Government efforts to prop up house prices are in effect mandating unaffordable housing and forcing the next generation to transfer wealth to the current one.

Irvine Home Address … 103 ORANGE BLOSSOM #97 Irvine, CA 92618

Resale Home Price …… $199,900

Just another lesson learned

Wear a scar, a bore repeating

Take a simple fateful turn

Opened up to stop the bleeding

Feeling like you never could

Been the disconnected frying

Hit the vein and struck a nerve

Seeing through a self that's blinding

Nowhere to buy in

Most of us hiding

Alice in Chains — Lessons Learned

The agents of denial seem bent on failing to learn the lessons of the housing bubble, or worse yet, they want to learn the wrong lessons. We are setting up a system where actions have no consequences, money is for the taking, and the bills get passed on to the prudent and law-abiding. All under the watchful eye of our bought-off politicians who will tell us the plundering of our nation's wealth was for our own good.

In my opinion, government has no place in setting market prices. We need regulations to ensure markets are transparent, contracts are enforceable, and our notions of justice are maintained. Even that level of regulation seemed burdensome to many prior to the meltdown of 2008.

Now the same people who wanted free markets and deregulation are looking for government policy to set prices in the housing market through any and all policies necessary. They can't have it both ways.

Affordability is at the heart of the problem. Lower house prices benefit new buyers who will be putting less of their income toward housing or obtaining better housing for their money. Affordable housing benefits the local economy because people have more disposable income they can spend on goods and services. Expensive housing is a drag on the economy that can only be temporarily masked by mortgage equity withdrawal. Contrary to popular belief, appreciation is not income.

Why Does The New York Times Want Government to Make Housing Unaffordable?

May 26, 2011 — Dean Baker

The lead New York Times (NYT) editorial tells readers that it is surprised and upset by the deflating of the housing bubble. It tells us:

“At times, it has looked as if things were improving, like last year’s jump in sales because of a temporary homebuyer’s tax credit or the recent rise in new-home sales from near-record lows. But, over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths.”

Actually no; it never looked like “things were improving” to people who follow the housing market. It looked like the tax credits were temporarily delaying the deflation of the housing bubble. This delay allowed banks and investors to have hundreds of billions of dollars in mortgages, which would be underwater today, taken off their books and replaced by Fannie and Freddie guaranteed loans, through sales or refinancing.

That is exactly what happened. With the previous profits properly privatized and the losses put on the backs of taxpayers and ordinary citizens, banks may have averted the need for nationalization. This policy undoubtedly preserved the bonuses of the idiots who lead us into this disaster. Are you still convinced this was necessary to save the economy? I'm not.

Prices are still close to 10 percent above their trend level, based on either the 100-year long-term trend in house prices or the current price to rent ratio. Neither the NYT, nor anyone else, has provided an explanation as to why we should expect prices to settle above trend.

Dean Baker will have to be forgiven for not reading the astute observations on the IHB. He would find plenty of reasons offered for prices to remain elevated above any measurable historic norm. Some of those reasons are more plausible than others, but as the ongoing decline in prices will attest to, they are all wrong.

It is not clear why the NYT would view any delay in the bubble's deflation as a positive development. People who buy houses at prices that are still inflated by the bubble can anticipate losing money on their house. Does the NYT have some reason for thinking it is good policy to get new homeowners into homes where they can anticipate capital losses.

realtors maneuver buyers into homes where capital losses are likely in order to generate commissions for themselves. They endorse the same failed policies designed to keep prices inflated, partly out of their perceived function as the voice of buyer manipulation, and partly out of a desire to feel less guilty about their previous deceit when they told people to buy during the bubble. To realtors, every problem is solved by more buying at ever-higher prices, affordability be damned.

More generally, high house prices amount to a transfer of societal wealth from people who don't own homes to those who do. Since the latter group is much wealthier on average than the former group, why should it be public policy to promote this sort of upward redistribution of wealth?

Each house that sells for a bubble price represents a current buyer paying off the debts of a previous one. When a new buyer is compelled to overpay by artificially restricted supply, the excess is a direct transfer from the new buyer to the former owner. Since banks are now owners of large amounts of REO, they are happy to join forces with other owners and lobby for policies that promote higher prices and greater indebtedness being passed on to the next generation.

The NYT's failure to seriously think about the housing market demonstrates an extraordinary laziness that prevents it from clearly understanding the policy implications. The economy will have adjust to a situation where prices return to trend levels. This will mean lower consumption. (Isn't this what everyone wants — higher savings?) The lost consumption must be replaced in the short-term by government spending, in the longer term by more net exports. The latter will require a lower dollar. This is all Econ 101.

Lower consumption! The horror of it. What would happen to Orange County if people had to consume less and live within their means? i guess they would have to cancel the Real Housewives of Orange County and bring back Kung Fu.

As far as the housing market, a little clearer thought would get policy to distinguish between markets where the bubble is still deflating (e.g. Seattle, Los Angeles, Boston)

and markets where prices are likely overshooting on the low side (e.g. Los Vegas and Phoenix).

It might make sense to have policies to boost prices in the latter set of cities. It makes no sense to have policies to boost prices in the former.

Sacrilege! Everything possible must be done to preserve Irvine's home prices! If something isn't done to keep coastal California real estate prices inflated, the bank losses are going to be astronomical. Who cares about Las Vegas? They're a lost cause, right?

The common sense nature of Mr. Baker's commentary will not be popular in the inflated housing markets that remain.

Finally, the simplest and cheapest way to help homeowners facing the loss of their home is to give them the right to stay in their house as renters paying the market rent. This requires no taxpayer dollars and no new bureaucracy and would immediately help all the homeowners affected. For these reasons, it is a non-starter in Washington.

The real reason his right-to-rent idea is a non-starter is because it would flatten coastal California, and it would strongly encourage strategic default which would wipe out the banks.

The real answer is to let the process go forward unimpeded. Borrowers who cannot afford their homes will vacate them either through short sale or foreclosure. Many of those people will need to declare bankruptcy and start over. Once all the excess debt has been purged from the system, house prices will be lower, less income will be diverted to debt service, and the economy would improve as people saved money and had more disposable income.

The only problem with the best solution is the pain. Ponzis and loan owners aren't big on austerity, and they seek out bogus government solutions that amount to handouts and support politicians who endorse these bad policies. Ultimately, cooler heads will prevail, and despite the unnecessary diversion of resources to hold back the floodwaters, the market will flow and find it's own course. That's why prices are falling again now.

Left or Right?

I am a left-leaning libertarian who finds myself being pulled in both directions by what I observed in the housing bubble. I have become far more conservative about issues of personal responsibility, yet I have become far more liberal about getting out from under debt through strategic default. Some decry my hypocrisy. So be it. I believe personal responsibility to one's family outweighs one's responsibility to a lender.

I have become far more liberal about economics and regulatory issues. I have lost faith in the workings of unfettered capital markets to avoid Ponzi schemes and cycles of booms and busts, yet I have become far more conservative in what I perceive as sensible solutions for market regulation that take a minimalist approach.

The New York Times article mentioned above is one of the finest examples of empty-headed liberalism I have read in a while. After the author makes his bogus contentions that falling house prices are bad, he follows with this jaw dropper:

Since the problems in housing are not self-curing, a government fix is in order.

What? No. a government fix is not in order. Enforcement of government regulations and an improvement in those regulations is in order, but some makeshift bailout program designed to prop up house prices at the expense of the next generation is a rip off. it's government facilitated theft.

It's the ideal issue for a politician to pander to the middle class. Of course, such a position is giving the bird to renters and future buyers who would benefit from lower prices, but perhaps bailing out the middle class and baby boomers at the expense of their children will help someone get elected.

I hope not. People need to learn their lessons eventually.

