A growing chorus of commenters are recognizing that allowing the free market to work will restore balance to the housing market.

Irvine Home Address … 28 TAQUITZ #36 Irvine, CA 92602

Resale Home Price …… $543,700

Swimming in the deep and trying to keep from turning blue,

Danger, danger, hoping not to drown

(Somebody get me out of here)

Makes me wanna die,

I've got the worst hangover from you

Hey Monday — Hangover

Debt is the hangover from the big housing party of the 00s. Like a cloud of pestilence lingering over the markets, the excessive debts borrowers took on during the bubble are making the decade after a time of suffering and borrower's remorse. Unfortunately, nobody wants to take the foreclosure medicine necessary to clear the air.

Regular readers of the IHB will find no surprises in the op-ed piece that follows, but the clear-headed logic of this writing is difficult to find in the mainstream media.

A free-market fix to the nation's housing hangover

The nation's mortgage hangover is particularly bad in the Golden State. It's time to let the free market fix the problem.

By Nicole Gelinas — July 31, 2011

There's a reason California hasn't seen as much of an economic recovery as some states: It has a serious debt problem.

The nation's mortgage hangover is particularly bad in the Golden State. From 2000 to mid-2006, home prices across the nation doubled, outpacing inflation six times. In the Los Angeles area, things were much more extreme: Home prices nearly tripled. Prices in San Diego and San Francisco beat the nation too. And even though home prices have now plummeted, much of the debt that funded the bubble remains and is still hampering the economy.

The crisis has not affected all states equally. Some parts of the country have a lot of homeowners who owe more than their houses are worth, but they also had far lower home prices at the height of the bubble, so the amount each borrower owes is relatively low. In other places, such as New York, fewer homeowners are “underwater.” But because housing costs are high, these homeowners each owe a lot.

California ranks in the top five of both categories. Nearly a third of California homeowners with mortgages — 2.1 million families — owe more than their homes are worth, according to CoreLogic. And each of those borrowers is underwater by an average of about $93,000.

Only a deep and painful crash with a very slow recovery will purge the kool aid from the California housing market. The devastation here is truly remarkable, and the foolishness of both borrowers and lenders is just as amazing..

This all adds up to $196 billion in dead-weight debt in California that isn't backed by property value. If home prices were to fall by an additional 5% — not an unlikely scenario — that figure would rise to $225 billion.

It isn't hard to see why lenders have embarked on the amend-extend-pretend dance. There isn't enough money in our banking system to recognize the losses in California alone.

To put the numbers in perspective: $200 billion is more than twice the $79 billion in general obligation bond debt that Californians owe. State bonds, though, generally pay for something useful, like road repairs. Dead mortgage debt doesn't pay for anything but a forehead-slapping “what were we thinking?“

LOL! That is one of the best statments of the situation I have read in a while.

Mortgage debt is nothing but a drain on the California economy. This “investment” produces nothing of value, but the flow of funds out of California does serve to reduce demand for goods and services and keep the economy down.

It would cost California's underwater homeowners more than $12 billion annually over 30 years to pay off this debt, even at today's super-low interest rates. That's money that people can't save for retirement or their kids' education, or can't put into businesses to create jobs.

We are now Japan. Banks can't afford the write down the bad debts, so we let them fake it, and borrowers can't afford to pay down the debts without austerity in every other aspect of daily life. The result will be years of poor economic growth caused by weak consumer spending.

No magic wand can make all this debt go away, nor should it. Some people have good reasons for paying debt on bubble-era valuations.

They have reasons, but they aren't necessarily good reasons with basis in reality.

They like their houses, or they think it would be a moral failing to leave.

That is changing. Strategic mortgage default has become common and accepted in 2011.

Maybe they figure house prices will regain bubble-era heights in less time than it would take to repair credit scores after defaulting.

The double-dip will remove this form of denial.

For people who aren't sure, though, it's past time for Washington to stop prolonging the suffering that comes with uncertainty. How? By letting the free market work.

Hallelujah! Fix the Housing Market: Let Home Prices Fall.

