Most owners contemplating selling resist the idea in a declining market. Today's post looks at the arguments in favor of selling now as opposed to waiting.

Irvine Home Address … 2 VERNAL Spg Irvine, CA 92603

Resale Home Price …… $3,395,000

Seems like I've been playing your game way too long

Seems the game I've played has made you strong

When the game is over I won't walk out the loser

I know I'll walk out of here again

I know someday I'll walk out of here again

Bruce Springsteen — Trapped

One of the more annoying lies realtors push on wouldbe buyers is “buy now or be priced out forever.” In the Great Housing Bubble, I described it this way:

When prices rise faster than their wages, people can obtain less real estate with their income. The natural fear under these circumstances is to buy whatever is available before there is nothing desirable available in a particular price range. This fear of being priced out causes even more buying which drives prices higher. It becomes a self-fulfilling prophecy. Of course, the National Association of Realtors, the agents of sellers, is keen to exploit this fear to increase transaction volume and increase their own incomes. If empirical evidence of the recent past is confirming the idea that real estate only goes up, the fear of being priced out forever provides added impetus and urgency to the motivation to buy.

Once prices begin to fall, the fear of being priced “out” forever changes to a fear of being priced “in” forever. A buyer who overpaid and over-borrowed will be in a circumstance where they owe more on their mortgage than the property is worth on the open market. They cannot sell because they cannot pay off the mortgage. They become trapped in their homes until prices increase enough to allow a breakeven sale. This puts the conditions in place to reverse the cycle and causes prices to drop precipitously.

Fear is not a good emotion for making clear decisions. Whether that fear is being priced-out or priced-in, it isn't an emotion a realtor should prey on if they truly want their clients to make the best financial decisions. Of course, we all know that realtors often are motivated more by commissions than they are by serving their clients.

The Case for Selling in a Falling Housing Market

Stan Humphries — Apr. 28 2011 – 10:20 am

The problem with the American housing market isn’t that too few of us want to move. We estimate that at least 4 million homeowners would love to sell their home and buy another one that’s bigger, smaller, better located or more affordable.

What’s holding back these “sidelined sellers?” Some can’t sell because they owe more than their homes are worth, of course. But many more are simply paralyzed by the fear of selling and buying again in a falling market. Often at root here is what psychologists and behavioral economists call “loss aversion.” We avoid accepting a grim loss on a current investment, and recent research suggests that we over-estimate the pain associated with a future loss (say, with buying a home that then loses value).

Loss aversion is paralyzing. The phenomenon is most apparent — and most dangerous — in securities trading. With a stock or other traded security, an investor can lose money by doing nothing. Selling for a small loss is often preferable to taking a risk on a very large loss. Most novice traders refuse to take small losses, and they end up allowing a few losers to grow out of control and wipe out their account.

So it’s understandable to want to wait for better days to sell, but—at least when it comes to your house—you’re probably making a mistake.

First, let’s dispense with the idea that better days are coming soon. The consensus among the 100 economists surveyed by Cambridge-based data firm MacroMarkets is that housing prices will slip 1.3% in 2011. That’s far, far too optimistic. At Zillow, we believe prices will tumble as much as 7% in 2011. After reaching the bottom, we expect real estate appreciation will remain in the doldrums for three to five years—something we’ve been forecasting for more than three years.

I think there is a bit of revisionist history going on here. I have been bearish for four and a half years, but I don't recall Stan Humphries and Zillow being so bearish. In any case, he is rightfully bearish now — in fact, he is even more bearish than I am.

So we’re all going to have to make a little peace with falling prices. But here’s the good news: If you run some numbers, you find that selling in a falling market is not always a bad idea. Especially if you’re thinking of trading in your current home for a smaller home or one in a less expensive neighborhood.

Check the math. Say you and your spouse own a nice two-bedroom condo like this on the north side of Chicago. You bought it in 2007 for $390,000, but it may only sell for $310,000 now.

Now say you’re feeling crowded in this condo because your two increasingly energetic kids have hit school age. You’ve got some savings and a good commuter car, and you think you can buy a 2,500-square-foot house like this one in a kid-friendly section of suburban Elgin for $370,000.

This is the oldest trade in the book—but here comes the loss aversion. First, you recognize that selling the condo means you’ll finally realize the painful $80,000 loss on your condo purchase. Then—and this is almost worse—there’s an anticipated loss on the new house. In February home prices in Chicago were down 10.3% from a year earlier, and you’re convinced they are likely to continue that decline and fall another 5%. Buy the new house and in a year you could be sitting on another $18,500 capital loss. It churns your guts, and maybe you decide it’s better to stay put and take the 5% hit in a smaller home.

That is a reasonable way to look at the problem. If prices are declining for all properties, it is better to wait out the decline in a less expensive one. Of course, it's even better to wait out the decline in a rental.

Trouble is, most of us wildly overestimate the benefits of waiting. We convince ourselves that avoiding a potential future loss is the same as saving money.

If you are a renter, avoiding a future loss is the same as saving money. Timing does matter. If you're a home owner, you're already exposed to whatever the real estate market has in store.

We underestimate the risks that we’ll face by waiting another year. And we totally ignore the real, measurable costs of staying in a home that’s too big or too small or poorly located.

Start with the $18,500 in savings that you thought you would garner by waiting another year to relocate to the suburb. Those savings will probably be offset by a similar decline in value on your downtown condo, which could sell for $15,500 less a year from now. Yes, by waiting you’ll also save $1,200 or so in reduced realty brokerage fees and closing costs to sell the depreciated condo. But add it all up and your total actual savings will be just $4,300.

That’s a couple of house payments, you may be thinking. That’s a solid down payment on second car—pretty handy when you move to a suburb. Wrong.

See, $3,500 of it that $4,300 would just be a net savings of home equity. It’s a paper loss you would avoid. The value would be on your family’s balance sheet, so perhaps it could serve as collateral for a loan. But it wouldn’t be real money in your pockets.

Actually, it would be real money in your pocket. If the timing is perfect, the savings would be real and tangible. It would be in a check at the closing. The fact that most people roll this equity into their new house doesn't make the money any less real.

The issue for home owners is whether or not trying to save a few thousand dollars is worth staying in a property the family wants to move out of. Financially, waiting is clearly the better decision, but for other reasons, it may not be the best decision for the family.

Now consider the risks you would have to take to get a shot at that $4,300 gain. Because while the potential savings are mostly on paper, the potential costs are quite real.

For one, you took an entire year’s worth of interest-rate risk. There are wars in the Middle East, escalating energy costs and lots of talk of inflation these days. If 30-year fixed mortgage rates move from 5% to 6.5%, the payment on a $200,000 loan goes from $1,070 to $1,260. That’s an extra $2,300 a year in mortgage costs.

