Credit standards are projected to tighten in 2011 because of losses on 2008-2010 mortgages and the ongoing drop in house prices.

Irvine Home Address … 39 EASTMONT 22 Irvine, CA 92604

Resale Home Price …… $347,800

Have you ever been for sale ?

when your isms get smart

oh so selfish and mindless

with that comment in your eye

Hide your face forever

dream and search forever

night and night you feel nothing

there's no way outside of my land

Guano Apes — Open Your Eyes

Government intervention and the amend-extend-pretend dance kept prices higher than if the market crash had been allowed to proceed unimpeded. Las Vegas is clear evidence of how lower prices can create a downward spiral of prices with strategic default ensuring supply problems will continue to pressure pricing. Prices in Las Vegas are below fundamental valuations by any historic measure. The fate of Las Vegas would have been shared by every distressed housing market in the country if lenders had foreclosed and pushed out the squatters.

Most pundits and bank economists agree that the between the government intervention and the bank's stopping foreclosure, a more significant decline in prices would have occurred — and, of course, supporting higher prices is a great thing. I disagree. And not just because I want to see lower price locally.

The markets that were not deflated will continue to see sluggish economic growth because so much of the local populations income is going toward their housing debt. Low house prices in Las Vegas, and even in some California fringe markets will be a huge boom to the local economy — not because prices will go up and people will have more HELOC spending money, but because people will be putting less money toward their mortgages, and they will enjoy a higher quality of life.

Get Ready For Another Housing Crash

Published: Tuesday, 18 Jan 2011 — 11:49 AM ET — By: John Carney

The best evidence that we're headed for a double-dip in housing is the quality of the mortgages during the recent period in which the housing market seemed to improve in many areas.

In the Freddie Mac review of Citigroup’s performing loans that I mentioned earlier today, the portion rated as “Not Acceptable Quality” was as high as 32 percent in the fourth quarter of 2009. While this has obvious implications for the repurchase or “put-back” liability of Citigroup, it also has broader implications for the housing market and the economy.

Keep in mind that the quarter in which Citi was churning out the highest amount of flawed mortgages was supposedly a good time for housing. The median price of previously owned single-family homes in the fourth quarter of 2009 rose in 67, or 44 percent, of the 151 metropolitan areas, according to a survey by the National Association of Realtors. Sixteen of the areas posted double-digit increases. The Case-Schiller numbers for that quarter showed U.S. home prices were trending up in 155 out of 384 metro areas.

Now there have been indications in the past that a mini-housing bubble was being built during that period. The Federal Housing Authority, for instance, was backing some very questionable loans. The home-buyer tax credit was allowing individuals to buy loans with no money down. All the bad practices of the 2005-2007 bubble seemed to be back again.

And now we know that this perception was correct. Mortgage quality had fallen off a cliff. If Citigroup's mortgages were this bad, we can expect the same level of problems at Wells Fargo, Bank of America and every other major US mortgage lender.

What does this mean for housing? It implies that home prices may be due for a another crash, as lenders try to avoid incurring losses from mortgage put-backs by raising credit quality once again. Much of the supposed health of the housing market may have been just another easy money illusion.

We may be able to avoid a crash if the economy improves rapidly enough to take up the slack created by the loose lending. Alternatively, more cheap money flowing from the Fed through the banks and into shoddily underwritten mortgages, could keep the bubble inflating for a while longer (and maybe, fingers crossed, the economy will improve and rescue housing.) And if a crash occurs it will likely not be as severe as the last one, simply because the improvements in the housing market in 2009 and 2010 were modest.

But one thing seems certain: much of the improvement in housing over the last two years was built on easy credit.

You can't build a sustainable market rally on easy credit at artificially low interest rates. You can create a great sucker's rally, but sustained house price appreciation requires income growth and household formation. Both of those are in short supply.

I described the problem this way in The Great Housing Bubble:

In 2007, the financial markets were abuzz with talk of a “credit crunch.” It was portrayed as some unusual and unpredictable outside force like an asteroid impact or a cold winter storm. However, it was not unexpected, and it was not caused by any outside force. The credit crunch began because borrowers were unable to make payments on the loans they were given. When lenders started losing money, they stopped lending money: a credit crunch. …

The massive credit crunch that facilitated the decline of the Great Housing Bubble was a crisis of cashflow insolvency. Basically, people did not have the incomes to consistently make their mortgage payments. This was caused by a combination of exotic loan programs with increasing payments, a deterioration of credit standards allowing debt-to-income ratios well above historic norms, and the systematic practice of fabricating loan applications with phantom income (stated-income or “liar” loans). The problem of cashflow insolvency was very difficult to overcome as borrowing more money would not solve the problem. People needed greater incomes, not greater debt loads.

When more money and debt was created than incomes could support, one of two things needed to happen: either the sum of money needed to shrink to supportable levels (a shrinking money supply is a condition known as deflation,) or the amount of money supported by the available cashflow needed to increase through lower interest rates. Given these two alternatives, the Federal Reserve chose to lower interest rates. The lower interest rates had two effects; first, it did help support the created debt, and second, it created inflationary pressures which further counteracted the deflationary pressures of disappearing debt and declining collateral assets. None of this saved the housing market.

