Purging debt through default and foreclosure is the key to an economic recovery. This uncomfortable truth is leaking out to the general public.

Irvine Home Address … 226 ORANGE BLOSSOM Irvine, CA 92618

Resale Home Price …… $159,900

One step forward

never seems to get you nowhere

Sinking faster

In you go

You want to save they day

so you grab on the reins and run in circles

You're going to crash and drag the world down with you

Only one thing remains

Default — Only One Thing Remains

The economy is being dragged down by massive debts taken on by insolvent households. We have tried loan modifications, and they failed. Voluntary principal forgiveness is not forthcoming, so that leaves only one alternative to purging the excess debt: massive strategic default.

Massive default is best way to fix the economy

Commentary: Clearing away the debt is the only way forward

Brett Arends — Sept. 12, 2011, 12:00 a.m. EDT

NEW YORK (MarketWatch) — You want to fix this economic crisis? You want to put people back to work? You want to light a fire under the economy?

There’s a way to do it. Fast. And relatively simple.

But you’re not going to like it. You’re not going to like it at all.

Default. A national Chapter 11 bankruptcy.

The fastest way to fix this mess is to see tens of millions of homeowners default on their mortgages and other debts, and millions more file for bankruptcy.

I told you that you wouldn’t like it.

The apologetic tone of this article reflects the cluelessness of the masses. The ideas he puts forward are the same I have been stating for the last several years without the apologies or the sugar coating. Perhaps it takes this tone to break the bad news to the masses who still believe we can amend, forgive, or earn our way to prosperity.

I don’t like it much either. It sticks in the craw that people got to borrow all that money and won’t have to pay it back.

Yes, the quality of life HELOC abusers got to enjoy while others were prudently living within their means is irritating. However, I think most people are over that. The unceremonious fall from entitlement is poetic justice.

But you know what? The time to stop that was five or 10 years ago, when the money was being lent.

It’s gone.

And mass Chapter 11 is, by far, the least obnoxious solution to our problems.

The only solutions to bubbles and Ponzi schemes is not to inflate them in the first place. After the hard lessons of the Great Depression, society put safeguards in place to prevent recurrence of the nasty financial viruses. Unfortunately, we dismantled many of those safeguards in the name of deregulation, and in short order we unleashed a monster.

That’s because the real cause of our economic slump isn’t too much government or too little government. It isn’t red tape, high taxes, low taxes, the growing divide between the rich and the poor, too much government debt, too little government debt, corporations, poor people, “greed,” “socialism,” China, Greece, or the legalization of gay marriage. It isn’t, in short, any of the things all the various nitwits say it is.

It’s the debt, stupid.

I pointed that simple fact out in 2009: It's NOT the economy, stupid. “The problems with the economy of the early 90s were rooted in a loss of disposable income because homeowners were overextended on their mortgages, and the money they should have been spending in the local economy was instead going to debt service somewhere else. It is a problem we will face going forward as well–unless the foreclosures wipe out the debts of most homeowners.”

We’re hocked up to the eyeballs, and then some. We’re at the bottom of a lake of debt, lashed to an anchor. American households today owe $13.3 trillion. That has quadrupled in a generation. It has doubled just in the last 11 years. We owe more than any other nation, ever. And for all the yakking about how people are “repairing their balance sheets,” they’re not. From the peak, four years ago, they’ve cut their debts by a grand total of 4%.

And a lot of that was in write-offs.

More than a quarter of American mortgages are underwater. Many are deeply underwater. In states like Nevada and Florida the figures are astronomical.

The key thing to understand is that most of that money has gone to what a fund manager friend of mine calls “money heaven.” Most of these debts will never, ever be repaid in real money. Not gonna happen.

The reality of “money heaven” is not being reflected on lender's balance sheets. With the suspension of mark-to-market accounting rules, banks are pretending they are going to be repaid money they will never see.

Think how corporations handle this kind of situation.

It happens all the time. Banks and bondholders find they have lent, say, $1 billion to a company whose assets and earning capacity will only repay, say, $300 million. What happens? Does the company soldier on with $1 billion in debt it can never repay? Do the stockholders send back their dividend checks? Do they sell their homes to pay off the bonds?

Not a chance. The company goes through Chapter 11. The creditors ‘fess up to their blunder, they face up to their losses, and they fix it. They write down the loans and take the equity instead. The balance sheet is cleaned up, and the company starts again.

Why not homeowners?

Most of the objections to this idea are well-meant, but misinformed.