That is a fallacy. If interest rates go up and mortgage costs rise, the overhang of distressed inventory will simply push prices lower. I exposed that nonsense last year in The National Association of realtors Latest Scare Tactic: Rising Interest Rates.

Then there’s market-timing risk. Different neighborhoods don’t always snap out of a market correction at the same moment. Maybe demand for bigger suburban homes will snap back faster than demand for condos in the city. That house in Elgin could get more expensive while the condo’s value continues to slide.

The risk of different market segments moving at different speeds is very real. The condo market will be the last to recover because people don't want to live in condos. The fact that the upper half of the market is crumbling shows the market is not at the bottom.

Then other, practical costs of holding the condo also creep in. Will you rent a storage space to hold the clutter that you would have shoved into the backyard shed in the suburbs? That’s at least $700 for the year. And what about the cost of sending two kids to private schools in the city for an additional year instead of sending them to Elgin’s public schools? That’s at least $10,000 per child. These costs won’t show up in the your house payment, but they’re real, measurable hits to the family cash flow.

Now he is bringing in bogus costs that could just as easily go the other way.

That’s just the math for a trade-up. Now suppose instead you want to downsize. The numbers become even more compelling.

Suppose you’re retiring. Say you dream of selling this home in Santa Monica for $900,000 and purchasing a significantly larger house like this 20 minutes away in Encino for $750,000.

Here, the costs of waiting to sell really pile up. If prices in Los Angeles fall 5% over the next year, the $150,000 difference in prices of the two homes will shrink by $8,000. And that $8,000 cost of waiting a year would not merely be a paper loss. You will actually have that much less money in your pocket after the sale of your home in Santa Monica.

I don't understand how this magic works in one circumstance and not in another. Whether prices are going up or down, there is a closing with a check to the owner. That check contains real money. Whether this money is spent on a down payment for another house, either more or less expensive, doesn't make any difference.

The $8,000 potential loss would be offset only somewhat by the lower commissions and closing costs you would face by waiting a year to sell your home in Santa Monica. But there would also be other costs involved in waiting for the trade-down. Like property taxes. Say you purchased your Santa Monica bungalow during the property bubble, when it was worth more than $1 million, and that your annual property-tax bill is roughly $13,000. That’s $3,000 to $5,000 more than you would have paid if you had moved to the Encino home.

Overall, it’s helpful to think of house prices as a river that flows forward and, on very rare occasions, backward. It’s natural for us to prefer to jump from one raft to the next when the river is moving forward—that is, when prices are rising, not falling. But even when the river is flowing backward, jumping rafts midstream can make sense. When the river is flowing backward, we tend to fixate on the speed of the next raft relative to the stationary riverbank (e.g., “My next home is going to fall 5% in value after I buy it”). We should focus instead on the speed of the two rafts relative to each other (e.g., “Both homes are going to fall 5% in value”).

He is right. Once a renter becomes a home owner, they are subject to the ebbs and flows of market prices, and when and where they move is not a big deal unless they are making a big change in the quality, price, or location of their home.

Here’s the bottom line. Of the three general classes of homeowner—first-time buyers, existing homeowners buying another home and existing homeowners exiting real estate altogether—only first-time buyers face a substantial risk when buying in a declining market. For homeowners seeking a trade, there are only real costs of selling now for people trading up, and even those are less than most of us perceive.

The broader housing market in the United States is heavily dependent upon first-time buyers, most of who should wait until prices stabilize. The failed government attempts at market manipulation simply delayed the real bottom by two years and made first-time homebuyers wait two years longer than they should have.

It turns out that in most scenarios, people who sell homes before the market bottoms do fine.

We devised this chart to show the potential loss (shown in amber or red) or gain (shown in green) you’d face in a year if you trade up or down in a falling market now. For example, trading up now to a house priced 20% greater than your current one in a market that you expect to decline by 5% over the coming year results in a 1.4% loss relative to waiting one year to buy that house. Most people likely anchor their loss expectations around the expected 5% decline in home values when, in reality, the actual loss is much less.

Percentages make the numbers seem small and insignificant, but if you talking about 4% on a $700,000 home, that is $28,000. That seems like a lot of money to me.

The third group—people leaving home ownership altogether in favor of renting—should, of course, always sell as early as possible in a falling market. That way they’re most likely to preserve as much equity as they can. In reality, I think many of these sellers are holding out in the current market hoping for some recovery in home values in the near-term. These people are waiting for Godot.

I agree that most discretionary sellers are holding their properties off the market waiting for better days that will not be coming any time soon.

My advice here doesn’t require you to be either a bear or a bull on home value appreciation. My chief point is that, when trading homes, future home value declines will matter a lot less than most people believe.

“I feel like this morning I’ve had nine different people tell me they don’t want to sell when the market is still falling,” Detroit-area real estate agent Jeff Glover says with a sigh. Glover wishes he could get more people into the leafy, prosperous suburbs west of the city, where prices have been falling now for nearly six years. He’s even got a catchy line he uses: “Do you want to wait this market out in your current house or do you want to wait it out in your next house?”

Most people ignore him. Maybe they shouldn’t.

It's unfortunate that what could have been an honest examination of the pros and cons of selling now instead turned into a smoke screen of nonsense. There are legitimate reasons to sell in a declining market. Selling to rent instead being first and foremost among them.

For home owners, the only real issue is the activity in the market for the existing home, and the activity in the market for the next home. If these markets are moving at different speeds, then either acting or waiting may be the correct decision.

For example, when the upper half the market finally does bottom, it will be better to get out of a condo and into a single-family detached. But right now with the upper half of the market falling and the lower half holding steady, it is far wiser to wait and stay in the condo until SFD prices come within reach.

Although there are good reasons to sell in a declining market, this article was not particularly convincing.

All Cash

The buyers of today's featured property bought it about a year ago in an all-cash transaction. Since they are selling it so quickly, it seems likely this was purchased as a speculative flip. Many people believed the housing market bottomed in 2009, despite proof to the contrary.

The high end already suffers from an excess of inventory and very few buyers, so where is the buyer for this property going to come? Do you think this owner will be able to sell this property and make money?

I don't.