Credit availability moves in cycles of tightening and loosening. Lenders tend to loosen credit guidelines when times are good, and they tend to tighten them when times are bad. This tendency of lenders often exacerbates the growth and contraction of the business cycle. During the decline of the Great Housing Bubble, the contraction of credit certainly played a major role in the decline of house prices. Lenders continued to tighten their standards for extending credit for fear of losing even more money. This meant fewer and fewer people qualified for smaller and smaller loans. This crushed demand for housing and made home prices fall even further.

Homebuyers will see stricter lending policies in 2011

By Kelli Galippo — Jan 17th, 2011

Buying a home will be more difficult in 2011 than in 2010, prompted by new government lending regulations and the newly-enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

In an effort to decrease the chances of an encore performance of the Great Recession, new federal legislation requires lenders to maintain at least 5% of the credit risk on the mortgages they originate. This retention of risk, instead of bundling the loans and selling 100% of them to the secondary mortgage market, eliminates this disastrous practice.

Wishful thinking to believe making banks hold some risk will totally eliminate bad loans. It is a step forward from the pure origination model.

What these risk-retention changes mean for the homebuyer is that securing a mortgage will be more difficult going into 2011 compared to the relaxed years of the mid-2000s. Mortgage lenders will now be less inclined to originate a mortgage for borrowers who pose a risk of default – that is, those who lack a solid employment history and peak FICO scores.

I am shocked! Lenders are going to stop lending to people who won't pay them back. What a concept!

Additionally, Fannie Mae and Freddie Mac will be imposing risk-based mortgage fees, dependent on homebuyers’ credit scores and loan-to-value (LTV) ratios. If the homebuyer is perceived as a risk, the increase in fees may result in thousands of dollars more out of pocket — potentially translating to about $10 extra on every monthly payment for a $200,000 mortgage. Thus, that homebuyer will need to wait a couple of years before buying a home to build up their credit score and save for a larger downpayment.

first tuesday take: The new consumer protection legislation is a double-edged sword. On one hand, lenders will be held accountable for their actions by fresh regulations aimed at defending homebuyers from exposure to unsuitable mortgages – particularly adjustable rate mortgages (ARMs). But in a collective and organized response, lenders have increased mortgage fees and are overreacting by making it more costly for anyone to obtain mortgage funding – for most, a requisite for purchasing a home. [For more information regarding Fannie Mae’s new lending guidelines, see the November 2010 first tuesday article, Fannie’s gift for the holidays: stricter lending guidelines.]

I doubt they are overreacting. They are simply taking prudent measures to mitigate risk, something they didn't even consider doing in 2006.

As brokers and agents adjust to lenders’ self-imposed tighter lending policies, loans will remain plentiful for all with a downpayment in hand, a better FICO score and a permanent job – fundamentals of lender underwriting in any market. The volume of sales transactions will not be affected by these developments.

However, these changes will leave the public believing loans are not available, and thus consumers will hesitate to buy a home. It is incumbent upon brokers and their agents to make potential buyers within their community aware that mortgages are in fact available, and the only issue is getting the lowest rate and fees by shopping at least two or three lenders for pre-approvals. This will cost the prospective homebuyer nothing but time and effort. [For more information regarding mortgage shopping, see the June 2010 first tuesday Form of the Month, A borrower’s mortgage worksheet: who has the most advantageous financing.]

LOL! I imagine many in the real estate community have failed to mention to their clients that financing is available. I rather doubt many buyers are sitting on the sidelines because they don't believe they can get financing.

Attitudes of lenders and consumers going forward will be much different, as both camps assert their influence and fight for favorable regulations. Lenders will not win the early battles, but in the long haul they have the staying power to move regulations in their favor. High-functioning brokers and agents will do their part to ensure their buyers succeed in the new real estate paradigm by guiding them to shop around for the best rates and most advantageous loan terms before signing on the dotted line.

So long as the mortgage rules remain level for all lenders, the competition imposed on them by homebuyers who shop several lenders and then take the best deal will keep mortgage lenders from playing games with the rates and fees they charge. But it is the brokers and agents as gatekeepers that have to gently push and guide their buyers to do the intuitive thing — shop. [For more information regarding the Dodd-Frank Act, see the October 2010 first tuesday Legislative Watch, TILA circa 2010; consumer protection enhancement and Section 32 consumer loans: TILA increases disclosures and tightens parameters; for additional commentary on the prudent practice of shopping around for a mortgage, see the May 2010 first tuesday article, Shop, shop, shop until you drop and the December 2010 first tuesday article, Homebuyers shop around for everything but their mortgage.]

Re: “Would-be homebuyers might encounter obstacles in 2011” from the Sacramento Bee and “Fannie Mae is jacking up mortgage fees” from the LA Times

Credit tightening is the inevitable consequence of bad loans. Credit must continue to tighten until the bad loans stop. That will not happen until borrower indebtedness is under control (less than 31% DTI), and prices fall to ranges affordable by the local populations. Until both of those events occur, lenders will continue to create distressed borrowers who will default either because their DTI is too high or house prices continue to fall.