Another long term owner that went Ponzi

My records don't go back far enough to say exactly when these owners bought, what they paid, and what they borrowed. However, it looks as if they purchased at the peak of the previous bubble in 1990. If that is accurate, they lost their home to foreclosure from excessive borrowing after 20 years of ownership. Very sad.

My records pick up with a $163,500 first mortgage on 4/1/2003. The bounced back and forth between Washington Mutual and World Savings Bank with various HELOCs until on 5/9/2005 they obtained a new first mortgage for $250,000.

The pinnacle of stupidity was Bank of America that gave them a $20,000 HELOC three months after the final refinance.

Apparently Wells Fargo got the servicing on this loan from World Savings Bank, and since they weren't on the second mortgage, they proceeded with foreclosure.

Foreclosure Record

Recording Date: 08/12/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 05/13/2010

Document Type: Notice of Default

Irvine House Address … 103 ORANGE BLOSSOM #97 Irvine, CA 92618

Resale House Price …… $199,900

House Purchase Price … $186,454

House Purchase Date …. 10/12/2010

Net Gain (Loss) ………. $1,452

Percent Change ………. 0.8%

Annual Appreciation … 10.5%

Cost of House Ownership

————————————————-

$199,900 ………. Asking Price

$6,997 ………. 3.5% Down FHA Financing

4.56% …………… Mortgage Interest Rate

$192,904 ………. 30-Year Mortgage

$42,184 ………. Income Requirement

$0,984 ………. Monthly Mortgage Payment

$173 ………. Property Tax (@1.04%)

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

$42 ………. Homeowners Insurance (@ 0.25%)

$222 ………. Private Mortgage Insurance

$275 ………. Homeowners Association Fees

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

$1,696 ………. Monthly Cash Outlays

$0 ………. Tax Savings (% of Interest and Property Tax)

-$251 ………. Equity Hidden in Payment (Amortization)

$12 ………. Lost Income to Down Payment (net of taxes)

$45 ………. Maintenance and Replacement Reserves

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

$1,502 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$1,999 ………. Furnishing and Move In @1%

$1,999 ………. Closing Costs @1%

$1,929 ………… Interest Points @1% of Loan

$6,997 ………. Down Payment

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

$12,924 ………. Total Cash Costs

$23,000 ………… Emergency Cash Reserves

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

$35,924 ………. Total Savings Needed

Property Details for 103 ORANGE BLOSSOM #97 Irvine, CA 92618

——————————————————————————

Beds: 1

Baths: 1

Sq. Ft.: 819

$244/SF

Property Type: Residential, Condominium

Style: Two Level, Contemporary

View: Creek/Stream

Year Built: 1976

Community: Orangetree

County: Orange

MLS#: P781272

Source: SoCalMLS

Status: Active

——————————————————————————

Amazing price for this Orangetree condo with creek/stream views. Upper level end unit with 1 bedroom + Loft, 1 bath, approx. 819 sq. ft. that has: NEW interior two tone paint. NEW exterior paint. NEW carpet. NEW kitchen counters/sink/faucet. Eating area/living room/kitchen all overlook each other. Neutral colors throughout. Central heat and a/c. Laundry area in kitchen. Vaulted ceilings. No one above you. THIS IS NOT A SHORT SALE. Seller will assist owner occupied buyer with closing cost assistance-Call for details. Come on by and take a look today!

Have a great weekend,

Irvine Renter

The liquidation of bank REO is pushing prices lower. Prices are extraordinarily affordable in Las Vegas as the market there overshoots to the downside. How does that compare to Irvine?

Irvine Home Address … 556 ALBACATE St Henderson, NV 89015

Resale Home Price …… $65,000

To anyone drinking the morning away

The afternoon will prove a mistake

They never will get it right

Now they've got it so low

Ocean Colour Scene — So Low

How low will prices go in Las Vegas? Affordability is no longer a problem, so now it comes down to supply and demand. On the supply side, the behavior of lenders is not helping their own cause. As they continue to release properties to the market for much less than recent comps, the perpetuate the decline that is wiping them out.

Today's featured property is a recent closing of an REO resale in Las Vegas. I discovered this neighborhood while looking at another auction property nearby. The property of interest is in a cluster product neighborhood in a nice part of Henderson, Nevada. All the properties were built in 2005 and sold new in the mid 200s.

We all know prices are falling throughout Las Vegas, but when I saw the comps for this property, I couldn't believe my eyes.

The list of comparables below are all in the cluster neighborhood, and they are arranged in decending order of closing dates. Take a careful look at the sales price in the column second from the right.

If I had looked at these comps last November, I would have estimated the resale value at between $105,000 and $110,000. Further, I would have likely set an initial asking prices of about $114,000 without much fear of a low appraisal forcing me to lower my price to an FHA buyer.

What would possess an asset manager at a bank to let properties go in the mid 60s? There are limited possibilities:

Capitulation may be motivating asset managers to take any deal presented to them. If they have a caseload of thousands, they care less about maximizing recovery and more about processing files. The asset manager could also be incompetent.

Fannie Mae has the Homepath program where they allow owner occupants to bid on properties and sell them at a reduced price. I understand their desire to put owner-occupants back into homes, but when they let them go for 40% under comps, they merely take down the values throughout the neighborhood and dramatically increase the pain for other owners and sellers in the area.

Another possibility is fraud. The listing agent could have submitted comps from properties in another neighborhood to the lender to justify a $65,000 selling price. The lender may have approved this sale without realizing there were model-match properties in the same neighborhood selling for much, much more.

This property was quickly listed on the MLS, but the seller probably realized they were not going to be able to sell the property as it had already been sold twice in the last year. Neither the GSEs or FHA will insure a loan on a property sold three times in a year. Further, if it was purchased through an owner-occupant deal with Homepath, the owner also faced resale restrictions because the GSEs don't want to sell to flippers.

$40,000 in value gone in three months

How would you like to be the next-door neighbor at 555 Albacate St. who paid $105,000 three months before the model-match at 556 Albacate St was sold for $65,000?

House Address … 555 ALBACATE St Henderson, NV 89015

Resale House Price …… $105,000

House Purchase Price … $253,900

House Purchase Date …. 2/28/2005

Net Gain (Loss) ………. ($155,200)

Percent Change ………. -61.1%

Annual Appreciation … -13.9%

Cost of House Ownership

————————————————-

$105,000 ………. Asking Price

$3,675 ………. 3.5% Down FHA Financing

4.56% …………… Mortgage Interest Rate

$101,325 ………. 30-Year Mortgage

$22,158 ………. Income Requirement

$517 ………. Monthly Mortgage Payment

$91 ………. Property Tax (@1.04%)

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

$22 ………. Homeowners Insurance (@ 0.25%)

$117 ………. Private Mortgage Insurance

$41 ………. Homeowners Association Fees

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

$787 ………. Monthly Cash Outlays

$0 ………. Tax Savings (% of Interest and Property Tax)

-$132 ………. Equity Hidden in Payment (Amortization)

$6 ………. Lost Income to Down Payment (net of taxes)

$33 ………. Maintenance and Replacement Reserves

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

$695 ………. Monthly Cost of Ownership

——————————————————————————

GREAT 3 BEDROOM AND 2 AND HALF BATH; WITH CORIAN COUNTERTOP AND UPGRADED MAPLE CABINETS

Based on the cost of ownership and comps to date, the buyer of the above property must have felt they got a good deal last October. It was. At least until the identical property below sold for $40,000 less.

