELOC Abuse Grading System, I describe some of the distinctions between borrower behavior:

The top of the range of D graded HELOC abusers is the limit of each borrowers self delusion when it comes to how much appreciation they feel comfortable spending without losing their homes. People who earn a D still planned to keep their homes, they were merely misguided by their own ignorance and the incessant Siren's Song of kool aid intoxication. These are the sheeple; like the rats St. Patrick cast into the sea, each borrower followed the Piper to their underwater mortgage and a watery foreclosure.

Most of the HELOC abuse posts I have done have been Grade E abusers because they are entertaining. When someone borrows and spends a $1,000,000, it is dramatic, and as an outside observer, you have to wonder what they spent all that money on.

Somewhere beyond the limit of self delusion, a borrower makes another psychological leap, they no longer worry about the consequences of their actions and they spend, spend, spend. This grading category spans the continuum from thoughtless spending to foolish and reckless spending where the borrower exercises no restraint at all.

HELOC abusers who get an E had to make an effort to spend. It takes time and effort to really spend beyond ones means one small transaction at a time. How many dinners out, trips to Vegas and other indulgences does it take to consume $1,000,000? I don't know, but grade E abusers try to find out.

In my opinion, the owners of today's featured property earn an E. They don't seem to have given much thought to their spending. It's hard to see how you can spend so much money and really believe your house was going to pay for it.

But was it reckless? Was their spending restrained and calculated in any way, or was it out of control? I will let you decide.

• This property was purchased on 6/4/2001 for $395,000. The owners used a $355,500 first mortgage and a $39,500 down payment (10%).
• On 12/27/2001 they obtained a HELOC for $34,000 and had access to their down payment.
• On 9/18/2002 they refinanced the first mortgage for $384,000.
• On 11/4/2002 they opened a HELOC for $45,000.
• On 12/8/2003 they got a $480,000 first mortgage and a $60,000 HELOC.
• On 7/14/2004 they refinanced again with a $586,000 first mortgage and a $71,000 HELOC.
• On 5/11/2005 they got a $568,000 first mortgage and a $151,000 HELOC.
• On 8/25/2006, the obtained a stand-alone second for $165,400 right at the peak and maximized their mortgage equity withdrawal. Through periodic refinancing, they managed to obtain every penny of appreciation the moment it appeared, and they left nothing in the walls. The bank bought this property via bad loans right at the peak.
• Total property debt is $733,400.
• Total mortgage equity withdrawal is $377,900.
• They have been squatting about 20 months now.

Foreclosure Record

Recording Date: 08/19/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/14/2009

Document Type: Notice of Default

I don't know how we could make kool aid any stronger than that. There are thousands of families out there like this one that extracted nearly $400,000 out of their homes and spent it. Then we allowed them to squat for a couple of years. With benefits like that — or at least the lure of potential benefits like that — it is no wonder that everyone in California wants to own a home and consider themselves a land baron or real estate investment genius.

Irvine Home Address … 14691 FIR Ave Irvine, CA 92606

Resale Home Price … $615,000

Home Purchase Price … $395,000

Home Purchase Date …. 6/4/2001

Net Gain (Loss) ………. $183,100

Percent Change ………. 46.4%

Annual Appreciation … 4.5%

Cost of Ownership

————————————————-

$615,000 ………. Asking Price

$123,000 ………. 20% Down Conventional

4.34% …………… Mortgage Interest Rate

$492,000 ………. 30-Year Mortgage

$117,948 ………. Income Requirement

$2,446 ………. Monthly Mortgage Payment

$533 ………. Property Tax

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

$51 ………. Homeowners Insurance

$43 ………. Homeowners Association Fees

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

$3,074 ………. Monthly Cash Outlays

-$405 ………. Tax Savings (% of Interest and Property Tax)

-$667 ………. Equity Hidden in Payment

$194 ………. Lost Income to Down Payment (net of taxes)

$77 ………. Maintenance and Replacement Reserves

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

$2,273 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,150 ………. Furnishing and Move In @1%

$6,150 ………. Closing Costs @1%

$4,920 ………… Interest Points @1% of Loan

$123,000 ………. Down Payment

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

$140,220 ………. Total Cash Costs

$34,800 ………… Emergency Cash Reserves

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

$175,020 ………. Total Savings Needed

Property Details for 14691 FIR Ave Irvine, CA 92606

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,095 sq ft

($294 / sq ft)

