House price supports engineered by policy in Washington are successful in some markets and failures in others.

Irvine Home Address … 27 RESERVE Irvine, CA 92603

Resale Home Price …… $2,900,000

Oh, I get by with a little help from my friends,

Mmm, gonna try with a little help from my friends

Ooh, I get high with a little help from my friends

Beatles — A Little Help From My Friends

in a move to save our banking system, Ben Bernanke and friends took extraordinary efforts to prop up the housing market.

They failed.

The recent double dip in house prices makes it official: the 2009 bottom built on government props was not durable.

Clear Capital® Reports National Double Dip

U.S. home prices double dip as West, South and Northeast regions fall prey to the last grip of winter.

TRUCKEE, CA – May 5, 2011 – Clear Capital (www.clearcapital.com) today released its monthly Home Data Index™ (HDI) Market Report, and reports prices have double dipped nationally 0.7 percent below prior lows experienced in March 2009. This month’s HDI Market Report provides the most current (through April 2011) and relevant analysis of how local markets performed compared to the national trend in home prices.

Report highlights include:

• National quarterly home prices changed -4.9%; while year-over-year national price changes reached -5.0%.
• National home prices have fallen 11.5% over the previous nine-month period, a rate of decline not experienced since 2008.
• In a sign of the continued volatility and fragility of home prices, all the major Metropolitan Statistical Areas (MSA) tracked in this month’s report showed quarter-over-quarter price declines.
• National REO saturation rate reaches 34.5%.

“The latest data through April shows a continued increase in the proportion of distressed sales that are taking hold in markets nationwide,” said Dr. Alex Villacorta, director of research and analytics at Clear Capital. “With more than one-third of national home sales being REO, market prices are being weighed down as many markets have not regained enough footing to withstand the strain of the high proportion of REO sales.

One of the mantras of housing bears over the last four years has been the inventory is coming. Of course the bulls dismissed this argument because the banks withheld the inventory, and it didn't appear on the MLS. Many bulls even denied this inventory exists. The facts are that shadow inventory is real, and banks are attempting to meter out properties to the MLS at a rate that doesn't crash prices. However, they are a cartel, and with prices falling and time passing, the pressure to exit the market is growing, and the cartel is starting to fall apart.

In light of the compounding effects of winter’s seasonal slowdown and increased distressed sale activity, the market now faces the true test of whether prices can rebound in the historically active spring season,” added Villacorta.

As national home prices reached new lows this past winter, hopes remain for a spring revival. Markets have entered uncharted territory, however, as this current home buying season will be the first since 2008 without any tax credit incentive. A note of caution to those looking for a strong end to 2011: The last time no incentives were in place and distressed inventories were this high, home prices fell sharply.

The biggest surprise of this years spring selling season has been the lack of volume and continued price declines. Like most housing analysts, I expected some sort of spring rally. So far, no spring rally has materialized. If sales are weak and prices are dropping in a historically vibrant time of year, what is going to happen this fall?

Areas like Irvine could be particularly hard hit by the fall drop because jumbo loan limits are also falling. Less government support means higher interest costs, lower loan balances, and fewer qualified buyers. Who are the banks going to sell their overpriced houses to?

Home Price and REO Saturation Parallels to 2008

Past market reports have shown periods of stabilization. Movements of home prices certainly have been less dramatic than during the start of the downturn in 2006, and two years of mixed seasonal gains and losses have given the appearance that prices are stabilizing, or at least bouncing along a trough.

This assumption of stabilization also considers the last two years have marked a period of external stimulus in the form of tax credits. As an alternative and cautionary reference, below is a comparison between the housing market from spring 2008, through the end of the year; compared to the post tax credit period of late 2010 through April 2011.

National REO Saturation (2008 to 2011)

Last month's HDI Market Report (released April 7, 2011) noted the subtle but rather ominous trend that distressed sales activity in the West, as a percentage of total sales, had climbed after a prolonged 18-month period of general improvements. Nationally, a similar trend has formed with REO saturation climbing to a current level of 34.5 percent after it declined to near 20 percent in mid-2010. Strikingly similar, 2008 saw REO saturation grow from the near 20 percent early in the year to 32 percent by the end of 2008.

National Home Price Change (2008 to 2011)

Looking at home price trends during these same two periods ties together similarities, with a 15.6 percent price decline for the 2008 timeframe compared to the 11.5 percent decline for the mid-2010 through April 2011 period.

This comparison leads to concern over home price declines through the rest of 2011. The trends of 2008 were quickly reversed with the introduction of stimulus measures. However, home prices today are already down nearly 25 percent since the 2008 period, creating increasing home affordability, in addition to gradually improving employment measures. Unlike the 2008 period where the downward trend ended in the winter, we're now heading into the home buying seasons of spring and summer. Regardless, the housing market still faces many challenges that will only be solved through increased buying activity or a reduction in the distressed segment―neither of which is assured in 2011.

That is a very insightful analysis. Distressed inventory is what pushes prices lower. Banks know this, so they embarked on the amend-extend-pretend policy in 2008, they stopped foreclosing on delinquent borrowers, and they amassed a huge shadow inventory.

Amend-extend-pretend: a different kind of crash

One of the big unknowns of the housing bubble is whether or not the policies of the government designed to prop up house prices will be successful in propping up house prices (it's a flawed policy I hope will fail). To date, the policy has failed miserably in Las Vegas, and it has succeeded in Orange County — so far.