House Address … 556 ALBACATE St Henderson, NV 89015

Resale House Price …… $65,000

House Purchase Price … $268,656

House Purchase Date …. 1/4/2005

Net Gain (Loss) ………. ($207,556)

Percent Change ………. -77.3%

Annual Appreciation … -21.2%

Cost of House Ownership

————————————————-

$65,000 ………. Sale Price

$2,275 ………. 3.5% Down FHA Financing

4.56% …………… Mortgage Interest Rate

$62,725 ………. 30-Year Mortgage

$13,717 ………. Income Requirement

$320 ………. Monthly Mortgage Payment

$56 ………. Property Tax (@1.04%)

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

$14 ………. Homeowners Insurance (@ 0.25%)

$72 ………. Private Mortgage Insurance

$41 ………. Homeowners Association Fees

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

$503 ………. Monthly Cash Outlays

$0 ………. Tax Savings (% of Interest and Property Tax)

-$82 ………. Equity Hidden in Payment (Amortization)

$4 ………. Lost Income to Down Payment (net of taxes)

$28 ………. Maintenance and Replacement Reserves

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

$453 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$0,650 ………. Furnishing and Move In @1%

$0,650 ………. Closing Costs @1%

$0,627 ………… Interest Points @1% of Loan

$2,275 ………. Down Payment

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

$4,202 ………. Total Cash Costs

$11,100 ………… Emergency Cash Reserves

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

$15,302 ………. Total Savings Needed

Property Details for 556 ALBACATE St Henderson, NV 89015

——————————————————————————

Beds: 3

Baths: 2

Sq. Ft.: 1354

$048/SF

Property Type: Single Family Residential, Detached

Year Built: 2005

County: Clark

MLS#: 1071785

Source: GLVAR

Status: Closed

——————————————————————————

Great 3 Bedroom 2 1/2 Bath home with a 2 Car Garage and a nice back yard.

Affordability is the best ever in Las Vegas

Take a look at the cost of ownership and the income requirement for this house. The monthly cash outlays and total cost of ownership are lower than the cheapest rental in all of Las Vegas. Even 1 bedroom apartments in most complexes rent for more than this property costs to own.

Prices are trading at their 1995 levels in Las Vegas, and interest rates are south of 5%. Even back in 1995 when prices were at the same level, interest rates were north of 8%. The cost of home ownership has never been less expensive in Las Vegas than it is today — ever.

Lenders wonder why buyers are sitting on the sidelines, but with liquidation behavior like this and the future REO inventory ballooning, buyers should be worried. This could happen anywhere at any time — including Irvine.

Irvine Comparables

People in Irvine, California, make about 50% more than as workers in Henderson, Nevada. Therefore, it is logical to assume house prices in Irvine for comparable properties should be roughly 50% higher than what people are paying in Henderson. The historic relationship between Orange County and Clark County where Irvine and Henderson are respectively located is shown below.

So what are Irvine comps asking?

$439,900 — 32 Alevera St., 2/2 1,050 SF

$449,000 — 33 Alevera St. 2/2 1,200 SF

$519,900 — 40 Alevera St. 3/2.5 1,500 SF

$525,000 — 8 Sonata St. 3/2.5 1,300 SF

The four properties above are all located in a cluster community in Oak Creek. The properties in Irvine are older, most are smaller than the Las Vegas properties, and two of them have one less bedroom.

The least expensive of these properties if 4 times as expensive as the $105,000 property, and the most expensive comparable is nearly 9 times more expensive than the $65,000 comparable.

Does that seem right to you?

Which is a better investment?

Which is a better place to invest, Irvine or Las Vegas? I am putting my money where my mouth is and investing in Las Vegas. I believe the historic relationship between house prices in the two cities will be restored over time, probably through continued erosion of pricing in Irvine and a rebound in pricing in Las Vegas. Plus, while waiting for prices to revert to the mean, the cashflow in Las Vegas is outstanding while the cashflow in Irvine is breakeven at best.

There is no reason to believe the premium in Irvine doubled in 2009 for any reason other than the housing bubble has not deflated here and it has overshot to the downside in Las Vegas. Despite problems with unemployment, the relationship between wages in the two cities has not changed, and although most readers of this blog find Irvine a more desireable place to live (me included), nothing has made Irvine twice as desirable as it was for the prior 20 years.

Take where you would want to live out of the equation, and ask yourself where you think your investment — combined cashflow and appreciation — has greater upside potential over the next 10 years, Las Vegas or Irvine?

The punishment lenders inflict on strategic defaulters are lighter than most realize, and likely to lessen as lenders need customers in the future.

Irvine Home Address … 65 ESSEX Irvine, CA 92620

Resale Home Price …… $729,000

Trust me,

Believe me,

It's all in the art of stopping

Wire — In the Art of Stopping

There is an art to strategic default. There are many options, and some have stronger consequences than others. Does the borrower want to maintain some lines of credit? Will selectively defaulting on certain debts hurt their credit score more than others? Will strategic defaulters need to declare bankruptcy?

Now that millions have defaulted on their mortgage, we have anecdotal data and research studies on what really happens to those who quit paying. The results will surprise some and inspire many.

Eroding the Fear of Foreclosure: New Research Shows Strategic Defaulters Experience With Post-Foreclosure Credit

Posted on May 12th, 2011

One of the most cited deterrents of deciding whether or not to foreclose or strategically default is the fear of a catastrophic and irreversible hit to one’s credit score, leading to an inability to rent, purchase a new car or home, or open a new credit card. After polling some of our 5,000 clients nationwide, YouWalkAway.com has discovered it’s a fear that may be blown way out of proportion.

Susan Edwards is a client of YouWalkAway.com, a company that walks defaulting homeowners through the foreclosure process. Edwards recently walked away from a property in Southern California. “Prior to missing our first payment, my credit score was 805,” Edwards stated “I checked it again in June after we missed the 5th payment and it was 680. At the time, it was commonly reported that the average foreclosure would lower your credit score about 150 points. I had assumed it would stay in that range for up to 7 years. I was wrong.”

So, what is Edwards credit score now? According to Edwards, after only 3 months following the foreclosure auction of her property, her credit is back up to 734 and climbing. Fortunately, the hit taken to her credit was not nearly as bad as most people, including those who claim to be experts, might have depicted.

If this woman's credit score gets back above 740, there will be no real ramifications for her default. Most lenders don't have a super-duper category for those with FICO scores over 740, so the borrower with a 745 is getting the same rate and the same treatment as someone with an 805.

Edwards is not the only YouWalkAway.com client to see her credit rebound so quickly. New York resident and YouWalkAway.com client Jodi Romanello has walked away from two investment properties in Florida. While she has never closely monitored her credit score, Romanello has yet to see any negative repercussions of a credit drop. “When I first skipped payments on my first foreclosure, CitiBank Diners Club abruptly canceled my card due to ‘undesirable changes in my credit rating,’” Romanello explained. “I got very upset because I hadn’t thought this would happen, but to my enormous relief none of my other cards did this. I have a high limit with American Express Gold, Visa, MasterCard and a lot of store cards, and Amex just renewed my card with an invitation to go Platinum.” Romanello continued to explain how she staved off the negative credit effects of two foreclosures, “I am careful to pay all other bills instantly when I receive them, I run no balances on any cards month over month.”

The key to keeping a high credit score is to selectively default. Some people who strategically default stop paying on all their debts, often as a precursor to bankruptcy. Anyone hopelessly overloaded with debt is probably wise to follow that path. However, for those who can afford to maintain other credit lines, and feel the need to do so, can simply stop paying their mortgage and keep paying everything else.

When I first reported that borrowers were defaulting on their first mortgage and keeping their second mortgages current, I was shocked. I conjectured most borrowers would default on their second mortgage and keep the first mortgage current to prevent a foreclosure because it's unlikely an underwater second would foreclose. That isn't what people are doing.

Most borrowers are defaulting on their first mortgage and keeping other debts current which is helping their credit scores.

According to the study, credit cards, car payments and student loans are the most common forms of additional debt, with personal loans and medical loans rounding out the bottom. Surprisingly, only 23% of those surveyed have ever defaulted on any other debts. Many YouWalkAway.com clients have never even had a late payment on their record prior to strategically defaulting from a property. Although, 91% of underwater homeowners surveyed are facing other debts in addition to their mortgage, YouWalkAway.com has seen these recurring trends amongst many clients. Those who have handled the foreclosure strategically by closely monitoring their credit and other debt are fairing much better financially after the foreclosure.