Appreciation didn't happen

Many purchases at the end of the housing bubble were made purely because prices were going up and lenders were enabling buyers to play an elaborate game of musical chairs with real houses. When the music stops, anyone with a big mortgage and real estate gets wiped out.

The owner of today's featured property bought it at the peak with no money down. It appears they stayed for four years and defaulted last April. The lender wasted no time. These people were foreclosed on as quickly as the system will allow.

Foreclosure Record

Recording Date: 11/01/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 07/27/2010

Document Type: Notice of Default

I believe lenders are playing a form of mortgage roulette. Some delinquent borrowers are singled out each month at random and pushed through the system as quickly as possible. With stories floating around from former owners who did not get a period of squatting, the rest of the herd doesn't know what to do. Are they really going to get 18 months of free rent? What if they only get 7? Is it still worth it to strategically default?

Strategic default is at the root of this problem. Banks know that the squatting they are permitting is enticing those on the fringe to either strategically default or accelerate the inevitable.

By frightening the herd with terrorist tactics, lenders how to keep those on the margin from walking from their mortgage and leaving the bank with low-value real estate.

In this instance, the second mortgage of $97,800 was already wiped out in the December foreclosure. Now the first mortgage holder is going to take their haircut when another $125,000 to $150,000 is lopped off by the real estate crash.

The buyer/borrower only takes a hit to their credit score — that's all they were asked to risk. They had no money in the transaction, except perhaps 4 years where the cost of ownership likely greatly exceeded the cost of a rental. Despite the loss, there is nothing here that would deter this owner from speculating again if given the opportunity.

Irvine Home Address … 39 EASTMONT 22 Irvine, CA 92604

Resale Home Price … $347,800

Home Purchase Price … $454,051

Home Purchase Date …. 12/16/2010

Net Gain (Loss) ………. $(127,119)

Percent Change ………. -28.0%

Annual Appreciation … -149.7%

Cost of Ownership

————————————————-

$347,800 ………. Asking Price

$12,173 ………. 3.5% Down FHA Financing

4.78% …………… Mortgage Interest Rate

$335,627 ………. 30-Year Mortgage

$70,223 ………. Income Requirement

$1,757 ………. Monthly Mortgage Payment

$301 ………. Property Tax

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

$58 ………. Homeowners Insurance

$271 ………. Homeowners Association Fees

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

$2,387 ………. Monthly Cash Outlays

-$287 ………. Tax Savings (% of Interest and Property Tax)

-$420 ………. Equity Hidden in Payment

$22 ………. Lost Income to Down Payment (net of taxes)

$43 ………. Maintenance and Replacement Reserves

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

$1,746 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$3,478 ………. Furnishing and Move In @1%

$3,478 ………. Closing Costs @1%

$3,356 ………… Interest Points @1% of Loan

$12,173 ………. Down Payment

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

$22,485 ………. Total Cash Costs

$26,700 ………… Emergency Cash Reserves

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

$49,185 ………. Total Savings Needed

Property Details for 39 EASTMONT 22 Irvine, CA 92604

——————————————————————————

Beds:: 3

Baths:: 3

Sq. Ft.:: 1220

Property Type:: Residential, Condominium

Style:: Two Level, Contemporary

View:: Park/Green Belt

Year Built:: 1978

Community:: Woodbridge

County:: Orange

MLS#:: P764835

——————————————————————————

Bank Owned Property!!! 3 Bedrooms with over 1200 Sqare feet of living space! Located in the Beautiful Woodbridge Community of Irvine. This unit is located in a quite and private area with fabulous tree lined pathways to your front door! Large fenced rear patio perfect for the warm summer evening BBQ's! Must see property!! Call today For potential Seller financing and incentives!

Government policymakers have gone through heroic efforts to save the housing market. The question is: should they?

Irvine Home Address … 20 AVANZARE Irvine, CA 92606

Resale Home Price …… $599,000

There's nothing left to say

But so much left that I don't know

We never had a choice

This world is too much noise

It takes me under

It takes me under once again

Rise Against — Savior

Should US Taxpayers responsible for every underwater homeowner? Many in government act as if they should, and many in the mainstream media report as if the status quo should be preserved.

It's common at housing blogs to find calls for the government to get out of the housing market. It's rare when you find this sentiment coming from a local newspaper editorial in conservative South Carolina.

Should we work to 'save' housing market?

Source: Herald; Rock Hill, S.C.

Publication date: January 5, 2011

By Thomas Sowell

“Housing Market Setback Forecast,” the newspaper headline said. A recently released report on housing says that home sales are down more than 25 percent and the inventory of unsold homes is about 50 percent higher than it was the same time last year.

This is just one of innumerable stories about the woes of the housing market. We all understand about human beings having woes. But how can a housing market have either setbacks or woes? Moreover, why should politicians be riding to the rescue of the housing market with the taxpayers' money?

Investors lost money. Many of them were homeowners who over-indebted themselves to capture appreciation. That's our daily tale of woe. Politicians are riding to the rescue, not to save the crying masses who lost money on their homes, but to save their large campaign backers in the banking industry. The are raping the US taxpayer because they can.