As you can see from the chart above, prices in Clark County, Nevada, where Las Vegas is, have fallen well below historic trendlines. This is the main reason I am very bullish on this market. When prices are 40% below where they should be, the cashflow is excellent.

Since prices fell below their historic trendlines, sales volumes have been up. In fact, sales in Las Vegas currently surpass the rate seen at the bubble peak in 2006.

In Orange County the story is very different.

Orange County house prices have not deflated from their bubble highs, and they are still overvalued by historic norms. Elevated prices and a depleted buyer pool have slowed Orange County sales to historic lows, more than 20% off the long term average and well below the sales rates at the bubble's peak.

The Orange County, California, home price premium over Clark County, Nevada

Orange County commands a house price premium over Clark County in direct proportion to the difference in household income. House prices are ultimately tethered to the incomes of the local population who buy houses, so an Orange County price premium around 2 is expected. It's the times when this ratio is out of whack that are instructive.

The housing bubble of the early 90s was experienced in California but not Nevada, so the premium was stretched to about 2.3. During the crash and foreclosure crisis that followed, Nevada house prices kept going up and California house prices went down. Relative to incomes, Orange County house prices were affordable in the mid 90s.

By 2002 house prices in California had recovered, and the state was busy inflating another housing bubble. In response to low affordability in California and other coastal areas, lenders came up with the Option ARM. This loan became very popular in Nevada and in California, and house prices in both states went to the moon.

When the amend-extend-pretend dance began in earnest, product was withheld from the Orange County market and prices temporarily stabilized, albeit at very low sales volumes. In Clark County, lenders were not successful in managing their inventories, and prices kept falling. As a result, the premium in Orange County has been stretched to extremes.

Realistically, what do you think is going to happen?

Will house prices go up in Las Vegas? Will house prices go down in Orange County? Will we embark on a new era where the Orange County premium is sustained at 3.5 where it's no longer supported by incomes?

Personally, I think we will see all of the above. When the foreclosure inventory is worked off, house prices in Las Vegas will stage a comeback to its historic trendline. Due to the foreclosure inventory, house prices in Orange County will continue to fall. It may be many years before the Orange County premium reverts to it's historic mean, but eventually house prices must equalize with income.

Perhaps Las Vegas will always remain a relative bargain. For local residents that would be a good thing.

All Cash buyers are bailing from the high end

Some small number of foreign cash buyers came to Irvine and bought the bear rally. These less-than savvy investors failed to recognize how inflated house prices were, and they overestimated the support other cash buyers would have on the market. Some of those buyers, like the sellers of today's featured property are bailing out and moving on.

It must be very disheartening to lose nearly $2 million because you bought a house in Irvine four years ago.

Irvine House Address … 27 RESERVE Irvine, CA 92603

Resale House Price …… $2,900,000

House Purchase Price … $4,508,000

House Purchase Date …. 4/27/2007

Net Gain (Loss) ………. ($1,782,000)

Percent Change ………. -39.5%

Annual Appreciation … -10.8%

Cost of House Ownership

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$2,900,000 ………. Asking Price

$580,000 ………. 20% Down Conventional

4.62% …………… Mortgage Interest Rate

$2,320,000 ………. 30-Year Mortgage

$510,904 ………. Income Requirement

$11,921 ………. Monthly Mortgage Payment

$2513 ………. Property Tax (@1.04%)

$567 ………. Special Taxes and Levies (Mello Roos)

$604 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$410 ………. Homeowners Association Fees

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$16,015 ………. Monthly Cash Outlays

-$1782 ………. Tax Savings (% of Interest and Property Tax)

-$2989 ………. Equity Hidden in Payment (Amortization)

$1005 ………. Lost Income to Down Payment (net of taxes)

$382 ………. Maintenance and Replacement Reserves

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$12,632 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$29,000 ………. Furnishing and Move In @1%

$29,000 ………. Closing Costs @1%

$23,200 ………… Interest Points @1% of Loan

$580,000 ………. Down Payment

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$661,200 ………. Total Cash Costs

$193,600 ………… Emergency Cash Reserves

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$854,800 ………. Total Savings Needed

Property Details for 27 RESERVE Irvine, CA 92603

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Beds: 6

Baths: 6

Sq. Ft.: 5600

$518/SF

Property Type: Residential, Single Family

Style: Two Level, Other

View: City, Ocean, Panoramic

Year Built: 2007

Community: Turtle Ridge

County: Orange

MLS#: S657320

Source: SoCalMLS

Status: Active

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Exquisite La Cima estate w/ ocean & city light views. Exclusive guarded gated community. Completely designer upgraded(spent well over $800,000)property. Approx. 5600 sq. ft. 6 BR 6.5 Bath. residence crafted to combine magnificence of the indoors w/ the serenity of the outdoors. Additional master bedroom with bonus living room and kitchen equipped with finest appliances. Exposed sand blasted wood beams in ceilings. Central vaccum system. Elaborate laundry room with extra freezers, phone/internet connedctions. Form crown moldings throughout. Charming courtyard entrance, separate living suite(casita). Custom upgraded kitchen w/ large center island, formal dining room. Excellent surround sound throughout interior and exterior of house. Adjacent to Newport coast. Professional outdoor landscaping, w/ waterfalls & built in BBQ. Great amenities & more!

Why does someone need a freezer in a laundry room?

vaccum? connedctions?