Lenders should be thrilled that borrowers can't seem to kick the habit. People want signatory debt, and they would rather walk away from their underwater house than default on their other debts. Personally, I think people should get rid of all their debts and live on the positive side of the financial ledger, but that isn't what most borrowers are doing.

Even borrowers who opt for a short sale have seen quick restoration of their credit. San Diego Real Estate Broker, Jeff Grant can attest to his credit recovering after a short sale of his investment home which was upside down by more than $200K. “After my own short sale, missing a total of 8 mortgage payments, my credit went from 729 to 679. But it quickly recovered to 728 a year and four months later!”

Less than 18 months after a short sale, and his credit score is basically unchanged. Why would anyone fear the credit implications of a short sale?

Following in suite, Wynn Bloch’s house in Palm Springs, CA sold at foreclosure auction in March 2010. As a result of the foreclosure, her credit score fell just 45 points – from 780 to 735. “It didn’t hurt me really at all,” Bloch stated, “In fact, I was foreclosed upon last March and just bought a new house in December!” While it may be unlikely for all defaulting homeowners to purchase a home so quickly, 51% of YouWalkAway.com clients polled do wish to purchase a new home within 5 years.

From foreclosure to homeowner in less than a year. Perhaps lenders should be tougher on these people, but the need for warm bodies to sign a loan document is prompting lenders to forgive and forget.

In reality, many YouWalkAway.com clients are more than happy to shed the excess baggage of their underwater homes and downsize to a rental. Nearly, 100% of clients report saving money by renting, and 52% chose to rent a house smaller than their previous one. Jon Maddux, CEO of YouWalkAway.com explains, “Eighty-one percent of our clients have experienced no issues renting after a foreclosure or short sale. Only, 18% were asked to provide a slightly larger deposit.”

As Susan Edwards shares, “I love being at our new house. I can imagine my dogs in the yard and our family sitting at the table for Thanksgiving. Funny,” she continues, “but I’m more excited for [my new rental] than I was when we bought this house. It really is a new beginning for us.”

Renting is a huge relief to people escaping a huge mortgage payment. Home is where the heart is, it doesn't require a big loan.

Edwards, Romanello and Bloch are not exceptions to the rule or lucky strategic defaulters who have fallen through the credit reporting cracks. They are living proof that if homeowners continue to keep on top of other debts and their credit scores, they can rebound much faster than initially predicted.

Maddux continues, “There has been a lot of misinformation regarding the effects foreclosure has on one’s credit. More often than not, it is those who have an agenda to deter homeowners from walking away who use scare tactic phrases such as, ‘Foreclosure will destroy or decimate your credit.’

That is exactly why lenders try to foster the perception that default will be harmful. It's only harmful to those who want to use credit, and apparently it isn't very harmful to those who want to get another home loan.

Due to the nature of how credit scoring works, I prefer to describe the effects of foreclosure as wounding one’s credit. Blemishes will heal on their own as long as one continues to keep other lines of credit current. Seeing it first hand with our own YouWalkAway.com clients, a homeowner’s credit will improve over time as the delinquent payments move further into the past.” …

Lenders want to keep the millions who would benefit from strategic default in a state of fear and confusion to compel the borrowers to keep paying. They would prefer to publicly endorse borrowers most macabre fantasies of strategic default while quietly soliciting new customers behind the scenes. Prior to the blog era, they might have been successful.

Study: Mortgage-only defaulters may be safe credit risks

By Julie Schmit, USA TODAY

People who default on their mortgages — but no other debts — are not as risky as expected, according to a new study from credit monitor TransUnion.

TransUnion's research shows that those who only default on mortgages are less likely to then default later on new car loans or credit cards than are people who default on mortgages and at least one other debt at the same time.

The study results, to be released Tuesday, also show that mortgage-only defaulters saw credit scores rebound faster than people who defaulted on multiple loans, which could include people who went bankrupt.

The mortgage-only defaulters “are less risky than they appear,” says Steve Chaouki, TransUnion vice president. “Lenders will want to lend to these people in the future.”

There you have it. The already light punishments for strategic default will be lessened even more in the future, provided the strategic defaulter is calculated and selective in their default.

TransUnion, like other credit-management firms, is seeking insight into mortgage-only defaulters, who could prove to be a big market for lenders. In the past five years, almost 4 million U.S. homes have been lost to foreclosure, says market researcher RealtyTrac. A chunk of those were “strategic defaults,” in which homeowners who could afford to pay their mortgages walked because home values had tanked so much.

FICO, keeper of the widely used FICO credit score, last month released one of the first credit studies on strategic defaulters and found them to be savvy about credit, with better credit histories than other mortgage defaulters.

As with FICO, TransUnion did its study — “Life After Foreclosure” — after enough people had defaulted and results could be considered valid.

TransUnion's research should diminish expectations that mortgage-only defaulters will join the ranks of habitual defaulters, Chaouki says.

Fear of being lumped in with the riff-raff is largely what prevents many with good credit for defaulting. Information like this will likely push many off the fence and into a new rental.

For instance, 5.8% of mortgage-only defaulters examined in the study were at least 60 days delinquent on new car loans which were opened after they defaulted on their mortgages. But 13.1% of the multiple defaulters were at least 60 days delinquent. The mortgage-only defaulters also had lower 60-day delinquency rates for credit cards, 11.4% vs. 27.1%. Both measures were taken at least 120 days after mortgage defaults.

Credit scores for mortgage-only defaulters bounced back quicker, TransUnion also found. For instance, consumers with Vantage credit scores — a competitor to FICO scores — in the 631 to 650 range saw their scores rise a median 8 points 12 to 17 months after defaulting on mortgages. People in the same credit score range with multiple defaults saw their credit score drop by 2 points. Vantage scores range from 501 to 990. …

People considering strategic default who wish to maintain their credit use should default only on their primary mortgage. The punishments aren't that bad, and they are likely to be lessened as time goes on.

Although, there are some consequences….

What did they need $650,000 for?

The owner's of today's featured property were solid borrowers who paid down their mortgage through the entire housing bubble when all their neighbors were borrowing money and spending like drunken sailors. But then in the summer of 2007, they obtained a $650,000 stand-alone second from a private party.

The owners who show a pattern of HELOC abuse simply spent the money as if they had earned it, but these rare cases where borrowers have large private loans, something unusual happened. Based on what the property records show, they used this HELOC to leverage themselves into a much larger home.

Before the property crash, people used to sell their properties before moving up. Perhaps they wanted to keep this one as a rental, or perhaps they didn't want to sell it for less than its peak value. In either case, they now have a massive debt on this property to go along with the $1,104,614 debt they have on their new property. With over $800,000 in debt on this property, it isn't cashflow positive.

Basically, they leveraged their modest down payment on today's featured property into two properties with nearly $1.9M in debt between them. For their sakes, I hope they either make a great deal of money or Irvine real estate starts going up.