Washington has attempted to intervene since the start of the crisis, but the interventions have only prolonged the pain. And elected officials have been reluctant to do the one thing that would make a difference: forcing lenders to accept responsibility for their bad lending practices.

In 2008 Washington relaxed accounting rules which allowed lenders to mark their holdings to fantasy prices. Lenders embarked on the amend-extend-pretend dance and sought ways to shift the losses to taxpayers and the federal reserve.

Take the 2009 home buyer tax credit, which dangled an $8,000 credit to first-time home buyers. The bust had just exposed the consequences of reckless borrowing, so what did Washington do? It encouraged more people to take on debt to buy homes that were still overvalued, and encouraged the banks to fund that indebtedness.

Bear rally buyers paid $30,000 to $40,000 more for properties in order to obtain a $8,000 tax credit. Now these buyers are underwater and trapped in their homes. I advised buyers against purchasing during this time period despite the constant bottom-calling from bulls. Renters who headed my advice are happy today.

And let's look at the Federal Reserve Board's actions. By keeping interest rates at close to zero percent since 2008, the Fed has allowed banks to borrow nearly for free. All that cheap money has kept banks from having to cut their losses by either seizing and selling off properties that are underwater or reducing loan amounts so that people can stay in their homes. Instead, they have strung out their bad loans. But that can't go on forever.

Actually, banks have been writing down their debts slowly and methodically. At the rate they are going, it will take another decade to write down the bad debts unless house prices rise by magic — or brute force of printed money.

Another Washington program, the Home Affordable Modification Program, was supposed to encourage banks to modify loans for underwater homeowners. But the modifications that lenders offered seldom addressed the problem. Many offers involved extending teaser interest rates, or tacking on defaulted amounts to the end of a mortgage's life.

Loan modifications are Option ARMs by another name. We all know how well the Option ARM worked out the first time, so there is little reason to believe loan modification programs will fare any better. The real purpose of these programs is to buy time for the banks and placate voters who want to believe Washington is trying to cure their self-inflicted wounds.

Washington has not used its leverage to push lenders to write down the amount owed. Instead, the biggest beneficiaries of Washington's modification program have been mortgage “servicers,” the folks who handle paperwork for lenders to modify loans.

To see how bizarre the government's strategy is, consider this: Recently, federal regulators exacted a $108-million settlement from Countrywide, once the nation's largest mortgage lender. The money is because Countrywide, now owned by Bank of America, has behaved incompetently, at best, in servicing defaulted mortgages.

Yet over the last year, through the Home Affordable Modification Program, federal taxpayers have spent nearly $132 million in “incentive payments” to Countrywide and its investors and borrowers to reward the company for its superficial mortgage adjustments.

The government is finding any way it can to funnel money to the banks to keep them solvent. This practice will likely continue until banks are solvent again.

The Federal Housing Administration too has done its part to keep the bubble inflated, nearly doubling the size of mortgages eligible for a government-insured lending program, to $729,750, up from $417,000, starting in the fall of 2008.

This move is the only thing which sustained the housing market in coastal California since 2008. There was no jumbo loan market, and without this move, transaction volume would have fallen to near zero, and prices would have crashed hard. Now that the conforming limit is coming down and the jumbo market is at least present, house prices will need to adjust to the new equilibrium of fewer buyers using more expensive financing. With all the squatters in high-end homes who need to be foreclosed on, the coastal markets are the most at risk.

People can put as little as 3.5% down for such loans, meaning that a slim decrease in house prices traps them underwater too.

It's time to end these market-distorting charades. If President Obama won't say so, one of his White House rivals should seize the moment.

No politician is going to enthusiastically embrace lower house prices and the pain that will entail. They have no choice but to allow it to happen, but none of them will encourage it if they want to get elected.

House prices need to find their lows. That would give buyers confidence to jump back in at prices they could afford without sacrificing their futures to debt. To help prices find their new normal,

So far buyers have been willing to sacrifice their futures to debt. It is a way of life in California most believe they can overcome by taking on even more debt.

banks need to modify loans by reducing the amount owed.

No, they don't. No principal reduction program works without serious moral hazard issues.

When that doesn't make sense, banks should foreclose on delinquent owners promptly and legally. The current high number of bad loans in limbo guarantees economic chaos.