A fund manager I asked raised the issue of “moral hazard.” Why should anyone pay their mortgage if some people were getting a pass, he asked?

The answer: For the same reason GE and Verizon kept paying the coupon on their bonds while Lehman Brothers defaulted. You want to keep your credit standing. And you want to keep your equity.

The better question is “why would anyone who is underwater and paying more than a comparable rental keep paying their mortgage?” And the simple answer is “they shouldn't.” Many will be cajoled by the nonsense lenders put out about moral obligation, but by and large, unless a loan owner has equity or is saving money versus renting, they should quit paying. Many will.

If a company defaults, the stockholders get wiped out. If a homeowner defaults, the bank takes the home. I like keeping my home, as well as my savings, and my credit rating. Most people are the same.

The reality is most people don't have any equity or any savings, and their credit score is not worth the hundreds of thousands of dollars they are underwater.

Some will say the financial impact would be terrible. But the banks would just be facing up to reality. And a lot of these mortgages are already trading at distressed levels.

I like that part. Banks should be forced to accept the consequences of their mistakes. The idiots who caused this mess should lose their jobs and their huge bonuses. Unfortunately, that isn't what happened.

Some will say, “why should people get away with borrowing imprudently?” The response: Why should the banks get away with lending imprudently?

Yes, imprudent lending is the larger problem, and Strategic default is moral imperative to prevent future housing bubbles.

There’s no point telling people not to borrow money. They always will. I have yet to see a Wall Street executive turn down free money. I have yet to see a company in an IPO say, “Don’t give us so much money!” People like money. They will take as much as they are offered.

In a free economy, the people who are supposed to ration the loans are the lenders. Banks are supposed to lend carefully and responsibly.

I pointed out this fact in Lenders Are More Culpable than Borrowers.

What else are they paid for? Accepting deposits? You could hire people on minimum wage to do that.

Some will say, “it’s immoral” for borrowers to default. Alas, most of these people are being inconsistent. They are usually the first ones to defend a company when it closes down a factory and ships the jobs to China, or pays the CEO $50 million for doing a bad job, on the grounds that “this ain’t morality, pal, this is business!”

But when Main Street wants to do the same thing, they start screaming “Morality! Morality!”

We don’t live in an economy based on morals and fairness.

T Mobile doesn’t charge me what’s “fair” each month. They charge me what’s on the contract. Your employer doesn’t pay you more if you need more. He pays you your economic value. Did Dick Grasso give back his bonus? Bob Nardelli? Dick Fuld? We operate in an economy based very firmly on contracts, and nothing else. Companies, and the wealthy, live by the letter of the law.

American mortgage contracts allow for default. Half of the states in this country are “non-recourse,” which broadly speaking means you can send in the keys and walk away from a bad loan. The other half are sort of “semi-recourse.” The bank can come after you for any shortfall, but only in a limited way. Broadly speaking they can’t touch retirement accounts and basic assets. You can typically keep your car, personal effects, often things like life insurance.

Strategic Default Is Merely Collecting On Home Price Protection Insurance Sold By Lenders.

Most of the people who are deeply underwater don’t have that much anyway.

And the banks knew this. When they were lending $500,000 to a bus driver with $1,000 in his checking account, they knew that their loan was only guaranteed by the value of the home.

If they didn’t know it, they should have. Their incompetence is not our problem.

It’s tempting to say, “if someone borrows money, they should repay it.” Generally speaking, I agree. I pay all my debts. But while that makes sense when applied to any individual, it doesn’t work so well when it’s applied to everyone.

We have tens of millions who cannot repay their debts. But they are all trying to. That sucks huge amounts of money out of the economy. And that means these people cannot function properly as consumers or workers. That’s the reason people aren’t coming into your restaurant. It’s the reason people aren’t taking your yoga class. It’s the reason they haven’t hired you to redo the kitchen.

Note the after-crash disposable income slice on the far right. That's why the excess debt of the housing bubble is so economically debilitating.

And so tens or hundreds of millions of perfectly responsible business owners and employees are also suffering from this slump. That’s the reason we have a shortage of demand. That’s the reason no one is hiring.

Even worse: People who are underwater on their mortgage, but who do not want to default, cannot move to where the jobs are either. They are stuck with their home.

You want to break this logjam? Try Chapter 11 for the nation. Massive defaults. Clear the decks, clean the books.

Hallelujah! Foreclosures are essential to the economic recovery.

What are the alternatives?