Irvine House Address … 65 ESSEX Irvine, CA 92620

Resale House Price …… $729,000

House Purchase Price … $322,000

House Purchase Date …. 7/24/1998

Net Gain (Loss) ………. $363,260

Percent Change ………. 112.8%

Annual Appreciation … 6.3%

Cost of House Ownership

————————————————-

$729,000 ………. Asking Price

$145,800 ………. 20% Down Conventional

4.56% …………… Mortgage Interest Rate

$583,200 ………. 30-Year Mortgage

$127,535 ………. Income Requirement

$2,976 ………. Monthly Mortgage Payment

$632 ………. Property Tax (@1.04%)

$150 ………. Special Taxes and Levies (Mello Roos)

$152 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$165 ………. Homeowners Association Fees

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

$4,074 ………. Monthly Cash Outlays

-$498 ………. Tax Savings (% of Interest and Property Tax)

-$760 ………. Equity Hidden in Payment (Amortization)

$248 ………. Lost Income to Down Payment (net of taxes)

$111 ………. Maintenance and Replacement Reserves

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

$3,175 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,290 ………. Furnishing and Move In @1%

$7,290 ………. Closing Costs @1%

$5,832 ………… Interest Points @1% of Loan

$145,800 ………. Down Payment

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

$166,212 ………. Total Cash Costs

$48,600 ………… Emergency Cash Reserves

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

$214,812 ………. Total Savings Needed

Property Details for 65 ESSEX Irvine, CA 92620

——————————————————————————

Beds: 4

Baths: 4

Sq. Ft.: 2500

$292/SF

Property Type: Residential, Single Family

Style: Two Level, Craftsman

View: Trees/Woods

Year Built: 1998

Community: Northwood

County: Orange

MLS#: S658156

Source: SoCalMLS

Status: Active

——————————————————————————

* * * FANTASTIC LOCATION IN AWARD WINNING NORTHWOOD POINTE * * * 4 bedrooms plus an office in almost 2,500 square feet, 3.5 bathrooms, 2 car attached direct access garage, large and private yard, upgrades include wood floors, custom paint, newer carpet, custom built-ins, ceiling fans. Located less than 100 yards to award winning schools, meadowood Swimking Cnter, Citrusglen Tennis Center, Hicks canyon Hiking Trail and easy access to freeways, shopping and recreation.

Banks attempts to manage MLS inventory have resulted in an enormous REO inventory and an even larger shadow inventory of future REO. Banks will need to sell, but buyers won't have to buy.

Irvine Home Address … 1902 CRESCENT OAK Irvine, CA 92618

Resale Home Price …… $264,900

So let’s try one last time

So we never forget

This is still worth fighting

Still worth fighting for

It’s gone on

For too long

And this is it

My Darkest Days — Still Worth Fighting For

Affordable housing is no longer part of the American Dream. Lenders have usurped the American Dream by forcing everyone to take on huge debts to get an education, a car, and a house.

How many among us were debt-free at 25, 30, 35 or 40? Lenders assail teenagers with credit card offers knowing their parents will pick up the tab. They burden students with college loans that will take an entire career to pay off. By the time most graduate, they are so burdened with debt that they cannot save money to buy a car or a house, so they take on even more debt just to get by.

Now that lenders have inflated a massive housing bubble with even more debt, they pushed millions of people into insolvency where their only hope is strategic default on their mortgages and bankruptcy. As a result, they now have an abundance of homes they can't sell because the over-indebted population cannot afford them. Yet they hold onto these homes at inflated prices to force the next generation of buyers to play along.

As Marie Antoinette would say, “Let them eat house.”

Banks Amass Glut of Homes, Chilling Sales

By ERIC DASH — Published: May 22, 2011

EL MIRAGE, Ariz. — The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

Calculated Risk has added some clarification to the RealtyTrac numbers in a recent post:

I pointed out that the RealtyTrac estimate of 872,000 REO (lender Real Estate Owned) was probably too high, and I also noted that there are approximately 2.25 million homes currently in the foreclosure process. There are another 1.8 million homes with the borrower more than 90 days delinquent – so there is more to come. …

First, the F's (Fannie, Freddie and the FHA) will probably foreclose on close to 500 thousand homes this year since they are picking up the pace. So they will also sell 500+ thousand homes this year – they sold 110,000 in Q1 alone.

But notice that modifications and short sales are twice the number of foreclosures. So if the F's foreclose and sell 500 thousand homes, they might modify/short sell another 1,000,000 (this is mostly modifications, and of course short sales are distressed sales too, but they usually sell for more than REO).

If we add in the PLS and banks and thrifts, the lenders will probably make significant progress on delinquencies this year (and again in 2012). Of course some of the modifications will redefault and end up as REO too, but I just wanted to make sure everyone knows that all of these properties won't end up as REO.

They don't all have to end up as REO to either pummel prices or hold prevent appreciation for several years. There is a very simple dynamic of sales in play: banks need to sell and buyers don't need to buy.

The reason markets capitulate is because sellers give up waiting for the prices they want and liquidate for whatever they can get. Real estate owned inflicts carrying costs and maintenance expenses on banks of about 1.5% each month without providing any income. The more REO a bank has, the more it costs them each month. A lender holding out for top dollar may go broke before the market recovers, assuming they aren't too big to fail.

Since each lender has a different financial strength and different beliefs about the future of pricing, some lenders will sell now even though prices are low and their losses will be large. Each bank that liquidates keeps prices down while they sell and makes the other banks wait longer if they want to get their wishing prices.

Eventually, years go by with banks bleeding cash with no end in sight, and lenders get motivated to liquidate and get what capital they can. When lenders become motivated to liquidate, that is capitulation. It's the same dynamic for individuals who hold cashflow negative properties that are underwater. At some point, most figure out it is pointless to throw bad money after bad, so they cut their losses through strategic default. Lenders don't strategically default, they merely sell REO for whatever they can get, lobby for a bailout, and move on.

Back to the NY Times Article:

Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.

“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”

The double dip was the last gasp of denial market bulls had left. With house prices tunneling to new lows five years after the market peaked, many who held out hope that 2011 and 2012 might help them with their capital recovery are now facing the reality that it will take a very long time to get back to the peak. With carrying costs of 1.5% per month, capitulation becomes a more viable option than waiting with hopes of recovery later, particularly with the GSEs liquidating their inventory.

Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.

Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one.

Before the housing implosion, the inflow and outflow figures were typically one-to-one.

There is not light at the end of the tunnel. As long as they are taking on many more houses than they liquidate, they fall further behind.

The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm.

The reasons for the backlog all can be reduced to the desire of lenders to keep prices up. The numerous delays were not holding back banks eager to process foreclosures. Each delay had a cover story such as robo-signer, but the reality is that lenders simply don't want to flood the MLS with properties and recreate Las Vegas in every housing market in the country.

“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”

If I were an asset manager from Washington Mutual during the bubble, I would be hiding my head in shame rather than using that as a credibility booster in a news article. His comments are accurate though.

A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings.

But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once.

There is a price point where anything will sell. If prices are low enough to attract cashflow investors, they will buy even in a declining market because the cashflow is so rewarding. Prices won't fall to zero, and the activity of cashflow investors is usually the buying interest that causes markets to bottom.

Lenders have also been more willing to let distressed borrowers sidestep foreclosure by selling homes for a loss. That has accelerated the pace of sales in the area and even caused prices to slowly rise in the last two months, but realty agents worry about all the distressed homes that are coming down the pike.

“My biggest fear right now is that the supply has been artificially restricted,” said Jayson Meyerovitz, a local broker. “They can’t just sit there forever. If so many houses hit the market, what is going to happen then?”

Prices will go down. What else could happen? Low prices aren't a bad thing, particularly for today's buyers. realtors seem to forget that for each unhappy seller, there is often a very happy buyer.

Back when lenders began restricting inventory realtors cheered the move. Now that buyers know this inventory is out there and buyer motivation is at a low because of it, realtors are suddenly concerned about the problem. Perhaps realtors believed they could overcome the inventory problem with brute force of bullshit. Unfortunately for them, buyers aren't that stupid.

The major lenders say they are not deliberately holding back any foreclosed homes.

What? I would like to read a quote from someone at a major bank who actually stated that transparent lie. I have profiled many properties on this blog that were bought by the bank a year earlier and finally made their way onto the MLS.

They say that a long sales process can stigmatize a property and ratchet up maintenance and other costs. But they also do not want to unload properties in a fire sale.

“If we are out there undercutting prices, we are contributing to the downward spiral in market values,” said Eric Will, who oversees distressed home sales for Freddie Mac. “We want to make sure we are helping stabilize communities.”