Nicole Gelinas is a contributing editor to the Manhattan Institute's City Journal.

Yes, foreclosures are essential to the economic recovery.

A retail flip

The IHB had its beginnings in September of 2006 profiling retail flips gone bad. By early 2007, the flipper who paid retail prices and attempted to sell quickly for a profit disappeared from the market.

Retailing flipping is very hard because it's very difficult to buy a property far enough under value to obtain a margin. It's hard when buying wholesale at the auction.

This is the first retail flip I have seen in over four years. Given the razor thin margins and the double-dip in home prices, I doubt this seller will pull it off.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 28 TAQUITZ #36 Irvine, CA 92602

Resale House Price …… $543,700

Beds: 3

Baths: 3

Sq. Ft.: 1826

$298/SF

Property Type: Residential, Condominium

Style: Two Level, Mediterranean

Year Built: 2002

Community: Northpark

County: Orange

MLS#: P789348

Source: SoCalMLS

Status: Active

On Redfin: 12 days

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* * * REDUCED * * * JUST REMODELED AND UPDATED MONTICELLO 3/3 UNIT IN THE VILLAGE OF NORTHPARK SQUARE. REGULAR SALE!! NO WAITING!!! MOTIVATED SELLER!! GREAT LOCATION. .. NO ONE ABOVE OR BELOW. HAS A ONE BEDROOM AND FULL BATHROOM ON THE MAIN FLOOR. MAIN BATHROOM JUST UPDATED WITH NEW LIGHTS, NEW BRONZE FAUCETS, AND NEW MIRRORS. OPEN AND SPACIOUS KITCHEN WITH CENTER ISLAND, BREAKFAST COUNTER, ALL WITH NEW GRANITE COUNTER TOP, NEW BRONZE FAUCETS, AND ALL NEW STAINLESS APPLIANCES. MASTER BEDROOM BOASTS A SPACIOUS WALK-IN CLOSET AND OVERSIZED SOAKING TUB WITH A SEPARATE SHOWER UNIT, WITH ALL NEW LIGHTS AND BRONZE FAUCETS. FIREPLACE IN THE LIVINGROOM. NEW HARDWOOD/LAMINATE FLOORING. CROWN MOLDING. NEW ELECTRICAL LIGHT FIXTURES. NEW DESIGNER PAINT. 2-CAR ATTACHED GARAGE WITH DRIVEWAY AND DIRECT ACCESS. WALKING DISTANCE TO BECKMAN HIGH. COMMUNITY AMENITIES INCLUDE THREE PARKS, JUNIOR OLYMPIC POOL, BBQ AND PINIC AREAS, BASKETBALL COURT, TOT LOT. .. .

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Proprietary IHB commentary and analysis

Resale Home Price …… $538,800

House Purchase Price … $481,000

House Purchase Date …. 6/27/2011

Net Gain (Loss) ………. $25,472

Percent Change ………. 5.3%

Annual Appreciation … 70.1%

Cost of Home Ownership

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$538,800 ………. Asking Price

$107,760 ………. 20% Down Conventional

4.53% …………… Mortgage Interest Rate

$431,040 ………. 30-Year Mortgage

$93,930 ………. Income Requirement

$2,192 ………. Monthly Mortgage Payment

$467 ………. Property Tax (@1.04%)

$50 ………. Special Taxes and Levies (Mello Roos)

$112 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$294 ………. Homeowners Association Fees

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

$3,115 ………. Monthly Cash Outlays

-$366 ………. Tax Savings (% of Interest and Property Tax)

-$565 ………. Equity Hidden in Payment (Amortization)

$181 ………. Lost Income to Down Payment (net of taxes)

$87 ………. Maintenance and Replacement Reserves

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

$2,453 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$5,388 ………. Furnishing and Move In @1%

$5,388 ………. Closing Costs @1%

$4,310 ………… Interest Points @1% of Loan

$107,760 ………. Down Payment

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$122,846 ………. Total Cash Costs

$37,500 ………… Emergency Cash Reserves

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$160,346 ………. Total Savings Needed

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