Irvine House Address … 2 VERNAL Spg Irvine, CA 92603

Resale House Price …… $3,395,000

House Purchase Price … $3,020,000

House Purchase Date …. 3/11/2010

Net Gain (Loss) ………. $171,300

Percent Change ………. 5.7%

Annual Appreciation … 10.1%

Cost of House Ownership

————————————————-

$3,395,000 ………. Asking Price

$679,000 ………. 20% Down Conventional

4.72% …………… Mortgage Interest Rate

$2,716,000 ………. 30-Year Mortgage

$605,094 ………. Income Requirement

$14,119 ………. Monthly Mortgage Payment

$2942 ………. Property Tax (@1.04%)

$625 ………. Special Taxes and Levies (Mello Roos)

$707 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$610 ………. Homeowners Association Fees

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

$19,003 ………. Monthly Cash Outlays

-$1925 ………. Tax Savings (% of Interest and Property Tax)

-$3436 ………. Equity Hidden in Payment (Amortization)

$1215 ………. Lost Income to Down Payment (net of taxes)

$444 ………. Maintenance and Replacement Reserves

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

$15,301 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$33,950 ………. Furnishing and Move In @1%

$33,950 ………. Closing Costs @1%

$27,160 ………… Interest Points @1% of Loan

$679,000 ………. Down Payment

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

$774,060 ………. Total Cash Costs

$234,500 ………… Emergency Cash Reserves

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

$1,008,560 ………. Total Savings Needed

Property Details for 2 VERNAL Spg Irvine, CA 92603

——————————————————————————

Beds: 5

Baths: 8

Sq. Ft.: 5533

$614/SF

Property Type: Residential, Single Family

Style: Two Level, Spanish

View: Canyon, Golf Course, Hills

Year Built: 2004

Community: Turtle Rock

County: Orange

MLS#: U11001856

Source: SoCalMLS

Status: Active

——————————————————————————

Situated in the exclusive residential golf preserve of Shady Canyon, this beautiful residence has a private location and exceptional views. The home embodies Hacienda-style Spanish Revival architecture and sits on an oversized lot with a large salt water pool with water features, separate children's wading pool, spa and heated outdoor cabana with a built-in barbeque, bar and kitchen, a pool bath outdoor showers. This attractive and spacious home has warm hardwood flooring, a gourmet kitchen, great room, office, guest casita and media room and extensive upgrades throughout. The master suite offers a relaxing reprieve with a spa-like bath, fireplace, balcony and views of the golf course, rolling hillsides and canyon.

Home sales are off again in 2011 and remain well below historic norms. Are lenders creating this problem with overly tight lending standards?

Irvine Home Address … 507 TERRA BELLA Irvine, CA 92602

Resale Home Price …… $285,000

I'd put out a burning building with a shovel and dirt

And not even worry about getting hurt

I'd lay in a pile of burning money that I've earned

and not even worry about getting burned

The Fabulous Thunderbirds — Tuff Enough

Everyone who put a down payment on an underwater home is laying in a pile of burning money they earned. In the end, they all get burned. Some will succumb to the financial pressures, some will accelerate their defaults, and some will hang on paying far too much for the properties they inhabit.

Now that house prices are again in free fall, lenders need to be concerned about loan quality and borrower qualifications more than ever. If they make bad loans now, they won't have a rising market to sell into that will recover their capital.

Slow spring: Home demand off 5%

May 2nd, 2011, 6:34 am — posted by Jon Lansner

The latest Orange County home inventory report from local broker Steve Thomas — data as of April 28 — says …

Demand, the number of new pending sales over the past month, decreased by 5% over the past month, shedding 169 pending sales and now totals 3,189. This year, the height in demand was reached on March 31st with 3,358 pending sales.

My criticism of Steve Thomas's methodology is that pending sales fall out of escrow — frequently. Using pending sales simply distorts the numbers. During the beginning of the selling season escrow numbers should be increasing instead of going down.

Two weeks prior, on March 17th, demand had increased to 2,982. So, current demand may be off over the past month, but it is definitely up from earlier in the year. The Orange County market had been following a normal cyclical pattern, but has changed course over the past month. Typically, demand remains elevated or increases during the spring, not dropping.

This is a sign of just how weak the market really is.

Is it the negative press on pricing, buyer fear, tight financing, unemployment, consumer confidence, gas prices, the Middle Eastern upheaval, the U.S. economy, or the world economy? Maybe the answer is a bit simpler; we suffer from the “too much information age.”

I will admit, the IHB contributes to the “too much information age.” Now people know what is really going on with the market. it must have been much easier for realtors when people accepted their bullshit as experts.

Market psychology is not what is holding back the market right now. The problem is that there are not enough people with jobs and good credit scores to buy the available inventory, not to mention the shadow inventory lingering out there.

In The Great Housing Bubble, I wrote about the problem this way:

In the denial stage of a residential real estate market, many speculators are unable to obtain the sale price they desire. The accumulation of unrealistically priced houses starts to build a large inventory of homes “hanging” over the market. Overhead supply is a condition in a financial market when many units are held for sale at prices above current market prices. Generally there will be a minor rally after the first price decline as those who missed the big rally but still believe prices will only go up enter the market and cause a short-term increase in prices. This is a bear rally. It is aptly named as those bullish on the market buy right before the bear market reverses and quickly declines. For prices to resume a sustained rally, the overhead supply must be absorbed by the market. Once prices stopped going up and actually began to fall, demand is lessened by diminished buyer enthusiasm and the contraction of credit caused by mounting lender losses. With increasing supply and diminished demand prices cannot rally to absorb the overhead supply. The overall bullish bias to market psychology has not changed much at this point, because owners are in denial about the new reality of the bear market; however, the insufficient quantity of buyers and the beginnings of a credit crunch signal the rally is over and the bubble has popped.

The problem is not buyer psychology. Kool aid is still alive and well in Orange County.

Back to the OC Register article.

Everybody seems to react to just about anything and everything that is happening locally, nationally and abroad. There just is too much information at our fingertips with cable news, Internet news, print news, blogs, and RSS feeds. So, where do we go from here? Demand is not going to plummet like it did a year ago with the end of the first time home buyer tax credit. It will be interesting to gauge demand in June and see if it finally surpasses 2010 year over year comparisons, a real measure of market strength.

Yes, this summer will tell us if the market is going to hold its own over the winter or take another major leg down. Based on the weak sales number so far this year, I am becoming more bearish about this fall and winter. It could get ugly.

Thomas calculates a “market time” benchmark tracking how many months it theoretically takes to sell all the inventory in the local MLS for-sale listings at the current pace of pending deals being made. By this Thomas logic, as of last Thursday, it would take:

• 3.49 months for buyers to gobble up all homes for sale at the current pace vs. 3.36 months two weeks ago vs. 2.45 months a year ago vs. 2.35 months two years ago.
• Of the 8 pricing slices Thomas tracks, 1 had faster market time vs. 2 weeks ago; and 2 improved over a year ago.
• Homes listed for under a million bucks have a market time of 3.10 months vs. 9.43 months for homes listed for more than $1 million.
• So, basically, it is 3.0 times harder to sell a million-dollar-plus residence!
• And just so you know, the million-dollar market represents 17% of all homes listed and 6% of all homes that entered into escrow in the past 30 days.

Is there any good news in there for bulls? I don't see it. By any measure, the market for high end homes in Orange County is very weak. The reduced asking prices will likely continue to be reduced. There is far too much inventory and very few buyers.