Government cutbacks, higher taxes, and a balanced budget? In a normal economy, fine. But in this situation, when the private sector is also slashing its spending, that could lead to absolute catastrophe. That’s what happened in the Great Depression. And our debt levels are worse than in the Great Depression.

Government borrowing? That’s the Keynesian solution. “The consumer can no longer borrow like a crazy person,” says the Keynesian, “so Uncle Sam has to do so instead.” It’s just transferring private madness to public madness.

If you talk to a Keynesian like Paul Krugman, no amount of government spending is too large if it boosts the economy. Perhaps, just perhaps, the economy should experience a slowdown. The dumb ideas that survived in good times get purged in recessions. That's one of the reasons we have them. Unsustainable business plans which consume resources but provide little or no value get wiped out. The capital tied up in losing ventures is released to find a better home. Keynesian's try to avoid this necessary purging so nobody experiences any pain. It doesn't work. It only builds into larger problems in the future.

Inflation? That’s probably the least bad alternative. But it’s just default by another name. And instead of taking money from the imprudent banks that caused the problem, it robs grandma’s savings.

Once the deflationary headwinds subside, the federal reserve will most likely continue stimulatory policies for too long, and we will experience a bought of inflation. We won't hear any credible inflation talk until the economy picks up, but once it does, we will likely inflate away much of the excess debt by currency devaluation.

Twice before, advanced economies have gone through what we are going through now — namely a massive hangover after a massive debt binge.

The first was the U.S. in the 1930s, the second was Japan in the 1990s.

The U.S. didn’t get out of it until the 1940s unleashed inflation and reduced the debt’s value in real terms.

Japan still hasn’t gotten out of it. They have deflation, while government debt has skyrocketed.

The correct moral hazard is to punish the banks who lent imprudently by making them eat their own losses.

I told you that you wouldn’t like it. I don’t either. But the alternatives are worse.

He obviously didn't write this article for my consumption. I love the idea. No need to apologize to me.

$1,350 in; $132,000 out

The owner of today's featured property bought at the bottom of the last real estate recession. On 8/29/1997 she paid $72,000 for this property. She borrowed $70,650 which means she put a whopping $1,350 down.

She refinanced with a $72,000 first mortgage on 3/29/2001, and she obtained a $35,000 stand alone second on 12/20/2004 (Merry Christmas). She capped it off with a $132,000 HELOC on 11/2/2006. If she used the HELOC, this property is deeply underwater. Since it is advertized as a short sale, we can assume she at least took part of it.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 226 ORANGE BLOSSOM Irvine, CA 92618

Resale House Price …… $159,900

Beds: 1

Baths: 1

Sq. Ft.: 662

$242/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

View: Pond

Year Built: 1976

Community: Orangetree

County: Orange

MLS#: S672729

Source: SoCalMLS

On Redfin: 1 day

——————————————————————————

Nice ground floor single level property. Very clean! Large livingroom opens to patio along the stream. Great for BBQs or simple entertaining. Kitchen has breakfast counter and indoor laundry hook-ups. lots of association ammenites. Short distance to Irvine Valley College and Irvine Spectrum.

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

ammenites?

Resale Home Price …… $159,900

House Purchase Price … $72,500

House Purchase Date …. 8/29/1997

Net Gain (Loss) ………. $77,806

Percent Change ………. 107.3%

Annual Appreciation … 5.6%

Cost of Home Ownership

————————————————-

$159,900 ………. Asking Price

$5,597 ………. 3.5% Down FHA Financing

4.20% …………… Mortgage Interest Rate

$154,304 ………. 30-Year Mortgage

$52,410 ………. Income Requirement

$0,755 ………. Monthly Mortgage Payment

$139 ………. Property Tax (@1.04%)

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

$33 ………. Homeowners Insurance (@ 0.25%)

$177 ………. Private Mortgage Insurance

$250 ………. Homeowners Association Fees

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

$1,354 ………. Monthly Cash Outlays

-$68 ………. Tax Savings (% of Interest and Property Tax)

-$215 ………. Equity Hidden in Payment (Amortization)

$8 ………. Lost Income to Down Payment (net of taxes)

$40 ………. Maintenance and Replacement Reserves

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

$1,120 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$1,599 ………. Furnishing and Move In @1%

$1,599 ………. Closing Costs @1%

$1,543 ………… Interest Points @1% of Loan

$5,597 ………. Down Payment

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

$10,338 ………. Total Cash Costs

$17,100 ………… Emergency Cash Reserves

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

$27,438 ………. Total Savings Needed

——————————————————————————————————————————————————-

In a desperate move to survive, Bank of America is cutting 30,000 jobs to reduce costs and has ramped up its foreclosure processing to obtain capital tied up in delinquent mortgages.