We hear all sorts of sad stories about people whose homes are “under water” or who are facing foreclosure. But why should our attention be arbitrarily focused on these particular people, rather than on the many other people who would benefit from being able to buy those same houses if the prices came down? The government is artificially keeping the prices up with subsidies and with pressures on lenders to accommodate the current occupants.

Can we not walk and chew gum at the same time? Is our attention span so limited that we can only think about one set of people that the media and the politicians have chosen to highlight?

Hasn't that been the story of the housing bubble from the mainstream media? Renters don't exist. Not like real people who own houses. The interests of renters as a group does not capture the attention of anyone in the mainstream media. The story is rarely told from their point of view.

Do other people count for less just because the media don't put their pictures in the paper or on the TV screen? Or because politicians are ignoring them?

Sometimes we are more concerned about some people because they are especially deserving. But this cannot be said about those who borrowed money to buy homes that they could not afford, or who borrowed against the equity in their homes, and now find that what they owe is more than the home is worth.

If anyone is especially deserving, it is those who had the common sense to avoid taking on bigger financial obligations than they could handle, but who are now expected to pay as taxpayers for other people's irresponsibility.

The circumstance that angers me most from the housing bubble is what has been done to the people who were responsible.

No doubt some people who are facing foreclosures might have been able to continue making their mortgage payments if they had not lost their jobs. But since when were we all guaranteed never to lose our jobs? People used to put money aside “for a rainy day.” But now people who have spent like there are no rainy days are supposed to have the taxpayers pay to give them an umbrella.

Why are so few making more noise about this? Think of the message we are sending everyone. Once Uncle Sam commits to bailing out everyone, what incentive is there to be prudent?

What about the people who saved and put their money in a bank? Those who blithely say that the banks ought to modify the mortgage terms to accommodate people who are behind in making their monthly payments forget that, however “rich” a bank may be, most of its money actually belongs to vast numbers of depositors, most of whom are not rich.

Those depositors deserve to get the best return on their money that supply and demand can offer. Why should people who save be sacrificed for the benefit of those who spent more than they could afford?

When the federal reserve lowers interest rates it diverts money to banks that would have gone to savers. Stealing from the prudent for the greater good, right?

Why are politicians so focused on one set of people, at the expense of other people? Because “saving” one set of people increases the chances of getting those people's votes. Letting supply and demand determine what happens in the housing market gets nobody's votes.

If current occupants are put out of their homes and the prices come down to a level where others can afford to buy those homes, nobody will give politicians credit – or, more to the point, their votes. Nor should they.

Rescuing particular people at the expense of other people produces votes. It also produces dependency on government, which is good for politicians, but bad for society.

That is why politicians give what Adam Smith called “a most unnecessary attention” to things that would sort themselves out better and faster without heavy-handed government intervention.

Why do the media fall in with this arbitrary focus on particular people who are having trouble holding on to homes they cannot afford? Partly because it makes a good story and partly because too many people in the media simply go with the politicians' talking points. That is a lot easier than thinking.

But the rest of us have no excuse for not thinking – or for letting ourselves be stampeded by rhetoric about “saving” the housing market.

Thomas Sowell is a senior fellow at the Hoover Institution. His Web site is www.tsowell.com.

Actually, every homeowner in America has a huge incentive to let politicians do whatever is necessary to save them. Willful ignorance will rule the day. It always does.

The fate of sheeple

I am trying to do more posts on different mortgage situations I find in the property records. The HELOC abuse cases are still the most interesting, but they do not tell the full story of the housing bubble.

A sheeple would be a middle of the road borrower: someone who didn't take out the most exotic terms and who put some money down but less than 20%.

Your typical Irvine sheeple borrower at the top of the bubble was more like today's owners. They bought at the wrong time with the wrong financing, and they are losing their home, their equity, and their credit rating. California real estate is not always a pot of gold.

These owners paid $753.000 on 6/5/2005. They used a $602,400 ARM, a $75,300 HELOC, and a $75,300 down payment. Five and a half years later, and the owners are selling short, and the bank is hoping prices haven't dropped more than 20%. The owner doesn't care anymore.

Foreclosure Record

Recording Date: 11/24/2010

Document Type: Notice of Default

Irvine Home Address … 20 AVANZARE Irvine, CA 92606

Resale Home Price … $599,000

Home Purchase Price … $753,000

Home Purchase Date …. 6/3/05

Net Gain (Loss) ………. $(189,940)

Percent Change ………. -25.2%

Annual Appreciation … -4.0%

Cost of Ownership

————————————————-

$599,000 ………. Asking Price

$119,800 ………. 20% Down Conventional

4.79% …………… Mortgage Interest Rate

$479,200 ………. 30-Year Mortgage

$121,081 ………. Income Requirement

$2,511 ………. Monthly Mortgage Payment

$519 ………. Property Tax

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

$100 ………. Homeowners Insurance

$162 ………. Homeowners Association Fees

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

$3,292 ………. Monthly Cash Outlays

-$426 ………. Tax Savings (% of Interest and Property Tax)