Lot Size: 5,000 sq ft

Year Built: 1972

Days on Market: 7

Listing Updated: 40423

MLS Number: I10092718

Property Type: Single Family, Residential

Community: Walnut

Tract: 0

——————————————————————————

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

Upgraded home in the highly desirable College Park Community. Upgrades include remodeled kitchen with granite counter tops & stainless steel appliance, double paned windows and sliders, remodeled bathrooms with travertine tile. Master bedroom features 2 large walk-in closets, upgraded bath with double sink and balcony. One bedroom and 3/4 bath downstairs. Front yard features a large gated courtyard with a gas fire pit and water fountain. Professionally landscaped backyard with tons of hardscape. Community amenities include Pool and Park. Walking distance to school and conveniently located close to shops and freeways.

With all these fabulous upgrades — the word upgraded or upgrades appears 3 times — why don't we have any interior pictures?

Foreclosures are still not keeping pace with delinquencies as shadow inventory continues to grow.

Irvine Home Address … 26 RUSTLING WIND Irvine, CA 92612

Resale Home Price …… $689,000

Where, oh where, are you tonight?

Why did you leave me here all alone?

I searched the world over, and I thought I'd found true love,

You met another, and PFFT! You was gone!

Hee Haw — PFFT! You Was Gone!

Decline in foreclosures likely to be temporary

By Frank Ahrens

Washington Post Staff Writer

Friday, August 27, 2010

Foreclosures and late payments on home mortgages dropped slightly in the second quarter of this year, but sustained high unemployment and a stalled economic recovery could make the improvement short-lived.

This news story misses the broader point. The foreclosures are not primarily a result of unemployment. Sure, unemployment has pushed many loan owners over the edge, but huge distress in the mortgage markets was going to create a huge number of delinquencies and foreclosures regardless of what happened with the economy or employment. We are witnessing the collapse of a massive Ponzi Scheme, and as long as the toxic debt remains, any decline in foreclosures is likely to be temporary.

US real estate foreclosures fall marginally but mortgage delinquencies increase to bring more gloom

Monday, 30 August 2010

As financial experts warn that falling property prices in the US could affect economic output and create a double dip recession there is more mixed news for the country’s real estate sector.

Although figures shows that the number of foreclosures decreased nationally in the second quarter of 2010 compared to the first three months, mortgage delinquencies increased, suggesting that foreclosures could rise again by the next quarter.

A key point buried and lost in the article above is that delinquencies are back on the rise.

The delinquency rate for a prime adjustable rate mortgage (ARM) increased 47 basis points to 9.3% while the rate for a fixed rate mortgage (FRM) increased 8bps to 4.75%, according to the latest figures from the Mortgage Bankers Association.

This can no longer be spun as a subprime problem. Almost 10% of prime ARMs are delinqent. That is an astonishingly high number. And 4.75% of fixed-rate mortgages are delinquent, another very high number, unprecedented by historic measures.

Foreclosures for both types of mortgage loans remained relatively flat quarter on quarter, ARMs dropping only 4 basis points to 3.92% and FRMs increasing 1 basis point to 1.11%.

But for subprime mortgages, ARM delinquency rates jumped 114bps points to 30.9% and foreclosures fell 113bps to 10.6%. Subprime FRMs followed a similar, less drastic, trend, with delinquencies climbing 56bps to 22.5% and foreclosures falling 24bps to 4.8%.

Those subprime numbers are horrendous. Of course, we are used to that, and they will likely get worse. Very few subprime borrowers will sustain ownership before this mess is cleaned up.

Mississippi had the highest delinquency rate at 13.7% and Nevada had the highest foreclosure rate at 2.9%.

And the latest figures from the Lender Processing Services index shows that almost 900,000 loans that were current at the beginning of the year were at least 60 days delinquent or in foreclosure as of July.

Almost a million loan owners gave up this year. We haven't foreclosed on that many homes. Not just haven't we tackled the backlog, we haven't been keeping up with the new additions to shadow inventory. Anyone who thinks this problem is near resolution is really deluding themselves.