Irvine Home Address … 30 CIENEGA Irvine, CA 92618

Resale Home Price …… $423,800

You've got me desperate.

I know You hear me,

Would You give me a sign

Reel me in before I've fallen in line.

You've put me on a path I don't understand

I'm standing on a ledge waving my hands

Fireflight — Desperate

Who is more desperate, the lenders who aren't getting repaid, or the debtors trying to hang on to their houses? The stories in the mainstream media focus on the sensational stories of loan owners, but it looks like BofA is even more desperate than those who owe the bank money.

Today's post examines two apparently unrelated news events and postulates they are from the same cause: Bank of America has a cash problem. For those waiting for lenders to foreclose on homes and release inventory in California and Nevada (that would be me), this is good news. If Bank of America becomes more concerned with survival than it is with managing inventory and prices in the housing market, they may foreclose and sell larger numbers of homes to generate much needed cash. More foreclosures and sales means more inventory and lower prices.

Bank of America Confirms Plan to Cut 30,000 Positions

By NELSON D. SCHWARTZ

Published: September 12, 2011

Bank of America’s chief executive, Brian T. Moynihan, vowed on Monday to eliminate $5 billion in costs annually by 2014, including by cutting at least 30,000 jobs at the company.

In a widely anticipated speech at an investor conference in New York organized by Barclays, Mr. Moynihan outlined his plan to make Bank of America, the largest bank in the United States, more efficient and profitable — even if that meant sacrificing scale.

“We don’t have to be the biggest company out there,” he said. “We have to be the best.”

Five billion dollars a year is a huge amount to cut from payroll and operations. When those people were hired, the company must have felt a need for them. Money was invested in their training, and some valuable service must have been performed. You can't cut $5,000,000,000 in costs without sacrificing service. The only reason a company does this is because they have to, not because they want to.

While he did not specify how many jobs might be involved, the company announced shortly after his speech that 30,000 jobs were to be eliminated. The bank employs 288,000 people.

The job cuts are part of recommendations reviewed last Thursday and Friday by the company’s top management in Charlotte, N.C.

“The company expects that attrition and the elimination of appropriate unfilled roles will be a significant part of the anticipated decrease in jobs,” Bank of America said in a statement. …

Mr. Moynihan aims to cut at least $5 billion out of the bank’s $73 billion in annual expenses by shutting some of its 63 data centers, eliminating overlapping deposit systems and trimming layers of back-office staff that were accumulated during the acquisition binge undertaken by his predecessor Kenneth D. Lewis.

“It’s taking out work we don’t need to do any more, and getting it out of the company,” he said. “We’re a much simpler company than we were 24 months ago.” …

There about to be much smaller and simpler. Eliminating over 10% of a workforce is a huge cut. Perhaps the efficiencies of scale will permit them to eliminate many of the jobs for acquired companies.

During the question-and-answer part of the session, Mr. Moynihan was asked whether federal regulators had wanted the bank to raise more capital. Mr. Moynihan said they had not.

Or course he is going to say that. No official notifications may have taken place, but I wouldn't be surprised if private conversations have put BofA on notice.

A shareholder also asked about mounting losses at Countrywide Financial, the subprime lender. The losses are still plaguing Bank of America three years after it bought the company for $2.8 billion. Before the sale, Countrywide had nearly collapsed into bankruptcy when its financing dried up.

Mr. Moynihan answered that in dealing with Countrywide, the bank “looks at all our options on everything.”

When the shareholder followed up by asking Mr. Moynihan if he was saying that bankrupting Countrywide was a viable option, Mr. Moynihan again demurred. “There are options around all this stuff that we continue to work on,” he said.

Acquiring Countrywide has been a disaster for BofA. They did it primarily to obtain the servicing rights on the Countrywide portfolio. There is likely some back-room deal with the FDIC or the federal reserve to backstop at least part of the Countrywide losses, but the losses BofA must absorb are still weighing them down.

Angry investors who hold mortgage-backed securities are trying to force Bank of America and other large banks to buy back billions of dollars worth of mortgages that have defaulted. The investors argue that the home loans did not conform to the original underwriting standards or were originated with little evidence of adequate assets on the part of borrowers.