-$598 ………. Equity Hidden in Payment

$219 ………. Lost Income to Down Payment (net of taxes)

$75 ………. Maintenance and Replacement Reserves

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

$2,562 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,990 ………. Furnishing and Move In @1%

$5,990 ………. Closing Costs @1%

$4,792 ………… Interest Points @1% of Loan

$119,800 ………. Down Payment

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

$136,572 ………. Total Cash Costs

$39,200 ………… Emergency Cash Reserves

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

$175,772 ………. Total Savings Needed

Property Details for 20 AVANZARE Irvine, CA 92606

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 1,876 sq ft

($319 / sq ft)

Lot Size: 2,582 sq ft

Year Built: 1996

Days on Market: 210

Listing Updated: 40543

MLS Number: S622739

Property Type: Single Family, Residential

Community: Westpark

Tract: Trovata (Trov)

——————————————————————————

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

Short Sale: Light & bright detached home In desirable Westpark area. This beautiful home has 4 bedrooms, living room, family room & Formal dining room. Kitchen with tile floor, granite counters & breakfast counter. Large master suite w/walk-in closet, shower & large bath tub. Separate laundry room upstairs. Side yard w/patio. Wood floors downstairs, Laminate on stairs/hallway & carpet in bedrooms. Plantation shutters. Washer, dryer & Refrigerator are included. Walking distance to association pool, spa, tennis court & park. Walk to Plaza Vista Elementary school. Very close to shopping center. EZ access to freeway.

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

People will resort to some cooky rituals to make them feel good about living in a foreclosed home.

Irvine Home Address … 51 LAKESHORE 20 Irvine, CA 92604

Resale Home Price …… $499,000

Raven hair and ruby lips

sparks fly from her finger tips

Echoed voices in the night

she's a restless spirit on an endless flight

wooo hooo witchy woman, see how high she flies

wooo hooo witchy woman, she got the moon in her eye

The Eagles — Witchy Woman

Witches are being brought in to spiritually decontaminate foreclosed houses.

The Housing Slump Has Salem On a Witch Hunt Again

Buyers Worried About Bad Vibes From Foreclosed Homes Seek a Cleansing

By S. MITRA KALITA — JANUARY 13, 2011

SALEM, Mass.—There's a certain look and feel to a foreclosed home, and 31 Arbella St. has it: fraying carpet, missing appliances, foam insulation poking through cracked walls.

That doesn't faze buyer Tony Barletta since he plans a gut renovation anyway. It's the bad vibes that bother him.

So two weeks before closing, Mr. Barletta followed witch Lori Bruno and warlock Christian Day through the three-story home. They clanged bells and sprayed holy water, poured kosher salt on doorways and raised iron swords at windows.

It's amazing the silly things both big and small people do in order to feel good about a new purchase. Guys will typically run numbers on spreadsheets to convince themselves they can afford it. Women will imagine each room of the house, where the furniture goes, and whether or not the place gives them a warm and fuzzy feeling. I guess some people feel they need some dude with a broadsword to walk through their house and frighten the ghosts away. Sounds pretty stupid to me.

“Residue, residue, residue is in this house. It has to come out,” shouted Ms. Bruno, a 70-year-old who claims to be a descendant of 16th-century Italian witches. “Lord of fire, lord flame, blessed be thy holy name…All negativity must be gone!”

The foreclosure crisis has helped resurrect an ancient tradition: the house cleansing. Buyers such as Mr. Barletta are turning to witches, psychics, priests and feng shui consultants, among others, to bless or exorcise dwellings.

Normal, middle-class Americans don't go for strange rituals. No, if mainstream people have a problem, they turn to St. Joseph. He will help them out.

Sellers, too, are adopting the trend to help move a property stuck on the market.

In recent months, foreclosure and other distressed sales have represented about a third of all home sales, according to the National Association of Realtors. With so many foreclosures riddling the market, some buyers find that a coat of paint is hardly enough to rid a house of its creepy quotient.

“It's not entities or ghosts that we're dealing with anymore,” says Julie Belmont, a so-called intuitive who works in Orange County, Calif., where 40% of home sales last year were distress sales. “With foreclosures, a lot of it is energy imprints from past discussions, arguments, money problems. All of that is absorbed by the house.”

The Julie Belmont site is an interesting exploration of how some people make a living.

Homeowners of various faiths have turned to different rituals—called house cleansings or space clearings—for centuries. Catholics and Hindus, for example, might ask a priest to bless a new home before moving in. Before their new year, the Chinese cleanse the home to sweep away any bad luck accumulated over the past twelve months.

Ms. Bruno's process pulls from a few methods: Ringing bells, she says, breaks up the negative energy of a place. Iron keeps evil spirits away, says Mr. Day, brandishing a sword across the living room.

Mr. Barletta heard about the pair through his real-estate agent after his offer on the home was accepted. “I'm a spiritual person,” he says. “I just wanted to remove the negative energy first.”

