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

Assaulted by bad news, a home debtor has launched a public relations campaign to keep the kool aid flowing.

Irvine Home Address … 13 WINDJAMMER 2 Irvine, CA 92614

Resale Home Price …… $299,000

Some things in life are bad,

They can really make you mad.

Other things just make you swear and curse.

When you're chewing on life's gristle,

Don't grumble, give a wistle!

And this'll help things turn out for the best…

And… always look on the bright side of life!

Monty Python — Always Look on the Bright Side of Life

Defending Home Ownership

By Barry Ritholtz – August 28th, 2010, 10:42AM

Jonathan Miller and I have been kicking around an idea for a “Home ownership is a good thing” OpEd.

Apparently, we aren’t the only ones:

• Five Reasons to Stop Worrying About Your Home’s Value (Moneywatch)

• In Defense of Home Ownership (NYT)

None of these hit the issues and topics that we want to cover — but it is interesting that other folks are thinking along the same lines.

Now, if only I could figure out whether these articles are 1) Contrarian pushback against the dominant RE meme; or b) proof that the bottom is not yet here, as people cling to the hope of a RE recovery.

I'll answer that one for you Barry: it is a sign that people are clinging to the hope of a real estate recovery. We are not yet at the bottom.

Why is sentiment so important?

Why are market collapses signified by changes in consumer sentiment? First, we need to distinguish between deflating market bubbles and market swings causing temporarily low prices. The housing bubble was a bubble; prices became elevated from fundamental values, and they are in the process of correcting back to true value. Prices were not temporarily depressed, they were temporarily elevated. In a bubble scenario, prices do not recover.

When market sentiment is still in denial — like most of California's coastal markets are — people cling to the hope of a recovery that is not going to happen. Stories about the double dip may push the market into fear, but it is nowhere near capitulation and despair like the subprime markets are today. As long as there is the delusion that prime markets are somehow going to avoid the deflation of the bubble, there will be an overhanging supply of sellers waiting for a slight improvement to sell their properties, and the distressed debt in the market remains. As long as there is overhead supply and people holding distressed debt, the market will not recover because each attempt simply brings out more sellers and prices get pushed downward.

An understanding of this market dynamic is the primary concept separating traders from academics. Traders understand this. Academics don't. Since the banks get most of their advice from academics, they will consistently make the wrong decisions, the market will not clear, and prices will grind lower until they capitulate and the inventory is finally gone. As we are witnessing today in Las Vegas, everyone must sell, abandon hope, and feel widespread despair before the market bottoms.

In Defense of Home Ownership

By RON LIEBER

Published: August 27, 2010

It’s hard to read the headlines and not conclude that becoming a homeowner is a terrible idea.

This week, the National Association of Realtors announced that existing-home sales in July had fallen an astounding 25.5 percent from the previous year. Sure, there was a federal tax credit in place last summer. But with single-family home sales at their lowest level since 1995 and unemployment still stubbornly high, home prices may fall further.

In the meantime, millions of homeowners are still far underwater, and government programs to help them have fallen well short of their goals. More foreclosures are coming, casting a deeper shadow over home prices. So it’s hardly surprising that the conventional wisdom says that home values will never again rise faster than inflation.

The truth is that home prices cannot rise faster than inflation unless we are inflating a bubble. The only thing surprising is that reasonable people who understand this are being heard right now. Usually, the bullshit from the NAr and the general level of kool aid intoxication in the media makes more noise.

But as with stocks and the weather, it is dangerous to assume any certainty in the housing market. And by wallowing too much in the misery of others, people looking for a new place to live run the risk of thinking every home purchase will end in regret, at least financially.

Many still could, if they buy in hard-hit areas where prices could fall further.

The problem is that people don't know where prices could fall further. The markets commonly labeled as safe havens are the most at risk whereas the markets labeled as hopeless are at or near the bottom.

But a mortgage is still a form of long-term forced savings, after all. This is more important than ever, since fewer people have access to generous pensions than they did during the last big housing slump. A 401(k) or similar plan is no bargain, either, with its erratic returns and employer matches that come and go as the economic winds shift. Social Security is also likely to be less generous, and Medicare will probably cost more.

Besides, owning a home isn’t just about what shows up on a net worth statement — something that bears repeating after all the “investing” that people thought they were doing when buying homes over the last 10 or 15 years. Many of these more qualitative factors, from living free of a landlord’s whim to having access to a good school district or retirement community, haven’t changed and probably never will.