In other cases, investors including the federal government and the insurance giant A.I.G. want to recover tens of billions of dollars from the big banks for losses on securities they assembled from now-troubled subprime mortgages.

Then there is the investigation by state attorneys general into mortgage servicing abuses, which could cost the big banks more than $20 billion in a proposed settlement that so far they have been unable to complete. “The attorneys generals settlement is part of what can move us forward, but the settlement has to be reasonable for the company and reasonable for shareholders,” Mr. Moynihan said.

These lawsuits are a huge overhanging problem the banks face. If the settlement is too large, the banks will collapse. If a settlement cannot be reached, banks will die a death of a thousand attorneys. I'm all in favor or pushing banks to the edge of bankruptcy for their participation in the housing bubble, but we dare not push them over the edge unless we want financial turmoil.

Given the huge financial pressures Bank of America faces, the following headline shouldn't be a big surprise. I believe there is a direct cause and effect.

Huge Surge in Bank of America Foreclosures

Published: Tuesday, 13 Sep 2011 | 12:29 PM ET

By: Diana Olick

CNBC Real Estate Reporter

Bank of America is ramping up its foreclosure processing, sending out far more notices of default to borrowers in August than in previous months, well over 200 percent more month-to-month.

A notice of default is the first stage of the foreclosure process in non-judicial foreclosures states, that is, where foreclosures do not go before a judge.

The notice of default is usually sent when a borrower is 90 days or more overdue in payments, but that timeline has been extended significantly during this housing crisis, due to the so-called “robo-signing” processing scandal and the sheer volume of troubled loans.

Delays from Robo-signer only impacts judicial foreclosure states. Here in California, the delays have been purely due to lenders not wanting to take losses.

Mortgage and housing analyst and strategist Mark Hanson alerted me to unusually high legal default filing activity, and his research points to Bank of America as the primary driver. I contacted a Bank of America spokesman, who responded: “It appears the numbers you noted to me this afternoon generally track with our own numbers for key categories. It should be noted it’s driven more in key states like California and Nevada than overall, and certainly the progress we’re seeing is limited to non-judicial states. Judicial states continue to move very slowly, with key states like New Jersey only beginning to start processing foreclosures again this month.”

Why would BofA double their rate of foreclosure processing now? The economy is not doing well. They have no reason to believe an abundance of buyers will be ready to buy these homes. For the last three years, they have consistently accumulated shadow inventory to avoid recognizing losses. So why now? It has to be a desperate need for cash.

The foreclosure numbers are down very slightly year-over-year, but only because August 2010 was one of the highest foreclosure months on record, and of course was just before the “robo-signing” scandal was uncovered. Delays in processing have artificially lowered the foreclosure numbers over the past year, so this new surge is likely addressing loans that have been long delinquent, but unaddressed.

In other words, the foreclosure pipeline is filling again.

In other words, the foreclosure pipeline is filling again with delinquent mortgage squatters in shadow inventory.

If this assessment is accurate, we may be entering a new phase in the cleanup. I have long maintained the problems with housing will not be resolved until the shadow inventory is cleared out through foreclosure. If BofA is going to begin this process in earnest, the other banks will be forced to take notice and react.

RealtyTrac, a widely followed foreclosure sale and data site, is also confirming a surge in overall notices of default in its August numbers, to be released later this week. They do not cite Bank of America specifically, which bought Countrywide Financial, taking on millions of troubled loans.

“We've been seeing REO [bank-owned property] sales, and processing of loans through foreclosure. This increase may simply be the lenders and servicers starting the next cycle. August traditionally is a high month for foreclosure actions, so part of the increase might be seasonal,” says RealtyTrac's Rick Sharga. “Could be any number of reasons – but with 3.5 million delinquent loans, this had to happen sooner or later.“

I think many at the banks truly believed they would not have to foreclose on the delinquent mortgage squatters. Many held out hope that loan modifications would succeed, and many others hoped borrowers would make more money and make their debts current through making up the missed payments. Denial is preferable to recognizing losses — at least for a while.

The question of course is, is this a one month catch-up purge or will it continue at high levels for a while? And if the latter, will other banks follow suit quickly? Because if other banks see Bank of America pushing more loans to foreclosure, which will inevitably means more properties heading out for sale, they may want to get in before that glut of properties pushes prices down even further.

That is a great description of the collapse of the banking cartel.

“This proves once again that “credit” as measured by legal defaults and foreclosures is not necessarily about borrowers missing payments, rather about what the servicers chose to do about it,” notes Hanson.