In Salem, the site of the 1692 witch trials, the occult is a part of the everyday, from the high-school sports team known as the Witches to entrepreneurs such as Mr. Day and Ms. Bruno. He owns the Hex Old World Witchery magic shop downtown and she gives psychic readings there.

“It's a very spiritual city,” says Salem real-estate agent Janet Andrews Howcroft.

I think she means to say the city is filled with suckers who can best be appealed to with mumbo jumbo.

But the city's real-estate market hasn't been so charmed. Home prices here fell by about a third in the past two years, according to Ms. Howcroft. And Essex, the county that Salem calls home, had the state's second-highest foreclosure level in October, says the Warren Group, which tracks real-estate data in New England.

Ms. Howcroft attributes recent requests for house blessings in part to the economic picture here. She counted at least eight transactions last year that involved a house cleansing, compared to the occasional request in prior years.

I attribute the recent requests to the last gasp of desperation on the part of loan owners who cannot get the price they need to get out of the hole. When denial is stretched to its breaking point, people can engage in some pretty bizarre behavior. Do any of you remember the bulls in 2006-2008 who used to spam Lanzner's blog with dozens of daily comments to talk up the market?

The house on Arbella Street is under contract for $167,000, and was appraised for nearly double, pending renovations. But, Ms. Bruno cautioned, that bargain comes with a price. She gestured toward an empty room with “Mike, Age 13” scrawled on the wall in child's handwriting. “If someone took your home away, how would you feel?”

Taking her cleansing agent of kosher salt in a bowl of water and lighting a candle, she led the group—including the buyer's agent—up the stairs. Arriving at the upstairs kitchen, gutted of its cabinetry and appliances, Ms. Bruno yelled into the air: “You will not hurt anything I hold dear. I am the exorcist of your garbage!”

LOL! Do I really need to comment?

She is quick to distinguish her services from that of a plain-vanilla psychic. “Unlike psychics, witches know you can change the future,” she explains.

They might be described as good witches. Ms. Bruno, who feels she is well compensated for her readings, doesn't charge for her house cleansings—she's done more than 100, she says. Rather, she considers them to be a form of charity work. “I don't want to live off people's sadness,” she says. Fellow Salem witch Lillee Allee also performs house blessings and, like Ms. Bruno, she doesn't take a fee.

Elsewhere, others are viewing the rituals as a real business opportunity. Austin, Texas-based feng shui consultant Logynn B. Northrhip is teaming up with Scottsdale, Ariz., real-estate agent Jason Goldberg to offer a package of services to create better vibes in a home, either before sale or after purchase. The two met at a yoga retreat.

In Sacramento, Calif., realtor Tamara Dorris also used feng shui to help speed the sale of a property that had been on the market for more than a year. She placed a jade plant, believed to bring good financial luck, in a “prosperity corner” and waited.

“Within two weeks, I had two offers,” she says. “Most homes have at least one or two prosperity flaws. Foreclosed homes have five or six flaws.”

Foreclosed homes only have more flaws is the flipper fails to renovate and fix those flaws.

Sometimes, it's bad feng shui to even attempt to buy a foreclosure. That was Grace Lee's discovery as she toured 30 houses in the San Diego area, her consultant Simona Mainini in tow, to find a new home. In the end, Ms. Mainini just advised her to buy new construction, saying it would save her money on repairs and other troubles in the long run.

“You can keep looking for deals in distressed properties,” Ms. Mainini recalls telling her client. “But they all have an energy that is very weak for money.”

Sorry, Ms. Mainini, but distressed properties are not very weak for money. Although, I suppose they aren't helping the distressed owners much.

Another owner hoping for 10% appreciation last year

I remember when the housing bust first started, it was common to see peak buyers offer their properties for sale at a price that would give them some negotiation room, pay the realtors's commission, and get them out at breakeven. Now that prices are double dipping, we are seeing this behavior all over again.

This owner probably thought she was getting a bargain. The previous owner paid $551,000 back in 2004. He imploded when his Option ARM went bad. She was getting a 20% discount in late 2009. Was it enough?

Irvine Home Address … 51 LAKESHORE 20 Irvine, CA 92604

Resale Home Price … $499,000

Home Purchase Price … $450,000

Home Purchase Date …. 12/22/09

Net Gain (Loss) ………. $19,060

Percent Change ………. 4.2%

Annual Appreciation … 9.6%

Cost of Ownership

————————————————-

$499,000 ………. Asking Price

$17,465 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$481,535 ………. 30-Year Mortgage

$100,867 ………. Income Requirement

$2,524 ………. Monthly Mortgage Payment

$432 ………. Property Tax

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

$83 ………. Homeowners Insurance

$367 ………. Homeowners Association Fees

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

$3,406 ………. Monthly Cash Outlays

-$412 ………. Tax Savings (% of Interest and Property Tax)

-$601 ………. Equity Hidden in Payment

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

$62 ………. Maintenance and Replacement Reserves

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

$2,487 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,990 ………. Furnishing and Move In @1%