Here’s the recent data, as of last Thursday, for listings; deals pending; market time in months; last Thursday vs. 2 weeks ago, a year ago and 2 years ago (Note: k=thousand; m=million) …

Slice	Listings	Deals	Time (month)	2 week ago	1 yr. ago	2 yr. ago
$0-$250k	1,833	648	2.83	2.72	1.64	1.61
$250k-$500k	4,068	1,441	2.82	2.72	1.62	1.62
$500k-$750k	2,329	669	3.48	3.30	2.62	2.40
$750k-$1m	1,081	247	4.38	4.27	3.39	3.16
$1m-$1.5m	718	117	6.14	6.56	6.50	5.78
$1.5m-$2m	384	39	9.85	8.56	7.89	6.83
$2m-4m	526	37	14.22	13.42	13.49	11.71
$4m+	295	11	26.82	26.45	38.44	29.50
All O.C.	11,144	3,189	3.49	3.36	2.45	2.35

The glut of high-end homes is apparent. And since many delinquent mortgage squatters are inhabiting these high end properties, the shadow inventory makes the time on the market much, much longer.

The main reason there are so few sales at the high end is because people in Orange County don't make enough money to support those prices. The jumbo loan market is the only game in town. Jumbo loan lenders are lending their own money, so they are concerned about loan quality, whereas the rest of the market is origination-based lending where it only has to pass GSE or FHA standards.

Jumbo loan lenders won't loan money to people who won't pay them back, so FICO score requirements are high, interest rates are between 0.5% and 1.0% higher than conforming mortgages, and lenders are carefully scrutinizing what people really make. Jumbo loan lenders are not willing to count the appreciation and HELOC booty as income. Without mortgage equity withdrawal, far fewer people can afford the payments on jumbo loans, hence we have very low sales volumes at the high end.

That isn't going to change because the government is not insuring the market.

To make matters worse, the conforming limit is going down which will force more buyers to go jumbo — a loan they may not qualify for.

Are lenders being too tough?

May 3rd, 2011, 8:11 am — posted by Jon Lansner

In his latest biweekly commentary, veteran Orange County home broker Steve Thomas ranted about lenders going overboard with their underwriting, claiming it’s a reason the home market looks sluggish these days.

Lenders have reversed course and now look at every potential borrower as not lendable unless they can prove their worthiness with a mountain of written documentation and many requests that are borderline ridiculous.

Apparently, documenting income with more than a signature is too cumbersome for him. It certainly would be easier if everyone could just apply for a loan and get whatever they want, but when lenders tried that, they found that borrowers often didn't pay them back. Whocouldanode?

Their reaction reminds me of my kids reactions to painful experiences. Mia, my four year old daughter and splitting image of her gorgeous mother, was stung a few weeks ago after accidentally placing her hand on top of a crawling bee. After wiping her tears and a quick dose of Benadryl to stop the swelling, she didn’t want to go outside in fear of being stung again. Fortunately, she swiftly recovered after I took her by the hand and explained to her in front of a flowering bush swarming with bees that they were not out to get her as long as she left them alone. She resumed her normal neighborhood activities and hasn’t talked about it since.

That is cute analogy. However, what if those bees were African honey bees who will aggressively attack anyone nearby? Leaving those bees alone wouldn't be enough to protect yourself.

Lenders were stung, and they should be afraid to lend. Their lack of caution was directly responsible for the disaster they created. In a declining market with few qualified buyers, the aggressive lenders simply lose more money and go out of business — provided they are not too big to fail. The danger has not yet passed. The likelihood of more defaults and price declines is high. Lenders who fail to recognize that risk won't last very long.

I would like to take lenders and the U.S. government by the hand and show them that hard working buyers with a respectable job history, good credit and a reasonable down payment will NOT sting them. Instead, the lenders won’t go outside to play right now.

That is simply not true. Sales volumes are 30% below normal right now, but that still means 70% of the normal transaction volume is still occurring. Who are those people? They are the hard working buyers with a respectable job history, good credit, and a reasonable down payment. There aren't enough of those people. That is the problem.

They are playing it WAY too safe by lending only to those that qualify by the strictest of standards. It is time for lenders to go outside and play nicely.

Readers, do any of you think it's a good time to loan money to jumbo borrowers in Orange County? Would you put your own money behind such a loan? I wouldn't, except for those few good borrowers that remain.

They won’t get stung again as long as they don’t lend based upon one’s ability to fog a mirror.

If I understand his argument, he is saying we can do many other varieties of lending — which were proven losers during the housing crash — to inflate prices and increase sales as long as we don't go back to the worst of the housing bubble's lending practices. That sounds like nonsense to me.

Dr. Lawrence Yun, the chief economist for the National Association of Realtors estimates that if lenders would just relax their standards, sales activity would receive a 15% bump. If you don’t believe me, ask buyers and Realtors in the trenches. Lenders are commonly requesting letters of explanation for the absurd: a job 10 years prior, an old phone number that is no longer used, and much, much more.

Lenders learned from their mistakes of the housing bubble, and they don't want to repeat them. Steve Thomas does want them to repeat these mistakes because it would increase sales volumes and make him a few more pennies on commissions.

MEMO TO LENDERS AND THE U.S. GOVERNMENT: go outside and play again, lend to those that qualify, the entire economy and housing market is counting on it. An increase in sales activity would translate to more homes sold and a quicker improvement in the housing market. An improvement in the housing market helps in reestablishing consumer confidence. Confident consumers translate into more dollars spent and a return to a robust U.S. economy. Until then, expect more of the same, a housing market and an economy that lacks much direction other than sideways.

Does Thomas have a point?

No. Not really.

He paid over $400,000 for a 1 bedroom apartment

One of the surest signs of the housing bubble was the amounts people were willing to pay for glorified apartments. Properties like this only make sense as rentals. It's an obvious bubble when the cost of ownership is more than double the cost of rental — as it is with a $405,000 price tag.

This purchase was foolish for a couple more reasons. One, this was purchased in May of 2007 which is after the subprime meltdown and after outlets like the IHB were telling people the market was going to crash. The future buyer for this place was going to have difficulties without ignorant subprime lending. Two, there was no backup plan if the price didn't continue to rise 10% a year. Renting makes no sense when you are losing $1,000 or more a month with no opportunity for HELOC supplementation.

This purchase captures the essence of kool aid intoxication. It's a property purchase that only makes sense if you believe prices are going to rise significantly every year and lenders are going to give out unlimited HELOC money at ever-decreasing interest rates. Obviously, that didn't happen. It never could.

This property was purchased on 5/24/2007 for $410,000. The owner used a $328,000 first mortgage, a $82,000 HELOC, and a $0 down payment. I am amazed that any of the no money down deals still survive. We don't see them very often any more.

Despite this borrower's perseverance, the market has collapsed, and this owner is hoping for a 35% loss. I think it needs to go lower. The rent still only covers about two-thirds of the cost of ownership. Not exactly a cash cow.