Yes, the relationship between delinquencies and foreclosures broke down in 2008, and the two figures have been moving independently ever since. The foreclosure statistics no longer mean much because if foreclosures drop, its not because lenders have run out of people to foreclose on.

The collapse of the banking cartel?

Cartel arrangements work because each member of the cartel withholds supply from the market so the collective can enjoy higher prices. Cartel arrangements fail when the members of the cartel cheat in order to sell more inventory at higher prices.

In truth, the lending cartel is likely more of a happenstance caused by the limited write-downs banks can take each quarter. If lenders are limiting their supply because they can't afford to release any more, their behavior will have the cartel effect without a direct collusion among the members. This is most likely what is really going on.

Regardless of the reasons the cartel has been working, it has been working. Prices in many markets have not deflated due to lenders either withholding supply or failing to foreclose on delinquent mortgage squatters. If one of the biggest players in the cartel, Bank of America, has now decided they are going to dramatically ramp up their foreclosure processing, the cartel is going to collapse.

The other members of the cartel will be forced to react to BofA's actions. The last banks to liquidate will be the ones who obtain the lowest prices.

What may happen to many of the most capital-constrained banks is they will maintain their denial until the FDIC finally shuts them down. Several banks will pull back processing loans because they cannot afford the write downs yet. The longer they wait, the more painful the losses, so they will wait and wait until they are forced to act.

Regardless of what happens to the banks, increasing foreclosure processing and subsequent resale will weigh on prices. Lenders may still meter out their REO in order to prevent MLS saturation, or they risk a repeat of Las Vegas in every housing market in the country.

Foreclosure and resale is a two-step process. BofA and other banks may ramp up their foreclosures, but they may decide not to sell the REO. Perhaps they will rent some out. In all likelihood, the banks desperate for cash will sell on the MLS to get whatever they can. With so many banks being desperate for cash, the possibility of a price-crushing stampede is very real. We have already seen the results of this in Las Vegas.

2008 was a bad time to buy

Blog readers won't be shocked, but 2008 was not a good time to buy. Apparently, the owner of today's featured property was not a blog reader. He purchased on 4/3/2008 for the bargain price of $536,000. He used a $482,050 first mortgage and a $53,950 down payment. His down payment is lost, and his credit is ruined because he bought at the wrong time and paid too much.

That was an expensive three and one half years….

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 30 CIENEGA Irvine, CA 92618

Resale House Price …… $423,800

Beds: 3

Baths: 3

Sq. Ft.: 1617

$262/SF

Property Type: Residential, Condominium

Style: 3+ Levels, Mediterranean

Year Built: 2008

Community: Portola Springs

County: Orange

MLS#: S644951

Source: SoCalMLS

Status: Active

On Redfin: 230 days

——————————————————————————

Buyer cancelled -lucky you! Upgraded to the max! Like-new 3 story home in Portola Springs * Largest floorplan in tract has spacious great room w/ gorgeous dark wood floors * Large living area has fireplace & large media niche with added cabinet * Spacious dining area * Open gourmet kitchen has granite countertops & backsplash, extra-large island w/ bar seating, KitchenAid stainless steel appliances & sink, brushed nickel knobs * Lovely master bedroom w/ recessed lights, two walk-in closets & bath w/ tile countertop & large tub & separate shower w/ tile surrounds & decorative detail, double sinks * Secondary bedroom w/ French door, beautiful carpet * Bedroom & bath & laundry on first level * Features include dark wood cabinets, 2-tone paint, textured carpet, plantation shutters * 3 bedrooms, 3 baths, one on each level gives wonderful privacy & could be perfect for roommates * Enjoy association pool, tennis, bbqs, basketball * Best of all, children attend new Stonegate Elemenetary & award-winning Northwood High.

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Proprietary IHB commentary and analysis

Resale Home Price …… $423,800

House Purchase Price … $536,000

House Purchase Date …. 4/3/2008

Net Gain (Loss) ………. ($137,628)

Percent Change ………. -25.7%

Annual Appreciation … -6.7%

Cost of Home Ownership

————————————————-

$423,800 ………. Asking Price

$14,833 ………. 3.5% Down FHA Financing

4.20% …………… Mortgage Interest Rate

$408,967 ………. 30-Year Mortgage

$133,696 ………. Income Requirement

$2,000 ………. Monthly Mortgage Payment

$367 ………. Property Tax (@1.04%)

$210 ………. Special Taxes and Levies (Mello Roos)

$88 ………. Homeowners Insurance (@ 0.25%)