$4,990 ………. Closing Costs @1%

$4,815 ………… Interest Points @1% of Loan

$17,465 ………. Down Payment

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

$32,260 ………. Total Cash Costs

$38,100 ………… Emergency Cash Reserves

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

$70,360 ………. Total Savings Needed

Property Details for 51 LAKESHORE 20 Irvine, CA 92604

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Beds: 2

Baths: 2 baths

Home size: 1,610 sq ft

($310 / sq ft)

Lot Size: n/a

Year Built: 1979

Days on Market: 8

Listing Updated: 40553

MLS Number: S643538

Property Type: Condominium, Residential

Community: Woodbridge

Tract: Al

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MODEL PERFECT & HIGHLY UPGRADED SINGLE LEVEL WOODBRIDGE HOME WITHIN STEPS TO THE LAKE! Lake! Lake! Spacious floorplan with lots of windows makes this home very bright and desirable. This spectacular home is maticulously upgraded with the finest materials. WOW! OVER 85k in upgrades!!! Spacious Living room, formal dining room, and the hallway has upgraded with the highest quality hardwood flooring. Large Gourmet kitchen with breakfast nook and garden window has upgraded with stainless steel Samsung refrigerator, dishwasher, microwave, stove, lighting fixtures, and beautiful TRAVERTINE flooring. Recessed lightings, Crown Moldings, LG washer & dryer, 3 tone painting, and designer draperies throughout the home are examples of more upgrades. Beautiful private frontyard, and remodeled large backyard completes the desirability of this home, and make it one of the nicest home in the community.

A recent article in the LA Times expresses opinions of the fates of several key cities where the housing bubble fully burst.

Irvine Home Address … 97 STREAMWOOD Irvine, CA 92620

Resale Home Price …… $209,900

I know you feel these are the worst of times

I do believe it's true

When people lock their doors and hide inside

Rumor has it it's the end of Paradise

But I know, if the world just passed us by

Our memories of yesterday will last a lifetime

We'll take the best, forget the rest

And someday we'll find these are the best of times

These are the best of times

Styx — The Best of Times

When the housing bubble burst, it was the worst of time for loan owners and speculators, and it was the best of times for buyers and cashflow investors. Some cities and regions have dropped precipitously, and to the degree these areas were dependent upon homebuilding and construction is the degree to which they are suffering today. Some of these cities will come back. Some will not.

Housing bust creates new kind of declining city

A study says cities where home prices have fallen the most — including Riverside, San Bernardino and Fresno — could suffer long-term deterioration similar to that of the Rust Belt.

January 06, 2011 — By Alejandro Lazo, Los Angeles Times

In the Inland Empire and other former home-building hot spots, the housing bust has created a new kind of declining city, different from the nation's traditional rusting centers of industry, that could languish for years.

Although the causes of the decline in these metropolitan areas are distinct from the loss of employment from shrinking manufacturing and industry in some of the nation's old industrial powerhouses, these areas could experience fates similar to places such as Cleveland and Detroit, with neighborhoods experiencing high rates of vacancies for a very long time, according to a study to be released Thursday.

“Some neighborhoods are going to suffer tremendously or are never going to come back or come back very, very slowly,” said James R. Follain, senior fellow at the Rockefeller Institute of Government and author of the study published by the Research Institute for Housing America, a division of the Mortgage Bankers Assn.

I wrote about this same phenomenon in Ireland last May: Ghost Estates: Twenty Percent of Ireland’s Houses Are Vacant.

The long-term health of any housing market linked to the local economy. In areas where jobs are scarce and low paying, prices are low. California witnessed wage growth in excess of national norms for many years. This wage growth stimulated household formation and new home construction, and it made house prices go up faster than in other areas of the country. As a result, California home owners believe their house prices are destined to always rise faster than prices anywhere else.

Potential candidates for long-term decline named by the study are the areas hit hardest by the drop in home prices in recent years. They include several inland California metropolitan areas that grew rapidly during the boom, including Stockton, Modesto, Fresno, Riverside and San Bernardino. Las Vegas and Miami also made the list.

Las Vegas house prices will take forever to get back to the peak. Prices there are currently far below fundamental valuations, and some houses in some neighborhoods will need to triple in value to regain their 2006 stature.

Far from being a problem, the low house prices will be a huge boom to the city as workers can take lower paying jobs and live more comfortably than their counterparts in other areas. Timing does matter (a great old read).

A traditional city in decline is one that has suffered a sustained population drop, leaving behind empty houses, apartment buildings, offices and storefronts. Cleveland and Detroit, for instance, suffered from the erosion of manufacturing and the loss of residents, who left in search of jobs.

Instead of eroding a particular industry, however, the housing bust left a glut of homes because of overbuilding and the foreclosure crisis. Follain argues that the future of these cities is threatened in similar ways to that of Rust Belt cities.

“Long-vacant neighborhoods are going to develop, and we can imagine what can happen,” he said, including potentially higher crime and lower property taxes.

In California, some coastal cities already are seeing a housing market recovery. But inland areas that were built on optimistic assumptions of continued population growth and ever-climbing home values are facing a much more difficult recovery.

Any coastal market recovery is an illusion. The coastal markets are still going to get their comeuppance. Every market was subject to optimistic assumptions about house prices. Some markets have crashed and are nearing recovery whereas some markets have not crashed yet.