It is possible, as a homeowner, to make very little money but still buy plenty of happiness. So before you swear off real estate, reconsider a few of the basics.

WORST CASES Some buyers may rue the day in 2010 they bought their homes. They may end up like those who bought in 2006 and have lost their jobs. Now those people face the difficulty of moving to pursue employment elsewhere because they owe much more than their homes are worth.

Marke Hallowell and Allison Firmat, who are getting married next month, are well aware of the history. Yet they plan to put 5 percent or less down, using a fixed-rate mortgage backed by the Federal Housing Administration, once they find a condominium in southern Orange County, Calif. (They’ve already been outbid a few times.)

Ms. Firmat is not working, and Mr. Hallowell is a Web developer. Does he worry about mobility problems or making the payments in the event of a job loss, given that he’s the sole breadwinner? “We’re getting such a good deal on interest rates that we could rent our place out,” he said.

Mr. Hallowell and Ms. Firmat say they believe their approach is conservative, at least compared to what they might have done five years ago.

“Nothing is going to change the rate we will have,” Mr. Hallowell said. “Condos like the ones we’re looking at now were unobtainable in the past, unless we went into something with a total balloon payment. There were times I was tempted, but never seriously.”

Indeed, many people who are buying at the moment are locking in mortgage rates of about 4.5 percent. A year ago, they might have paid 5.25 percent on a $300,000 loan for a monthly payment of about $1,657. Today, you could lock in a lower monthly payment of around $1,520 on a mortgage that size, or you might not need to borrow that much, given that prices have fallen in many areas.

FORCED SAVINGS You may make nothing at all beyond inflation over time on a home, but the part of your mortgage payment that goes toward principal is a form of forced savings.

Sure, you might do better by renting and investing the difference between the rent and the total costs of ownership. But at least three things need to go right.

First, you need to actually save the money. Americans have trouble with that sort of plan. Then, you need an after-tax return that’s better than whatever a home would deliver. That’s a task that might not have gone so well over the last 10 or 12 years, and it involves its own future risk, given how little safer investments are returning now. Finally, you must not raid the savings along the way.

LOL! No HELOC abuse? The problem with the whole forced-savings argument is that it is not forced anymore. Unless you live in Texas where they restrict HELOC use — which is why Texas avoided the bubble — then forced savings requires self discipline. In our Ponzi culture here in Southern California, self-discipline is in short supply.

DIFFICULT LANDLORDS A bank can kick you out only if you don’t pay your mortgage. But landlords can drive you away in any number of ways.

Laura Mapp and her husband, Carl Berg, rented from a relative, but it didn’t go particularly well. They found another landlord they liked, but came back from a holiday trip one year to a note saying he wanted to move in himself. They had a month to scram. (The note came with a bottle of wine, at least.)

In yet another rental, they let their landlord know they were looking to buy and inquired about a month-to-month lease. No problem, their landlord said, as long as they used his boyfriend as their real estate agent.

Earlier this year, the couple gave up on landlords and bought a house in the Highland Park neighborhood in Seattle.

This is another specious argument. Landlords rarely if ever throw out a good tenant. In fact, landlords often won't raise rents for fear of losing a good tenant. This article makes it sound like landlords are a capricious lot that likes to exercise their power to make people move. That idea is rather silly.

Look at it another way: how many people have been evicted by their lendinglords over the last 3 years as compared to the number of capricious landlord evictions? Avoiding a landlord is a great idea, but substituting a landlord for a lendinglord isn't much of an improvement. What people should strive for is to pay off a mortgage so they don't need to worry about a landlord or a lendinglord. Of course, that requires sacrifice, so most people opt to service debt, abuse their HELOCs, and take their chances.

THE NICE PART OF TOWN No matter how pretty the neighborhood, prices may still fall further in places like greater Detroit, Cleveland and Las Vegas; outlying areas of Los Angeles, San Francisco and Phoenix; and much of Florida.

This writer is a safe-haven fool. Detroit and Cleveland won't come back because their economies are a shambles. However, Las Vegas, Phoenix, Riverside County, most of Florida, and the San Francisco suburbs are going to recover, and the low prices there represent buying opportunities. The "nice part of town" hasn't endured its price correction yet, so those markets are in danger.