Stabilize communities? Give me a break. They want to maximize recovery at the expense of today's buyers. If they could get everyone to sign on for massive loans with 50% DTIs, they would do it in a moment if it got them out of their mess.

If they really wanted to stabilize communities, they would firesale their homes, and give Americans affordable housing. Imagine a society where we weren't putting 30% or more of our income toward debt service on housing. Wouldn't that free up a great deal of money for stimulating the economy? Of course it would.

The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days — and that’s after the 400 days it takes for lenders to foreclose.

Why does it take so long to sell REO? Any property can be sold in 90 days if they just reduce the price.

After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months.

Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.

“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”

Lenient with renters? I feel better knowing the banks have decided to treat the renting subclass with a fraction of the respect they give the deadbeats who squat in their properties for years without making any payments. If banks are conscious of their images, they have completely failed to capture the hearts and minds of the people.

Every loan owner who gets the boot will hate the bank for life, and any renter who gets evicted by a bank because the landlord was a deadbeat will similarly hate the bank for life. Further, everyone who realizes the banks are stealing their money through government bailouts will also hate the banks for life. So who exactly thinks positively of banks these days?

Realty agents and buyers say the lenders are simply overwhelmed. Just as lenders were ill-prepared to handle the flood of foreclosures, they do not have the staff and infrastructure to manage and sell this much property.

Most of the major lenders outsourced almost every part of the process, be it sales or repairs. Some agents complain that lender-owned home listings are routinely out of date, that properties are overpriced by as much as 10 percent, and that lenders take days or longer to accept an offer.

It shouldn't be too surprising that REO departments are understaffed and inefficient. Who at the bank is going to get kudos for spending a lot of money to accelerate their loss recognition? Of course, lenders would be better off if they quickly resolved their REO and get what's left of their capital back. But they won't see it that way.

The silver lining for home lenders, however, is that the number of new foreclosures and recent borrowers falling behind on their payments by three months or longer is shrinking.

“If they are able to manage through the next 12 to 18 months,” said Mr. Zandi, the Moody’s Analytics economist, “they will be in really good shape.”

In really good shape? Wishful thinking.

The liquidation phase of the Great Housing Bubble will persist for years. Even if banks begin liquidation in earnest and accept whatever happens to house prices, it will still take three to five years before the REO is gone. Since the banks seem determined not to capitulate, it will likely take another decade before the liquidation is complete. Buyers can sit on the sidelines longer than lenders can remain solvent.

Bought at the peak with 100% financing

The bank unknowingly bought this property at the peak for full asking price. They provided a borrower all the money to obtain this property and thereby took on all the risk in the event of a price decline. With an asking price that represents a 42% loss after commissions, this REO is going to cost the lender plenty.

Irvine House Address … 1902 CRESCENT OAK Irvine, CA 92618

Resale House Price …… $264,900

House Purchase Price … $435,000

House Purchase Date …. 5/11/2006

Net Gain (Loss) ………. ($185,994)

Percent Change ………. -42.8%

Annual Appreciation … -9.3%

Cost of House Ownership

————————————————-

$264,900 ………. Asking Price

$9,272 ………. 3.5% Down FHA Financing

4.56% …………… Mortgage Interest Rate

$255,628 ………. 30-Year Mortgage

$55,901 ………. Income Requirement

$1,304 ………. Monthly Mortgage Payment

$230 ………. Property Tax (@1.04%)

$100 ………. Special Taxes and Levies (Mello Roos)

$55 ………. Homeowners Insurance (@ 0.25%)

$294 ………. Private Mortgage Insurance

$239 ………. Homeowners Association Fees

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

$2,222 ………. Monthly Cash Outlays

-$120 ………. Tax Savings (% of Interest and Property Tax)

-$333 ………. Equity Hidden in Payment (Amortization)

$16 ………. Lost Income to Down Payment (net of taxes)

$53 ………. Maintenance and Replacement Reserves

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

$1,838 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,649 ………. Furnishing and Move In @1%

$2,649 ………. Closing Costs @1%

$2,556 ………… Interest Points @1% of Loan

$9,272 ………. Down Payment

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

$17,126 ………. Total Cash Costs

$28,100 ………… Emergency Cash Reserves

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

$45,226 ………. Total Savings Needed

Property Details for 1902 CRESCENT OAK Irvine, CA 92618

——————————————————————————

Beds: 1

Baths: 2

Sq. Ft.: 900

$294/SF

Property Type: Residential, Condominium

Style: 3+ Levels, Contemporary

Year Built: 1999

Community: 0

County: Orange

MLS#: P781874

Source: SoCalMLS

Status: Active

——————————————————————————

Nice Irvine Townhouse located in Oak Park community. Great location near the swimming pool. 1 Bedroom, 1.5 Bath, plus attached 2 car tandem garage. Master suite has walk in closet and vaulted ceilings. Oak Park is a gated community with 2 swimming pools, clubhouse and spa. Close to shopping center and restaurants.

The NAr released its spin concerning the very poor sales numbers in April. As expected, their words are mostly self-serving bullshit.

Irvine Home Address … 1 GOLDFINCH Irvine, CA 92603

Resale Home Price …… $2,988,500

Stop right there. That's exactly where I lost it.

See that line. Well I never should have crossed it.

Stop right there. Well I never should have said

That it's the very moment that

I wish that I could take back.

I'm sorry for the person I became.

I'm sorry that it took so long for me to change.

I'm ready to be sure I never become that way again

'cause who I am hates who I've been.

Who I am hates who I've been.

Relient K — Who I Am Hates Who I've Been

One of the most life-changing spiritual lessons I have learned (and continue to relearn) is to constantly raise my standards. For example, when I look back on the quality of my daily posts on the IHB, I have consistently raised my standards for accuracy, completeness, and consistency. I work diligently to improve the reader experience by simultaneously educating and entertaining.

I have done many things in my past that I am not proud of. I don't spend much energy beating myself up or feeling self loathing. Instead I raise my standards and change my ways. I am in no position to judge anyone. On this blog, I try to point out the foolishness of people's actions, not to single myself out as being any better (I am not), but to enlighten readers to the errors in thinking bubble era people made so we can all learn from these mistakes and avoid them in our own lives.

The housing bubble was about human frailty not the operations of some unaccountable system. Changing the system is only part of the solution. If people fail to recognize the poor reasoning, faulty assumptions, and incorrect understandings that drove them to their own demise, they will repeat those mistakes and so will others who follow their lead.

The National Association of realtors has gone down the wrong path. They are lost in a mire of their own bullshit, and the only way out is a radical change. I will not be that agent of change as I won't soil myself to join their organization, but at some point, an internal movement may arise where some members say enough is enough and demand the organization stop their dishonorable practices. Who they become may hate who they were.

NAr disrespects its customers

Since Barry Ritholtz post on How to Read National Association of Realtors News Release, I have been contemplating the utter disrespect the NAr demonstrates for its customers through its constant manipulation of data for the sole purpose of convincing buyers to act even if it isn't in the buyers best interest to do so. It angers me that such a corrupt and self-serving philosophy of business is at the core of the NAr because their actions harm so many people.

The NAr doesn't care about its customers. They have no interest in sharing the truth or providing accurate information if such information may cause a buyer not to buy or a seller not to sell. A reasonable deduction from NAr press releases is that they will say anything to generate sales, specifically they want to control buyer psychology.

Spin and bullshit have a purpose. Many people considering buying a home are unsure if the decision is wise, and they look to figures of authority to validate their desires to buy and placate their worries. Unfortunately, realtors are considered experts, so their words carry influence. realtors use this implied authority to their advantage. Therefore, every word that is not data in a NAr press release is designed to positively impact buyer psychology.

Perhaps in an era of steadily rising house prices tethered to incomes, there is little harm in pushing a few wavering buyers into what is often a good purchase. At least that's how realtors comfort themselves. But once realtor induced kool aid intoxication took over, our housing markets became more volatile, and when there is volatility, the market undergoes periods of falling prices when it really isn't a good time to buy.