Irvine House Address … 507 TERRA BELLA Irvine, CA 92602

Resale House Price …… $285,000

House Purchase Price … $410,000

House Purchase Date …. 5/24/2007

Net Gain (Loss) ………. ($142,100)

Percent Change ………. -34.7%

Annual Appreciation … -9.1%

Cost of House Ownership

————————————————-

$285,000 ………. Asking Price

$9,975 ………. 3.5% Down FHA Financing

4.72% …………… Mortgage Interest Rate

$275,025 ………. 30-Year Mortgage

$61,272 ………. Income Requirement

$1,430 ………. Monthly Mortgage Payment

$247 ………. Property Tax (@1.04%)

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

$59 ………. Homeowners Insurance (@ 0.25%)

$316 ………. Private Mortgage Insurance

$395 ………. Homeowners Association Fees

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

$2,447 ………. Monthly Cash Outlays

-$133 ………. Tax Savings (% of Interest and Property Tax)

-$348 ………. Equity Hidden in Payment (Amortization)

$18 ………. Lost Income to Down Payment (net of taxes)

$56 ………. Maintenance and Replacement Reserves

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

$2,040 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,850 ………. Furnishing and Move In @1%

$2,850 ………. Closing Costs @1%

$2,750 ………… Interest Points @1% of Loan

$9,975 ………. Down Payment

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

$18,425 ………. Total Cash Costs

$31,200 ………… Emergency Cash Reserves

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

$49,625 ………. Total Savings Needed

Property Details for 507 TERRA BELLA Irvine, CA 92602

——————————————————————————

Beds: 1

Baths: 2

Sq. Ft.: 944

$302/SF

Property Type: Residential, Condominium

Style: 3+ Levels, Other

Year Built: 2000

Community: 0

County: Orange

MLS#: S656825

Source: SoCalMLS

Status: Active

On Redfin: 4 days

——————————————————————————

Exclusive Northpark community with 24 hour guard gated security, 6 swimming pools, tennis courts, sports courts, clubhouse, parks and trails. Spacious floor plan with an indoor laundry and a 2 car tandem garage space. Highly desirable and sought after unit. Please note, sale excludes wash/dryer and refrigerator.

In a rare wise move in Sacramento, the California state Senate killed a bill that would have dramatically changed the foreclosure process.

Irvine Home Address … 76 PACIFIC Crst Irvine, CA 92602

Resale Home Price …… $999,900

What Does It Matter To Ya

When You Got A Job To Do

You Gotta Do It Well

You Gotta Give The Other Fellow Hell

Paul McCartney & Wings — Live and Let Die

Each month when lenders get their dreadful delinquency reports, they make decisions on who is pushed through to auction and who is allowed to squat. The let some mortgage live and the let others die.

What is dual track foreclosure?

Foreclosure is the final act in a much longer drama. Foreclosure is akin to the river card in a game of poker or the verdict in a long civil trial. In poker many hands are decided before the river card is played, and in civil litigation most cases are settled without going to court.

Foreclosure is a threat to compel action. The lender wants the borrower to repay under the terms of the loan. Lenders don't want to get their money back and find another borrower, they would rather the borrower keep making their payments.

Dual track foreclosure is the process of reviewing loan modification application while simultaneously pursuing a foreclosure. Why do lenders do this? Well, many loan modifications get denied because the borrowers don't demonstrate hardship. In those cases, the foreclosure process should go forward unimpeded. Further, any loan modification is still a negotiation, and without the threat of imminent foreclosure, many borrowers don't recognize the weakness of their bargaining position.

Dual track foreclosure processing is necessary to prevent unwarranted delays by borrowers who seek loan modifications for which they don't qualify. If we eliminate the practice and force all lenders to “fully evaluate” borrowers for loan modifications, they merely add time to the process and allow delinquent mortgage squatters to further game the system.

California bill ending 'dual track' foreclosures faces key vote

Pursuing foreclosure even if a borrower has sought a loan modification has faced criticism. The Senate measure would require a lender to fully evaluate a homeowner for a loan modification first.

By Alejandro Lazo, Los Angeles Times — April 27, 2011

A proposed law facing a key vote in Sacramento on Wednesday would require lenders in California to make a decision on mortgage modifications for delinquent homeowners before beginning the repossession process, in effect ending “dual track” foreclosures in the state.

Financial institutions commonly pursue foreclosure even if a borrower has requested a loan modification, a two-track process the lending industry has argued is necessary to protect its investments. But dual tracking is under fire from regulators and lawmakers in the wake of last year's “robo-signing” scandal, which revealed widespread foreclosure errors.

Robo-signer did not reveal widespread foreclosure errors. That false perceptions probably exists in the minds of the public because the political Left heated up the rhetoric, but the Robo-signer investigations and subsequent lawsuits have not demonstrated a pattern of wrongful foreclosure. People who make their payments do not get foreclosed on.

The California Homeowner Protection Act,

People with no equity facing foreclosure do not own anything. Their names may be on title, but the only thing they own is their loan.

authored by state Senate President Pro Tem Darrell Steinberg (D-Sacramento) and Sen. Mark Leno (D-San Francisco), is one of the furthest-reaching efforts to limit the practice. Several other states have passed requirements for third-party groups to oversee mediations between mortgage servicers and homeowners.

The California bill, SB 729, would require a lender to fully evaluate a borrower for a loan modification before filing a notice of default, the first stage in the formal repossession process, and a significant change in the way foreclosures are conducted in the Golden State.

What does it mean to “fully evaluate?” And when did it become an entitlement for borrowers to get a loan modification? Aren't these private contracts? The attorneys will generate a lot of fees fighting over the definition of “fully.” No matter what banks do, lawsuits will be filed stating they haven't done enough.

The law would give delinquent homeowners the right to sue their lenders to stop foreclosures if they believe the requirement to properly evaluate their loan modification requests had not been followed. If the sale occurs without the proper evaluation, homeowners would also be given the right to sue for damages or to void a foreclosure sale for up to a year after the sale.

Auction prices would crumble if that provision were passed. With the one-year clawback, no title insurer would touch a property for a full year after an auction. Cash buyers would be required to hold for a full year unless they wanted to sell to another cash buyer. Bank REO would be similarly encumbered.

Such a change is necessary in the state because the two-track process often leads to unintended foreclosures by mortgage servicers that “don't know what they are doing” and often bungle the loan modification process, Leno said in an interview.

“We know of folks not only entering the loan modification process, but folks who have already been accepted, and are making timely loan modification payments, and then getting a knock on their door and being told 'your home will be sold,'” Leno said. “The stories are many and horrifying.”

It may be the perception of many who get foreclosed upon that the bank didn't give them the loan modification they deserved. However, the foreclosure may also be the bank's way of saying no, particularly if the borrower is hiding assets or otherwise gaming the system.

Groups representing lenders said the legislation overreaches and would only inhibit the state housing market's recovery by slowing down an already drawn out foreclosure timeline.