If you’re looking elsewhere, consult The Times’s rent-versus-buy calculator, halfway down the page at nytimes.com/yourmoney.

Their rent-versus-buy calculator is crap compared to the IHB calculator. Theirs was likely produced by the NAr.

But if you want to live in the Fox Hill Farm development in Glen Mills, Pa., you’ll have to buy because renters are not allowed, said Bob Kuhn, who lives there. The same may be true of other communities for older people.

And there may not be many family-size rentals — or at least any financial edge to be gained by renting — in suburbs or urban neighborhoods with excellent public schools.

This is nonsense and scare tactics. You can rent beautiful properties in the best neighborhoods in Irvine, and right now, those rents are below the cost of ownership. (High-end rental deal of the day: 31 Plumeria)

After many years of building their down-payment fund and a couple of years of watching the listings in the Eagle Rock and Mount Washington areas of Los Angeles, Garret and Alison Williams realized that prices simply were not falling much there.

That is the worst reason to buy.

By the time they were ready to pounce this year, they had a big enough down payment and interest rates had fallen so far that renting didn’t make much financial sense, even if they could have found a rental big enough for them and their two small children.

“Had we rented, we would be paying more than we’re paying for a mortgage,” said Ms. Williams, who had lived in the same two-bedroom rental for 12 years before she and her family moved into their new house in Eagle Rock earlier this month. “I don’t see how we could really regret having made the move when it’s so much better for us on so many levels.”

I question whether or not this family was getting a house equivilent to a rental if prices had not corrected yet. Perhaps their new mortgage payment is lower than rent, but they are moving into an inferior property.

I am bullish on ownership under certain conditions, and first among those is acquiring the property for a price below rental parity. In fact, I can flip from bearish to bullish quickly if prices fall below rental parity. We should start seeing more properties like that soon. I would prefer to purchase at the top of the interest rate cycle and refi on the way down, but that may be years from now, and if prices are below rental parity, I probably will not wait until 2015 for interest rates to hit 7%.

The bottom line is this: absent appreciation in excess of inflation, home ownership is a financial burden. There are emotional benefits to owning, but obtaining these benefits comes at a price. If the price is right, home ownership is wonderful, and if the price is wrong, home ownership can be a crushing weight or ball and chain.

It's worth noting that not everyone thinks our obsession with home ownership is a good thing:

Promoting Homeownership Is Not Only Un-American: It Contributed to the Housing Bubble

Posted on 08/29/10 at 2:53pm by Professor Mark J. Perry

From the Forbes.com article "The Un-American Dream":

"For nearly a century it has been the policy of the U.S. government to increase American homeownership. Its efforts include (but aren't limited to) bouts of easy money from the Fed, the mortgage-interest deduction, the exclusion of capital gains on primary residence sales, direct and indirect subsidies from the Department of Housing and Urban Development, and artificial liquidity pumped into the mortgage market via government sponsored entities Fannie and Freddie.

Policymakers assure us that the next generation of government housing programs will be "carefully designed" (bring on the next five-year plan, Comrade!). But the real question is why the government should be doing anything to promote homeownership.

"I do believe in the American Dream," said President Bush in 2002. "Owning a home is a part of that dream, it just is. Right here in America, if you own your own home, you're realizing the American dream." Bush was echoing a theme that reaches back at least to Herbert Hoover: When the government encourages homeownership, the story goes, it strengthens individuals and communities and thereby fosters the American Dream. They're wrong. A government crusade to promote homeownership is un-American.

America's distinction is that it was the first nation founded on the principle that you have a right to pursue your own happiness without government interference. But the government's homeownership crusade means it gets to decide how you should live, and stick-and-carrot you into living that way.

Here's the real lesson: The American Dream is not some government-subsidized house foisted on you by George W. Bush or Barney Frank. It's the undiluted freedom to decide how you want to live–and, if you want to own a home, it's the freedom to work, save, establish credit, and earn one. In America, the government's job is to protect our freedom to pursue our values, not to dictate what our values are. Its homeownership policy should be the same as its toaster oven policy: laissez-faire.

Government intervention in housing runs deep, and it can't be eliminated overnight. But the government should make its long-term goal to fully extricate itself from the housing market. It can then start gradually dismantling Fannie, Freddie, tax preferences for homeowners, and every other government housing program."