No part of the realtor business philosophy covers those periods when it isn't a good time to buy. Their spin and bullshit were relatively harmless when fewer people believed it, but in today's volatile housing market, being told when someone shouldn't buy and why is important information — information the NAr is not willing to share even if they were smart enough to figure it out.

Why else would Lawrence Yun have spent the last several years convincing people they should buy homes? He is either incompetent or knowingly complicit in a lie. I assume he is paid well enough to sell his soul.

The specifics of data, spin and bullshit

As a reminder:

Data: Factual statements that present statistics or some measurable phenomenon. Presenting data is ostensibly the reason for a real estate press release. However, the real intention is to spin the data or otherwise manipulate the interpretation.

Spin: The offered interpretation of data that forwards the agenda of the organization issuing the press release. Spin is usually a plausible interpretation that is most often taken out of context, knowingly, by the authors.

Bullshit: An interpretation of data that is either not factual, or the data itself is not factual, or an interpretation that is not plausible based on the data. Bullshit is an obvious lie an organization passes off to a gullible public in hopes that nobody catches on.

With that, let's see what the esteemed National Association of realtors had to say about the dismal market conditions in April.

April Existing-Home Sales Ease

Washington, DC, May 19, 2011

They can't even write a headline without injecting bullshit into it. Notice the word “ease.” Doesn't it sound positive? We were recently told quantitative easing was a good thing (another lie). The Eagles invite us to “Take it Easy.” Professional athletes talk about “easing” into the flow of competition. But what does it mean for sales to ease?

It means sales went down!

Is is reasonable to assume the NAr chose that word to manipulate buyer psychology? Why didn't they say “April Existing-home sales declined?” That is what in fact happened.

Existing-home sales slipped in April, although the market has managed six gains in the past nine months, according to the National Association of Realtors®.

Slipped? Did the market step on a banana peel? And if the market gained in six of the past nine months that means sales declined in three of the last nine.

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, eased 0.8 percent to a seasonally adjusted annual rate of 5.05 million in April from a downwardly revised 5.09 million in March, and are 12.9 percent below a 5.80 million pace in April 2010; sales surged in April and May of 2010 in response to the home buyer tax credit.

Easing and surging? Lawrence Yun should be writing porn. Perhaps next months sales will be throbbing or pulsing? In all likelihood, sales will be limp as the market remains flaccid.

What are the key facts above?

• Existing home sales went down between March and April. That is very unusual and should be a cause for alarm.
• March figures were revised downward because they have set up their reporting to exaggerate current months sales and quietly revise them lower later — another example of their duplicity.
• The homebuyer tax credit pulled demand forward, and both sales and prices have been hurting ever since.

Lawrence Yun, NAR chief economist, said the market is underperforming. “Given the great affordability conditions, job creation and pent-up demand, home sales should be stronger,” he said. “Although existing-home sales are expected to trend up unevenly through next year, unnecessarily tight credit is continuing to restrain the market, along with a steady level of low appraisals that result in contract cancellations.”

The market is underperforming, but the reasons Yun gave are a combination of spin and bullshit. In most markets (not ours) affordability is good, but unemployment is still a huge problem, and pent up demand is nonsense the NAr comes up with when they have nothing else. Desire is not demand.

What does it mean for a market to “trend up unevenly?” Most housing analysts expect the housing market to decline rather uniformly. Nobody outside of the NAr believes we will see any kind of uptrend even or otherwise. This is obviously spin bordering on bullshit.

I recently asked Are home sales slumping because lenders refuse to lend? Apparently, the tight credit meme is circulating in realtor circles. This is likely a precursor to a lobbying push in Washington to get the FHA and the GSEs to take on more risk by lowering their standards — something which would be disastrous for taxpayers but great for NAr commissions in the short term.

A parallel NAR practitioner survey shows 11 percent of realtors® report a contract was cancelled in April from an appraisal coming in below the price negotiated between a buyer and seller, 10 percent had a contract delayed, and 14 percent said a contract was renegotiated to a lower sales price as a result of a low appraisal.

I have run into this problem myself. I recently had a deal in Las Vegas where I obtained a full asking price offer from an FHA buyer for $95,900. Since it is a flip, it required two appraisals. The first came in at $96,000, but the second came in at $91,000. The buyer barely had the down payment, so I had to chose between killing the deal to wiping out two-thirds of the profit. In a declining market, I took the deal and decided to move on.

More conservative appraisals are better for the overall health of the housing market. I don't particularly like paying the price, but conservative appraisals are part of the solution. Every bubble era loan had some appraiser agree with an inflated value. Prices in Las Vegas went up 40% in 2004 alone. That didn't happen because appraisers were doing the right thing.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 4.84 percent in April, unchanged from March; the rate was 5.10 percent in April 2010.

“Although sales are clearly up from the cyclical lows of last summer, home sales are being held back 15 to 20 percent due to the very restrictive loan underwriting standards,” Yun said.

Sales are not up. Earlier in the press release the data said April 2010 had 5.8M sales and April 2011 had 5.05M. Further, summer is not a time when we have cyclical lows. That is pure bullshit that doesn't even pretend to mirror any kind of reality. He finishes with repetition of his earlier spin about restrictive loan standards.

All-cash transactions stood at 31 percent in April, down from a record level of 35 percent in March; they were 26 percent in March 2010; investors account for the bulk of cash purchases.

NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I., said the lending community needs to return to sensible standards. “We want to ensure that qualified buyers will be able to own their property on a sustained basis from a sound credit evaluation, but banks needn’t be so stingy as to only lend to those with the highest credit scores,” he said.

What does a realtor know about underwriting? Isn't restricting credit to those who will pay it back a reasonable reaction to loaning money to so many people who didn't? What he is advocating is a return to subprime lending. It's a low-risk position for him since it isn't his money being loaned to a subprime deadbeat.

“Very high shares of cash purchases, and high credit score requirements, have led to historically low default rates among home buyers over the past two years. This trend implies a gulf is opening between those who can and cannot have access to the American dream of home ownership,” Phipps said. “At the same time, existing guidelines from Freddie Mac and Fannie Mae must be fully implemented so all appraisals are done by valuators with local expertise.”

Default rates over the last two years have not been historically low. By pre-bubble standards, default and delinquency rates are still elevated mostly due to declining prices and ongoing unemployment problems. His reference to implementing existing guidelines is a subtle push for higher appraisals.

Notice the emotional appeal to the American Dream. What he advocates didn't work out well last time.

The national median existing-home price for all housing types was $163,700 in April, which is 5.0 percent below April 2010. Distressed homes – typically sold at a discount of about 20 percent – accounted for 37 percent of sales in April, down from 40 percent in March; they were 33 percent in April 2010.

“Home values, despite month-to-month volatility, have been remarkably stable in the range of $160,000 to $170,000 for the past three years,” Yun said. “Stable home prices in turn will steadily lower loan default rates, including strategic defaults.”

There has been very little month-to-month volatility. Prices rebounded steadily from March 2009 to May 2010 when the government subsidies ran out, and they have been falling steadily ever since.

There is no reason to believe stable home prices will steadily lower default rates. Stable prices probably will prevent additional strategic defaults, but only good jobs and reasonable payments will steadily lower default rates.

Total housing inventory at the end of April increased 9.9 percent to 3.87 million existing homes available for sale, which represents a 9.2-month supply at the current sales pace, up from an 8.3-month supply in March.

I am surprised they didn't inject some spin to take the sting out of that ugly statistic. How is the housing market supposed to recover with a 9.2 month supply of homes on the market?

First-time buyers purchased 36 percent of homes in April, up from 33 percent in March; they were 49 percent in April 2010 when the tax credit was in place. Investors slipped to 20 percent in April from 22 percent of purchase activity in March; they were 15 percent in April 2010. The balance of sales was to repeat buyers, which were 44 percent in April.