Yes, it would slow down the foreclosure process and deepen the ongoing crash in house prices. BTW, the housing market recovery meme needs to die now that we took out the 2009 lows.

California's comparatively streamlined foreclosure system, which allows for a home to be taken back without a court order, has helped the state work through a foreclosure glut relatively quickly and recover faster than other hard-hit states.

Nothing has recovered in California. The crash is ongoing.

“It is just not good for the housing market, which is not good for the state economy, especially when we are at 12% unemployment,” said Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn. “It is a reaction, an overreaction, to procedural mistakes,” he continued, “and this doesn't really get at solving any of those problems.”

My disdain for lenders is widely known, but sometimes they are right. This is a dumb idea at the wrong time that solves none of the problems with the housing market.

The bill also would make it more difficult for investors to purchase, renovate and resell bank-owned properties to first-time buyers because it gives foreclosed-on homeowners a year to sue after a foreclosure sale, critics said. Home buying by investors has been a significant driver of California home sales since the housing market hit bottom two years ago.

Yes, this would seriously impact the auction market and the resale market within a year thereof.

“It's unlikely that any prospective home buyer would want to buy these properties with that lingering uncertainty hanging over their heads,” said Beth Mills, a spokeswoman for the California Bankers Assn. The bill also would require mortgage servicers to:

• Prove they have a right to foreclose;

• Adhere to new timelines when evaluating borrowers for possible loan modifications;

• Provide an explanation letter detailing why a mortgage modification was not granted if a borrower is denied;

• Make a declaration of compliance with the law each time a notice of default is filed.

The bill also would allow a state banking regulator or the state attorney general to take action against lenders if the law isn't followed. …

So how much cost would those provisions add to the process? Who is paying that bill? Lenders? Taxpayers?

Fortunately, cooler heads prevailed.

Foreclosure prevention legislation fails in Sacramento

A proposed law that would have ended “dual track” foreclosures in California failed to win a key vote in Sacramento on Wednesday.

The California bill, SB 729, would have required a lender to fully evaluate a borrower for a loan modification before filing a notice of default, the first stage in the formal repossession process.

Sen. Alex Padilla (D-Pacoima) abstained from voting following a hearing in the state Senate's Banking and Financial Institutions Committee and the bill failed 3-3.

The California Homeowner Protection Act, authored by state Senate President Pro Tem Darrell Steinberg (D-Sacramento) and Sen. Mark Leno (D-San Francisco), was one of the furthest-reaching attempts to limit dual tracking, a common practice among financial institutions in which they pursue foreclosure even if a borrower has requested a loan modification.

The two-track process is one the lending industry has argued is necessary to protect its investments. But the practice is under fire from regulators and lawmakers in the wake of last year's “robo-signing” scandal, which revealed widespread foreclosure errors.

The most cowardly way politicians kill a bill is to let it die in a committee without a nay vote. It's sad what they have to go through in order to do the right thing. I suppose its the price they pay for pandering the rest of the time.

Ordinarily, I wouldn't rejoice when the banks win one, but this was a bad bill that deserved to go down to defeat.

A 2003 high-end rollback

First and ONLY Showing Wednesday at 6pm May 4th! CORPORATE OWNED REO; NOT A SHORT SALE

Today's featured property is a previously rare 2003 rollback at Irvine's high end. With weak sales and prices reaching 2003 levels across much of Irvine, properties like this will be more common.

• The owner paid $1,015,000 on 12/15/2003. He used a $761,250 first mortgage and a $253,750 down payment.
• On 1/29/2004 he opened a $150,000 HELOC.
• On 2/13/2004 he got a second $150,000 HELOC with a different lender.
• On 1/25/2005 he obtained a $418,750 HELOC.
• On 3/28/2008 he took out a $100,000 loan from Anaheim General Hospital. Perhaps that is the Corporate owned reference in the description. The owner on title is the individual who HELOCed himself into oblivion and quit paying the mortgage.

Foreclosure Record

Recording Date: 03/28/2011

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/21/2010

Document Type: Notice of Default

I think the description is likely bullshit. From what my records show, this is likely to be a short sale unless a bidding war happens this afternoon at 6PM and the offered price makes this borrower whole. In this market, I don't see that happening.

Irvine House Address … 76 PACIFIC Crst Irvine, CA 92602

Resale House Price …… $999,900

House Purchase Price … $1,015,000

House Purchase Date …. 12/15/2003

Net Gain (Loss) ………. ($75,094)

Percent Change ………. -7.4%

Annual Appreciation … -0.4%

Cost of House Ownership

————————————————-

$999,900 ………. Asking Price

$199,980 ………. 20% Down Conventional

4.72% …………… Mortgage Interest Rate

$799,920 ………. 30-Year Mortgage

$178,213 ………. Income Requirement

$4,158 ………. Monthly Mortgage Payment

$867 ………. Property Tax (@1.04%)

$283 ………. Special Taxes and Levies (Mello Roos)

$208 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$100 ………. Homeowners Association Fees

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

$5,617 ………. Monthly Cash Outlays

-$1003 ………. Tax Savings (% of Interest and Property Tax)

-$1012 ………. Equity Hidden in Payment (Amortization)

$358 ………. Lost Income to Down Payment (net of taxes)

$145 ………. Maintenance and Replacement Reserves

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

$4,104 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,999 ………. Furnishing and Move In @1%

$9,999 ………. Closing Costs @1%

$7,999 ………… Interest Points @1% of Loan

$199,980 ………. Down Payment

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

$227,977 ………. Total Cash Costs

$62,900 ………… Emergency Cash Reserves

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

$290,877 ………. Total Savings Needed

Property Details for 76 PACIFIC Crst Irvine, CA 92602

——————————————————————————

Beds: 4

Baths: 3

Sq. Ft.: 3456

$289/SF

Property Type: Residential, Single Family

Style: Mediterranean

View: Park/Green Belt, Yes

Year Built: 2001

Community: Northpark

County: Orange

MLS#: 11-523255

Source: TheMLS

Status: Active

——————————————————————————

First and ONLY Showing Wednesday at 6pm May 4th! CORPORATE OWNED REO; NOT A SHORT SALE; PRICED FOR QUICK SALE; RARE AND PRIVATE DOUBLE SIZE LOT(12,000 SQ FT). BEAUTIFUL HOME IN NORTH PARK SQUARE WITH A LARGE FLOWING FLOOR PLAN WITH A GOURMET KITCHEN WITH GRANITE COUNTERS THAT OPENS TO LARGE FAMILY ROOM WITH COZY FIREPLACE. ONE BEDROOM DOWN AND THREE UP INCLUDING A GRAND MASTER SUITE WITH A SPA LIKE BATH + BONUS ROOM + COMPUTER CENTER. .. 3 CAR GARAGE. .. LIMITED SHOWINGS WITH 24 HOUR(OR MORE) NOTICE BUT WELL WORTH IT. .. DO NOT DISTURB OCCUPANTS

A foreclosure advocate crossed the line between civil disobedience and criminality, and the State Bar Court took away his law license.