MP: You can add the government's role in promoting fixed-rate 30-year mortgages, and subsidizing FHA mortgages that only require a 3.5% down payment to the list of policies that the government has used to increase homeownership.

The chart above shows how the political promotion of homeownership in the U.S. may have contributed to the housing bubble. The blue line is the quarterly homeownership rate from the Census Bureau (data here) going back to 1991, which went from 64% in the early 1990s to a record high of more than 69% in 2004. During that same time period, the Federal Housing Finance Agency's (FHFA) Home Price Index (data here) doubled from 100 in 1991 to 200 in 2005, before reaching a peak of more than 222 at the height of the real estate bubble in 2007.

In the aftermath of the real estate bubble's crash, the homeownership rate has fallen to a 10-year low of 66.9% (QII 2010) and the FHFA home price has fallen back to 2004 levels. Promoting homeownerhip is not only un-American, but it helped create an unsustainable real estates bubble, which turned the "American dream" into an "American nightmare" for millions of Americans by turning "good renters into terrible homeowners."

Another hard-working condo

Day after day when I look at how much money people took out of their properties, I am astounded. I get the sense these houses worked harder than the people did. It certainly provided many with a substantial side income.

• Today's featured property was purchased on 10/26/1998 for $169,500. The owner used a $161,025 first mortgage and a $8,475 down payment.
• On 8/8/2000 he obtained a stand-alone second for $21,800.
• On 11/13/2001 he refinanced the first mortgage for $210,937, and he got a $33,750 HELOC.
• On 1/14/2003 he refinanced with a $191,250 first mortgage.
• On 9/24/2003 he obtained a $279,000 first mortgage.
• On 11/15/2004 he got a HELOC for $83,000.
• On 1/12/2006 he refinanced the first mortgage for $372,000.
• On 3/8/2006 he obtained a $53,000 HELOC.
• On 6/20/2006 he got a Option ARM for $425,000.
• On 4/2/2007 he refinanced with another Option ARM for $412,000 and obtained a $35,000 HELOC.
• Total property debt is $447,000.
• Total mortgage equity withdrawal is $285,975.
• Total squatting time is 8 months so far, but the NOT has not been filed yet. He has more time coming.

Foreclosure Record

Recording Date: 04/26/2010

Document Type: Notice of Default

Interesting fact: The resale price of this house may end up being less than the previous owner's mortgage equity withdrawal.

Irvine Home Address … 13 WINDJAMMER 2 Irvine, CA 92614

Resale Home Price … $299,000

Home Purchase Price … $169,500

Home Purchase Date …. 10/26/1998

Net Gain (Loss) ………. $111,560

Percent Change ………. 65.8%

Annual Appreciation … 4.8%

Cost of Ownership

————————————————-

$299,000 ………. Asking Price

$10,465 ………. 3.5% Down FHA Financing

4.50% …………… Mortgage Interest Rate

$288,535 ………. 30-Year Mortgage

$58,435 ………. Income Requirement

$1,462 ………. Monthly Mortgage Payment

$259 ………. Property Tax

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

$25 ………. Homeowners Insurance

$316 ………. Homeowners Association Fees

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

$2,062 ………. Monthly Cash Outlays

-$134 ………. Tax Savings (% of Interest and Property Tax)

-$380 ………. Equity Hidden in Payment

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

$37 ………. Maintenance and Replacement Reserves

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

$1,603 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,990 ………. Furnishing and Move In @1%

$2,990 ………. Closing Costs @1%

$2,885 ………… Interest Points @1% of Loan

$10,465 ………. Down Payment

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

$19,330 ………. Total Cash Costs

$24,500 ………… Emergency Cash Reserves

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

$43,830 ………. Total Savings Needed

Property Details for 13 WINDJAMMER 2 Irvine, CA 92614

——————————————————————————

Beds: 2

Baths: 1 full 1 part baths

Home size: 1,125 sq ft

($266 / sq ft)

Lot Size: n/a

Year Built: 1980

Days on Market: 114

Listing Updated: 40417

MLS Number: S617532

Property Type: Condominium, Townhouse, Residential

Community: Woodbridge

Tract: St

——————————————————————————

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

APPROVED SHORT SALE! Charming 2 bed, 1.5 bathroom home in Irvine Somerset tract. Ideal quiet location adjacent to greenbelt and amenities. Tremendous value!