$470 ………. Private Mortgage Insurance

$318 ………. Homeowners Association Fees

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

$3,454 ………. Monthly Cash Outlays

-$315 ………. Tax Savings (% of Interest and Property Tax)

-$569 ………. Equity Hidden in Payment (Amortization)

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

$73 ………. Maintenance and Replacement Reserves

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

$2,666 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,238 ………. Furnishing and Move In @1%

$4,238 ………. Closing Costs @1%

$4,090 ………… Interest Points @1% of Loan

$14,833 ………. Down Payment

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

$27,399 ………. Total Cash Costs

$40,800 ………… Emergency Cash Reserves

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

$68,199 ………. Total Savings Needed

——————————————————————————————————————————————————-

In a post-bubble world, housing markets and its participants must adjust to the new reality of prudent lending standards and less appreciation. The adjustment will be painful for many.

Irvine Home Address … 28 STREAMWOOD Irvine, CA 92620

Resale Home Price …… $145,000

Pain, I can't get enough

Pain, I like it rough

'Cause I'd rather feel pain than nothing at all

This life is filled with hurt


When happiness doesn't work

Pain — Three Days Grace

The pain from the housing bubble is a familiar topic at the IHB:

In case you haven't noticed, major economic disruptions are painful. It is mentally painful, emotionally painful, and sometimes physically painful. Mentally we all try to figure a way out of this mess. How can we make more money? What can we do about our current circumstances? We tie ourselves in knots trying to solve the enigma. It has no solution. These circumstances lead to emotional pain most often caused by the scarcity of money. We are unable to support our lifestyles, we have to cut back, and sometimes this is not enough. Sometimes the cutbacks are made for us. Creditors close financial lifelines, and lenders foreclose on homes. This can lead to destructive behaviors: divorces, alcoholism, smoking, and a whole host of other problems. This emotional pain leads to stress and physical pain. People start having health problems, and since they can't afford a doctor's visit, these problems often go unattended. In short, recessions really suck.

The pain is not over yet.

“New normal” means a lot more pain to come: Fed economist

by KERRY CURRY –Wednesday, September 7th, 2011, 5:13 pm

The United States needs to make it more attractive for capital to flow back into the housing market to get the residential real estate industry — and the economy — back on track, a Federal Reserve economist said Wednesday.

The nation is in a “new normal” marked by 2% to 3% growth rates, more frequent recessions, low interest rates and sluggish consumer spending, said William Emmons, assistant vice president and economist at the Federal Reserve Bank of St. Louis.

We may not be duplicating Japan of the 1990s, but the conditions he describes are very similar. The overhang of bad debt and mis-allocated capital will plague us until we decide to do something about it. Right now, we either lack the political will or the financial resources to do anything differently.

This new normal includes millions of foreclosures still in the pipeline. Households, he said, will continue to deleverage — both voluntarily by paying down debt and involuntarily via mortgage defaults — putting further constraints on the economy.

“My estimate is that we have in the U.S., somewhere between $3 trillion to $5 trillion too much mortgage debt,” he said. Emmons said the average household needs to deleverage by about $80,000 or about a third of its mortgage debt.

“Many millions of households have experienced great stress on their balance sheets,” he said. “There is tremendous pressure to reduce debt.” That is key in understanding why the economy is going to grow so slowly.

I am impressed with this economist. His analysis is right on. We are going to purge a great amount of debt through the foreclosure process over the next several years, and until it's done, our economy is going to suffer.

The new normal could last as long as seven to 10 years, he predicted, noting that was his own view not that of the Federal Reserve.

The fools at the federal reserve have to put a happy face on the cataclysm the banks unleashed on society. They may silence this loose cannon for being brave enough to tell the truth.

Emmons gave a decidedly pessimistic view of nation's growth prospects, saying he doesn't expect a bottom before 2015. He spoke as part of a webinar hosted by the American Legal & Financial Network, a national network of legal and residential mortgage banking professionals.

Signposts of the economic bottom will be recognizable

(1) when housing becomes a hated asset class,

(2) when homeownership is denounced by former housing advocates as a trick or a trap and

(3) significant consolidation in the housing and mortgage industries makes people feel that profitability in those industries is hopeless.

Yes. This guy truly understands the dynamics of market psychology. The conditions enumerated above are already coming to pass. The bear rally delayed the needed change in attitudes, but people are starting to realize the beliefs of 5 years ago are no longer operative.

As you can see from the chart above, when the market is in despair, prices are the lowest making for an excellent buying opportunity.