Celia Chen, a housing economist with Moody's Economy.com, predicts that a full recovery in parts of California, Nevada, Arizona and Florida won't occur until 2030.

“The housing boom elevated home prices in a number of areas far, far above what can be supported by the economic fundamentals, and so prices have fallen significantly, and they will remain below their previous peaks easily for a decade, or even two decades,” Chen said.

Yes, since house prices had no real reason to be so high in 2006, it probably will take until 2030 in some markets for sustained economic growth to bring wages in line with 2006 house prices.

Some experts contend that foreclosures, which have pierced neighborhoods of all income levels throughout the country, are quickly turning developments on the outskirts of metropolitan areas into the nation's newest slums. Complicating any recovery for these beaten-down areas is the difficulty in predicting which neighborhoods will fare worst. That uncertainty could lead to increasing skepticism by buyers and lenders looking to make loans on homes in these areas.

“If you are looking at this from the perspective of a home buyer or a lender, it is one thing to say you are in a market where home prices may drop 10% or 20%.” said Michael Fratantoni, vice president of research and economics with the mortgage bankers group. “That is different from the idea that 80% to 90% of the value could evaporate. That changes the whole nature of the business.”

Changes the whole nature of the business? You mean, there is risk in lending on real estate? Is there risk in buying real estate too?

Many foolishly believed that the very real risks markets face did not exist. Real estate only goes up. You can always refinance. Interest rates always go down. Both borrowers and lenders need to understand this reality if these transactions are going to occur in a stable environment. If nobody believes they have any risk, they behave in ways that inflates bubbles.

Still, the future of these regions remains a point of contention. Economist John Husing argues that the inland regions of California don't have a long-term problem.

“What has driven the Inland Empire economy is, for the last 30 years, simply the fact that the rest of Southern California is completely out of dirt,” Husing said. “Right now the price differential between coastal counties and inland counties is $100,000. People will ultimately respond to that.”

Yes, the substitution effect will stimulate demand in Riverside County and drag Orange County prices lower.

The development of industrial facilities to handle cargo from Southern California's ports will also continue inland because they require lots of space, said Husing, principal of Economics & Politics Inc. in Redlands. Such development, he said, will create jobs for workers who will need housing.

alejandro.lazo@latimes.com

Has the low end appreciated since early 2009?

Housing markets crumble from the bottom up, but they also stabilize from the bottom up too. The people who buy the bottom of the housing ladder at the bottom of the market have equity they can take with them to bid up prices in the next rung of the property ladder. This unit is the bottom of the Irvine property ladder — which actually says a lot for Irvine. If this is the worst Irvine has to offer, things are pretty good here.T

The owner of today's featured property paid $188,000 on 5/18/2009. He is asking enough to pay the realtor plus make 5% or at least give himself some room to negotiate.

Of course, this brilliant plan requires a willing buyer to play along. Is someone going to step forward and pay a higher price for this unit today?

Irvine Home Address … 97 STREAMWOOD Irvine, CA 92620

Resale Home Price … $209,900

Home Purchase Price … $188,000

Home Purchase Date …. 5/18/09

Net Gain (Loss) ………. $9,306

Percent Change ………. 5.0%

Annual Appreciation … 6.3%

Cost of Ownership

————————————————-

$209,900 ………. Asking Price

$7,347 ………. 3.5% Down FHA Financing

4.79% …………… Mortgage Interest Rate

$202,554 ………. 30-Year Mortgage

$42,429 ………. Income Requirement

$1,062 ………. Monthly Mortgage Payment

$182 ………. Property Tax

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

$35 ………. Homeowners Insurance

$242 ………. Homeowners Association Fees

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

$1,520 ………. Monthly Cash Outlays

-$99 ………. Tax Savings (% of Interest and Property Tax)

-$253 ………. Equity Hidden in Payment

$13 ………. Lost Income to Down Payment (net of taxes)

$26 ………. Maintenance and Replacement Reserves

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

$1,208 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,099 ………. Furnishing and Move In @1%

$2,099 ………. Closing Costs @1%

$2,026 ………… Interest Points @1% of Loan

$7,347 ………. Down Payment

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

$13,570 ………. Total Cash Costs

$18,500 ………… Emergency Cash Reserves

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

$32,070 ………. Total Savings Needed

Property Details for 97 STREAMWOOD Irvine, CA 92620

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Beds: 1

Baths: 1 bath

Home size: 639 sq ft

($328 / sq ft)

Lot Size: 690 sq ft

Year Built: 1977

Days on Market: 2

Listing Updated: 40555

MLS Number: S643991

Property Type: Condominium, Residential

Community: Northwood

Tract: Is

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Charming and Peaceful lower end unit, 1 Bedroom, 1 Bath, with Beautiful views from Dining, Kitchen, and Bedroom. The sounds of the creek right outside your windows. Spacious Patio. North facing unit across from laundry and assigned carport with storage. New carpeting and light maple wood laminate floors. Freshly painted. Community Pool, spa, BBq's, tennis courts. Close to award winning schools. Walk to stores and shopping center.