Although delinquency volume fell 2.3% month on month in July to 9.3%, it remains near historically elevated levels and record high numbers of delinquent loans are still entering the system, according to LPS. The volume of delinquencies increased 1.4% year on year, the report also shows.

The length of time these loans are staying in the foreclosure process is increasing as well. The average number of days a loan spends delinquent before it is finally forecloses reached 469 days in July, about a year and three months. In July of last year, the average was 351, more than three months shorter.

The total amount of loans in the foreclosure inventory passed 2 million in July, a 3.5% increase from a year ago, and 2.1% more than the previous month. The amount of foreclosures making it to REO status is picking up after diving earlier in the year. LPS reported nearly 100,000 REO properties in July.

The foreclosure inventory described above as 2 million homes is the visible inventory, loan owners that have received a foreclosure notice. The shadow inventory is several million more.

The bottom line is that delinquencies are far exceeding foreclosures. At some point, foreclosures must exceed delinquencies, and the foreclosures must be pushed through the system. We have many, many more foreclosures to come.

Put your cash in, take your cash out

The owners of today's featured property win the hokey-pokey award. They put in a large down payment, then proceeded to withdraw all of it and then some. I hope the huge down payment was not a gift from parents. If it was, I can't imagine the parents are too thrilled to see how this couple wasted all that money.

• The property was purchased on 7/22/2002 for $540,000. The owners used a $270,000 first mortgage and a $270,000 down payment. They put 50% down.
• On 5/11/2004 they refinanced with a $333,700 first mortgage.
• On 6/29/2004 they obtained a $230,000 HELOC.
• On 5/3/2007 they refinanced with a $700,000 first mortgage.
• Total property debt is $700,000.
• Total mortgage equity withdrawal is $430,000 including their down payment.
• Total squatting time is only about 7 months so far.

Foreclosure Record

Recording Date: 08/11/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/10/2010

Document Type: Notice of Default

How do you put $270,000 down then go on a massive MEW binge? At first, they looked very prudent, but then they behaved like the worst of HELOC abusers. Very strange.

Irvine Home Address … 26 RUSTLING WIND Irvine, CA 92612

Resale Home Price … $689,000

Home Purchase Price … $540,000

Home Purchase Date …. 7/22/2002

Net Gain (Loss) ………. $107,660

Percent Change ………. 19.9%

Annual Appreciation … 2.7%

Cost of Ownership

————————————————-

$689,000 ………. Asking Price

$137,800 ………. 20% Down Conventional

4.50% …………… Mortgage Interest Rate

$551,200 ………. 30-Year Mortgage

$134,655 ………. Income Requirement

$2,793 ………. Monthly Mortgage Payment

$597 ………. Property Tax

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

$57 ………. Homeowners Insurance

$400 ………. Homeowners Association Fees

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

$3,847 ………. Monthly Cash Outlays

-$466 ………. Tax Savings (% of Interest and Property Tax)

-$726 ………. Equity Hidden in Payment

$230 ………. Lost Income to Down Payment (net of taxes)

$86 ………. Maintenance and Replacement Reserves

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

$2,971 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,890 ………. Furnishing and Move In @1%

$6,890 ………. Closing Costs @1%

$5,512 ………… Interest Points @1% of Loan

$137,800 ………. Down Payment

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

$157,092 ………. Total Cash Costs

$45,500 ………… Emergency Cash Reserves

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

$202,592 ………. Total Savings Needed

Property Details for 26 RUSTLING WIND Irvine, CA 92612

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,550 sq ft

($270 / sq ft)

Lot Size: n/a

Year Built: 1978

Days on Market: 15

Listing Updated: 40416

MLS Number: F1853776

Property Type: Condominium, Residential

Community: Turtle Rock

Tract: Vt

——————————————————————————

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

Beautifully decorated sweet home in famous Turtle Rock Hills Community. Travertine Floors & Fireplace, Plantation Shutters, Crown Molding, Plastered Ceilings, Custom Built-ins, Recessed Lighting and Casablanca Ceiling Fans. Spacious living room with panoramic views. Walk to award-wining schools including University high, Turtle Rock elementary. Close to Newport Coast, Fashion Island, UCI, and easy access to freeway. Enjoy association pool, spa and Tennis.

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