Irvine Home Address … 4111 BLACKFIN Ave Irvine, CA 92620

Resale Home Price …… $895,000

Has he lost his mind

Can he see or is he blind?

Can he walk at all,

Or if he moves will he fall

Is he live or dead?

Has he thoughts within his head?

We'll just pass him there

Why should we even care?

Black Sabbath — Iron Man

Writing about real estate rarely leads me to the California Bar Journal. The housing bubble has spawned a number of attorney abuses including up-front payments for loan modifications, bogus foreclosure delay tactics like the deficient Notice of Default, and other practices. However, with as bad as some of these behaviors are, nobody gets censured for going over-the-top crazy. That is until foreclosure attorney, Michael T. Pines, managed to lose his mind.

I can appreciate this gentleman is passionate about helping people with real estate, and he is obviously an intelligent man. However, he lacks the wisdom to guide that passion and intelligence toward something which contributes to the greater good. As I pointed out above, success for him would have caused the housing market to cease functioning, and our banks to become undeniably insolvent.

Perhaps he didn't care? Maybe he just wanted his 15 minutes of fame? He got it.

At least some of it went toward improvements

Most of the HELOC abuse cases I profile show few if any improvements to the property. This leaves most readers, me included, asking “where did you spend all the money?”

At least with today's featured property, some of it was spent improving the property.

• My property records don't go back to the 1988 purchase for $327,000, but it is likely the owners used a 20% down payment.
• By 6/27/2001 through sophisticated financial management, the owners grew their mortgage to $384,000.
• On 1/15/2002 they obtained a $96,000 HELOC.
• On 7/30/2004 they got a $650,000 first mortgage. The listing says they tore the property down to the studs in 2005. I doubt it. This $170,000 increase in their mortgage is the largest of their serial refinances.
• On 10/5/2004 they opened a $135,700 HELOC, perhaps to finish paying for the renovation.
• On 3/28/2007 they refinanced with a $784,000 first mortgage.
• On 5/14/2007 they opened a $116,000 HELOC.
• On 11/19/2009 they either paid down the mortgage, or obtained some principal forgiveness as their final mortgage amount is shown as $696,000.
• Peak mortgage equity withdrawal is over $600,000.

Irvine House Address … 4111 BLACKFIN Ave Irvine, CA 92620

Resale House Price …… $895,000

House Purchase Price … $327,000

House Purchase Date …. 10/24/1988

Net Gain (Loss) ………. $514,300

Percent Change ………. 157.3%

Annual Appreciation … 0.1%

Cost of House Ownership

————————————————-

$895,000 ………. Asking Price

$179,000 ………. 20% Down Conventional

4.72% …………… Mortgage Interest Rate

$716,000 ………. 30-Year Mortgage

$159,517 ………. Income Requirement

$3,722 ………. Monthly Mortgage Payment

$776 ………. Property Tax (@1.04%)

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

$186 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$0 ………. Homeowners Association Fees

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

$4,684 ………. Monthly Cash Outlays

-$898 ………. Tax Savings (% of Interest and Property Tax)

-$906 ………. Equity Hidden in Payment (Amortization)

$320 ………. Lost Income to Down Payment (net of taxes)

$244 ………. Maintenance and Replacement Reserves

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

$3,444 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$8,950 ………. Furnishing and Move In @1%

$8,950 ………. Closing Costs @1%

$7,160 ………… Interest Points @1% of Loan

$179,000 ………. Down Payment

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

$204,060 ………. Total Cash Costs

$52,700 ………… Emergency Cash Reserves

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

$256,760 ………. Total Savings Needed

Property Details for 4111 BLACKFIN Ave Irvine, CA 92620

——————————————————————————

Beds: 5

Baths: 4

Sq. Ft.: 2800

$320/SF

Property Type: Residential, Single Family

Style: Two Level, Contemporary

Year Built: 1971

Community: 0

County: Orange

MLS#: S657149

Source: SoCalMLS

Status: Active

On Redfin: 2 days

——————————————————————————

ARE YOU THINKING NEWER HOME IN IRVINE? – THIS IS A MUST SEE!! Home has been completely rebuilt from the studs in 2005. Over $400,000 invested in unimaginable upgrades. BETTER THAN NEW- YET, NO MELLO ROOS, NO HOA, LOW TAX RATE. All natural materials used in every inch. 4 Bed & 3 bath upstairs + one bed & bath downstairs. Chef Kitchen, Top of the line Blue Star gas range and oven, industrial grade, Heated Marble Floors, Home Theater System w/ pull down screen from the ceiling, Sky lights, Modern recesses lights throughout, Whole house fan, triple pane windows, Water Softener and reverse osmosis water filter systems, Smart Home Electric System let you control the entire home from a remote or from your smart phone, Salt Water Pool and Spa, Private Yard, Open and Specious- Interior design was reconfigured to have the kitchen opened to both Living /Dining Room and to the family room. Unreal Master Bath with Jacuzzi Tub and Much Much more * * see full list in Media section * *

There are many ways to spend $400,000 for improvements. Do you think it was money well spent?

The decline in house prices is pickup up speed. The market will find a bottom when sellers holding out for higher prices capitulate and sell in despair.

Irvine Home Address … 33 LAKEPINES Irvine, CA 92620

Resale Home Price …… $225,000

Break me off, tie me down, tear me down

Make me feel like a little dog

We're a waste, we're a waste, we're a waste

And we're going down the drain, down the drain, down the drain

‪Lilly Wood & The Prick – Down The Drain‬

Far from getting better, the housing market in the United States is accelerating its swirling decent into the crapper.

Housing Crash 2.0 Is Accelerating

Published: Tuesday, 26 Apr 2011 — By: John Carney, Senior Editor, CNBC.com

House prices are falling again—and the decline is accelerating.

Today’s big housing numbers comes from the Case-Shiller home price indexes. The indexes, which measure how prices have changed over the previous three months, show prices falling in every major metropolitan area (except, weirdly, Detroit). The 20-city average declined 3.3 percent from a year ago, and 1.1 percent from the previous three-month average.

This is the seventh successive month of widespread price declines.

Last week we took a look at how the NAr spins data with bullshit. How do you think they would spin that uncomfortable series of data points?

The housing recovery began to stall last spring, after the government’s home-buyer tax credit expired. The three-month moving average of the Case-Shiller 20-city index showed that gains in home pricing slowing to a crawl in early summer and actually reversing in July and August. By September, it was clear that home prices were going into a serious decline.

The November numbers (which are actually the three-month average of September, October and November) showed a 1 percent decline over the previous month. Prices kept dropping by 1 percent in December and January.