As i reported last week in Shadow inventory can not be absorbed by first-time buyers, the homebuyer's tax credit of $8,000 merely pulled forward demand from 2011 into 2010.

Phipps added that proposals and regulations are being considered in Washington that could further constrain the housing market. “One of the most damaging proposals would effectively raise downpayment requirements to 20 percent, which would slam the brakes on the housing market,” he said. “What we need to do is simply return to the sound standards that were in place before the introduction of risky mortgage products.”

Twenty percent down payments would not damage the housing market. Calling the proposal damaging is spin, and claiming it would put the brakes on the housing market is bullshit. If implemented, a 20% down requirement will lower prices and make markets much more stable. Those are good things.

I found it amusing that he concluded with stating that we should return to pre-bubble lending practices. Well, that is 20% down and 30-year fixed-rate mortgages, something he claimed was bad one sentence earlier.

“Our data shows only one out of five first-time buyers needing a mortgage could afford a 20 percent downpayment, and without first-time buyers the trade-up market would stall with very negative consequences for housing and the overall economy,” Phipps said.

It wouldn't surprise me that very few first-time buyers have 20% to put down. When 100% financing became available during the bubble, people stopped saving money for down payments because it was unnecessary. Couple that with a severe recession from the collapse of the housing bubble, and very few buyers have the savings necessary to complete such a large purchase.

“Ironically, low downpayment FHA and VA loans, which are so critical to this segment, have performed well and never needed a taxpayer bailout because those borrowers stayed well within their budgets.” NAr consumer survey data shows 56 percent of entry level buyers in the past year financed with an FHA loan.

The reason FHA and VA loans from the bubble era performed better is because there were so few of them. With subprime lenders giving out copious amounts of free money with little or no documentation, FHA market share dropped from its historic 8% to 10% average to about 2% of the market. Fortunately, FHA and VA did not lower their underwriting standards to compete during the bubble. Unfortunately, they have become the replacement for subprime in the deflation of the bubble, and the losses from strategic default are starting to add up.

We may yet have to bail out the FHA. Insurance premiums have more than doubled on FHA loans in the last 18 months, and it still may be too little too late to prevent a bailout.

Single-family home sales slipped 0.5 percent to a seasonally adjusted annual rate of 4.42 million in April from 4.44 million in March, and are 12.6 percent below the 5.06 million pace in April 2010. The median existing single-family home price was $163,200 in April, which is 5.4 percent below a year ago.

The spin highlighted in the previous sentence is a fact, but its placement near the end of the press release was done to purposefully lessen its impact. Let me help them, SALES AND PRICES ARE DOWN!!!

Existing condominium and co-op sales fell 3.1 percent to a seasonally adjusted annual rate of 630,000 in April from 650,000 in March, and are 15.0 percent below the 741,000-unit level one year ago. The median existing condo price5 was $167,300 in April, down 2.3 percent from April 2010.

Regionally, existing-home sales in the Northeast fell 7.5 percent to an annual pace of 740,000 in April and are 32.1 percent below a year-ago surge. The median price in the Northeast was $225,400, which is 7.3 percent below April 2010.

Existing-home sales in the Midwest rose 5.7 percent in April to a level of 1.12 million but are 16.4 percent below a cyclical peak in April 2010. The median price in the Midwest was $133,200, down 5.1 percent from a year ago.

In the South, existing-home sales declined 1.0 percent to an annual pace of 1.95 million in April and are 9.3 percent below a year ago. The median price in the South was $142,800, which is 4.1 percent lower than April 2010.

Existing-home sales in the West slipped 1.6 percent to an annual level of 1.24 million in April and are 0.8 percent below April 2010. The median price in the West was $203,400, down 6.1 percent from a year ago.

The National Association of realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.

Is the NAr the voice for real estate? I think we can do better. Real estate agents can do better. Barry Ritholtz put it this way last September:

And, buyers have figured out that the NAR news releases are unmitigated fantasy. They have learned that any organization that has to go to such lengths to spin bad news must know that the news is much much worse. The result has been a Real Estate buyers strike.

Here it is, three years after that lame defense of NAR spin, and we can see the damage that spin has wrought. It is readily apparent that the NAR has become counter-productive to the agents they are supposed to be serving.

No, the NAR is not supporting you. They are making your jobs much, much harder. They are spinning the public, and doing you an enormous disservice.

Try Reality^TM! Its what is working these days.

Reality and truth are casualties of a philosophy that believes manipulation by a trusted adviser is acceptable behavior.

How many realtors made representations to clients during the bubble that induced trusting sheeple to buy homes they couldn't afford?

Do realtors feel guilt over their actions? Actions that caused pain and suffering to those who believed it? Aren't realtors responsible for their representations?

I haven't read any remorseful confessions from realtors, and I don't think that's asking too much. Some lenders feel bad about what happened, but realtors don't feel responsible. They should.

Do the rules apply to the high end?

Shevy and I have been telling people not to buy a house unless you plan to hold for at least 3-5 years and perhaps longer because it will take that long for prices to bottom and them appreciate enough to cover the transaction costs.

Apparently, the high end does not need to worry about that. Prices of the best homes just continue to go up 10%+ per year so no matter when people buy, they can always escape with a profit, right? I don't think so.

The owners of today's featured property bought a year ago, and despite continually dropping sales and asking prices, they believe their house has appreciated nearly 10% last year.

Realistically, they are playing the breakeven negotiating gambit where they price it high enough to pay the commissions and lower their price to get out for what they paid. I don't think it is going to work. Do you?

Irvine House Address … 1 GOLDFINCH Irvine, CA 92603

Resale House Price …… $2,988,500

House Purchase Price … $2,600,000

House Purchase Date …. 4/8/2010

Net Gain (Loss) ………. $209,190

Percent Change ………. 8.0%

Annual Appreciation … 12.0%

Cost of House Ownership

————————————————-

$2,988,500 ………. Asking Price

$597,700 ………. 20% Down Conventional

4.56% …………… Mortgage Interest Rate

$2,390,800 ………. 30-Year Mortgage

$522,823 ………. Income Requirement

$12,199 ………. Monthly Mortgage Payment

$2590 ………. Property Tax (@1.04%)

$600 ………. Special Taxes and Levies (Mello Roos)

$623 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$610 ………. Homeowners Association Fees

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

$16,622 ………. Monthly Cash Outlays

-$1789 ………. Tax Savings (% of Interest and Property Tax)

-$3114 ………. Equity Hidden in Payment (Amortization)

$1016 ………. Lost Income to Down Payment (net of taxes)

$394 ………. Maintenance and Replacement Reserves

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

$13,128 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$29,885 ………. Furnishing and Move In @1%

$29,885 ………. Closing Costs @1%

$23,908 ………… Interest Points @1% of Loan

$597,700 ………. Down Payment

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

$681,378 ………. Total Cash Costs

$201,200 ………… Emergency Cash Reserves

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

$882,578 ………. Total Savings Needed

Property Details for 1 GOLDFINCH Irvine, CA 92603

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Beds: 4

Baths: 4

Sq. Ft.: 4510

$663/SF

Property Type: Residential, Single Family

Style: One Level, Tuscan

View: Canyon, Hills, Mountain, Panoramic, Yes

Year Built: 2003

Community: Turtle Rock

County: Orange

MLS#: S658630

Source: SoCalMLS

Status: Active

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Simply gorgeous single story estate with private guest quarters located in the prestigious guard gated community of Shady Canyon Villas. Quality upgrades include granite chef style kitchen with breakfast island, stainless steel appliances, formal dining room, 500 bottle wine closet, rich hardwood and travertine floors, custom paint, coffered ceilings, venetian plaster entry, custom lighting system plus so much more. Professionally landscaped courtyards with romantic fireplaces, outdoor cabana, and endless views to enjoy!