February’s data shows that the decline is actually accelerating a bit.

This is the opposite of a recovery—it’s a crash building steam.

We’ve become almost passé about home price declines. A 3.3 percent year-over-year decline doesn’t seem all that shocking anymore. But prior to the recent housing crash, such a steep decline was unheard of.

The housing market is performing much worse than expected. In 2009, the Mortgage Bankers Association predict home prices would rise by 3 percent in 2011. Last year, the consensus among economists interviewed for the MacroMarkets LLC September survey was that home prices would fall by just 0.8 percent in 2011. A month ago, the economists were gloomier, estimating that housing prices would fall 1.38 percent by the end of the year. That estimate now looks overly optimistic.

I predicted that prices would fall between 2% and 5% this year. The consensus estimates are finally catching up to me. My detractors have inaccurately labled me as bearish. I do believe prices are going to fall, particularly locally, but I am only bearish when and where conditions suggest real estate is overpriced and likely to fall in value.

I am very bullish on Las Vegas real estate, despite the fact prices will continue to fall there. When cashflow becomes very positive, as it has in Las Vegas, the benefits of ownership outweigh the short-term loss in value. With low interest rates, even if prices fall further, it is entirely possible that the cost of ownership may actually go up when interest rates rise.

In Las Vegas, real estate is hated by everyone who owns. Prices are at 15-year lows and still falling. Most owners are underwater on their mortgages, and being a recourse state, they can't just walk away from their obligations.

Everyone in Las Vegas who owns wishes they didn't. The market is experiencing widespread despair. These are the best possible conditions to acquire good cashflow properties with a potential for future rebound.

Housing Bottom Comes When People Swear Off Houses

Neither housing nor employment show any sign of recovery. Nearly four years after the collapse of Countrywide, the nation’s biggest subprime lender, housing is still going down.

How far will it go? A. Gary Shilling says it will take another 20% drop in housing prices to bring them in line with their historical trend. Housing usually rises with the economy. Not more. Not less. To get back on track with the economy now, house prices have to go down.

What about over-shoot? Yes, that’s a risk too. Bubble markets don’t tend to go back to “normal” levels right away. Instead, they tend to go below normal.

Whether or not Mr. Shilling is correct with regards to Orange County, the harsh decline in prices with downside overshoot has certainly occurred in Las Vegas and a number of other subprime markets.

At first, homeowners think it is just a temporary break in an upward trend. They hold on, hoping to catch another move to the upside. Then, they gradually resign themselves to a long slump, but still believe that “you can’t go wrong on real estate, not over the long term.” Then, housing prices continue to sink. More homeowners give up. Some sell. Some default. More foreclosures depress prices even further.

The double dip is causing many real estate bulls to finally see their error in judgment. Bulls waited for three long years of serious declines to reach the illusory bottom of 2009. Now that prices are falling and gaining downside momentum, loan owners who less than a year ago thought they might be back above water soon are now faced with the reality of several more years waiting for a recovery that may never come.

The peak in foreclosures is not expected until March of 2012. When it comes – five years after the crisis began – most homeowners will be ready to throw in the towel. “Housing may go up in the long run,” they’ll say to each other, “but this downturn could last longer than I do.”

Prices are likely to drop below their historical trend. Homeowners will tell their children: “Don’t bother to buy a house. Rent. Housing is a losing proposition. It never goes up.” Then, with housing prices perhaps 25% to 40% lower than they are today, the market will have found its bottom.

When? Housing markets move slowly. It could happen by 2015, maybe 2020.

2003 rollback

Many people who bought in 2002 and 2003 believed they were buying in a normal market. In reality, they were buying into a housing bubble. Jon Lansner at the OC Register began talking about the housing bubble in 2002. Despite his early call, he was correct in his analysis. House prices were too high in 2002 and 2003 relative to incomes and historic norms. He can't be faulted for failing to anticipate just how stupid borrowers and lenders would become.

Few in real estate were seriously concerned about prices being too high in 2003. Few believed it was possible for prices to go down. Obviously, the bulls were wrong — not just a little wrong, but completely and totally wrong on all counts.

The owners of today's featured property bought on 12/23/2003, and they are paying the price for buying into the housing bubble frenzy. After nearly seven and one half years of ownership, they are going to sell for a loss.

They were conservative in their mortgage management, not that they are being rewarded for their prudence. They borrowed most of the money using a $188,000 first mortgage, a $35,250 second mortgage, and a $11,750 down payment. Despite the insanity which followed, they did not add to their mortgage, and if they get their current asking price, this will not be a short sale.

These owners did not find the pot of gold in California real estate, but through prudent management of their mortgage, they will escape with a small loss and their credit still intact.

Irvine House Address … 33 LAKEPINES Irvine, CA 92620

Resale House Price …… $225,000

House Purchase Price … $235,000

House Purchase Date …. 12/23/2003

Net Gain (Loss) ………. ($23,500)

Percent Change ………. -10.0%

Annual Appreciation … -0.6%

Cost of House Ownership

————————————————-

$225,000 ………. Asking Price

$7,875 ………. 3.5% Down FHA Financing

4.72% …………… Mortgage Interest Rate

$217,125 ………. 30-Year Mortgage

$48,373 ………. Income Requirement

$1,129 ………. Monthly Mortgage Payment

$195 ………. Property Tax (@1.04%)

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

$47 ………. Homeowners Insurance (@ 0.25%)

$250 ………. Private Mortgage Insurance

$295 ………. Homeowners Association Fees

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

$1,915 ………. Monthly Cash Outlays

-$105 ………. Tax Savings (% of Interest and Property Tax)

-$275 ………. Equity Hidden in Payment (Amortization)

$14 ………. Lost Income to Down Payment (net of taxes)

$48 ………. Maintenance and Replacement Reserves

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

$1,598 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,250 ………. Furnishing and Move In @1%

$2,250 ………. Closing Costs @1%

$2,171 ………… Interest Points @1% of Loan

$7,875 ………. Down Payment

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

$14,546 ………. Total Cash Costs

$24,400 ………… Emergency Cash Reserves

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

$38,946 ………. Total Savings Needed

Property Details for 33 LAKEPINES Irvine, CA 92620

——————————————————————————

Beds: 1

Baths: 1

Sq. Ft.: 934

$241/SF

Property Type: Residential, Condominium

Style: Two Level, Other

Year Built: 1977

Community: 0

County: Orange

MLS#: P779013

Source: SoCalMLS

Status: Active

On Redfin: 6 days

——————————————————————————

EQUITY SELLER. This beautiful 1 bedroom, 1 bath condo is located in picturesque Lakepines. This home features high smooth ceilings, warm paint and carpet colors, walk in closet, private washer/dryer hookups and a spacious fenced patio. Association amenities include 2 pools, a spa and tennis court. Great square footage and floor plan. No one above or below. No Mello Roos.