But that will be the time “to get in,” he said.

“We have to find that place where housing becomes exciting again and people want to buy houses,” Emmons said, noting that investors will be key to a “self healing” of the housing economy and pointed to “the capitalistic instinct to realize that any period of turmoil presents opportunities.”

Equity investors who view depressed housing prices as an opportunity could allow for large-scale conversion of for-sale properties into rental properties, helping to reduce the time it will take to re-balance the economy.

I know I am doing my part…

Emmons said he expected little, if anything, out of Washington with the existing cost-cutting mindset and lack of political will for grand-scale programs that would be large enough to make a difference. He also said the Federal Reserve has done what it can, saying the problem is one of solvency not liquidity.

Many people have pointed out from the beginning that the federal reserve could not solve this problem. If the problem were liquidity (availability of capital) the federal reserve can make more credit available. However, when the problem is solvency (too much debt), the federal reserve is shooting pool with a rope. You can't get people out of debt by loaning them more money.

President Obama is scheduled to address the nation on Thursday evening with a jobs speech for a beleagured nation dealing with an unemployment rate at 9.1%. On Friday, the Labor Department released a report showing zero employment growth in August. It's unclear whether Obama will address the country's housing woes in his speech.

He didn't.

But just waiting to grow out of the problem isn't feasible as it would take 20 to 30 years to grow into the mortgage debt the nation has now and the large debt overhang will continue to constrain markets, Emmons said.

I wonder if I can get this guy to go a guest post on the IHB? Everything he is stating has been sprinkled throughout my posts over the last few years. I fully agree with his assessment.

More likely, Emmons said, is a lost decade of deleveraging, much of that through mortgage defaults. While the adjustment will be more painful, the nation will hit bottom sooner and get back to normal sooner.

Deleveraging will increase disposable income and boost consumer spending. Money spent on interest is wasted to the economy. Debt is only an economic boost while it is getting larger.

With consumers on the sideline, the nation will need to figure out how to grow the economy without the help its gotten in the past from consumer spending, he said.

That means attention toward business growth and global competitiveness.

“We have to create climate for more business investment to take the place of consumer spending,” he said. In the short term, government spending will need to fill the void as the economy works to re-balance, he said.

It's difficult to get business investment when business owners don't believe there is consumer demand for their products. And, it is difficult to get more government spending in a time of huge deficits.

Back in December, Fed Chairman Ben Bernanke expressed concerns that the economy would not continue to be self-sustaining. It takes about 2.5% GDP growth to keep unemployment stable.

As growth slows below 2.5%, it may be more likely that the nation will slip into recession. Emmons suggested that may have already occurred as debt ceiling talks and the recent debt downgrade by Standard & Poor's further pummeled consumer confidence.

Ultimately, a stronger housing market will be key in getting the economy back on track. Five years ago, few would have thought the country would be in a situation with home prices down some 30%.

I did.

People seem incredulous that prices can drop further, but they can, he said.

“The scale of problems is so huge,” Emmons said. “Like a huge earthquake shook the entire nation, and knocked all the houses down.”

Write to Kerry Curry.

Follow her on Twitter @communicatorKLC.

Fantastic article. Few have the insight to see the truth in Mr. Emmons statements, and even fewer have the stomach for the truth it contains.

The low end is still searching for a bottom

The properties undesirable for owner-occupants are not being bid up to rental parity by conventional financing. In fact, they are not being bid up by FHA buyers either. The final line of support will be cashflow investors. With a $1,000 per month cost of ownership, someone will buy this before prices go too much lower.

Date	Event		Price	Appreciation
Aug 18, 2011	Price Changed		$145,000	—
Jul 18, 2011	Price Changed		$150,000	—
Jun 25, 2011	Price Changed		$160,000	—
Mar 18, 2011	Listed (Active)		$170,000	—
Oct 30, 2009	– Price Changed		*	—
Feb 01, 2007	– Delisted		—	—
May 30, 2006	– Listed		*	—
Jul 23, 2004	Sold (Public Records)		$288,000	25.7%/yr
Jun 21, 1999	Sold (Public Records)		$90,000	3.0%/yr

What looked like a teaser listing back in March is still going down. The lender would not be lowering price if a buyer were in place. How much lower will this one go?

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 28 STREAMWOOD Irvine, CA 92620

Resale House Price …… $145,000

Beds: 1

Baths: 1

Sq. Ft.: 639

$227/SF

Property Type: Residential, Condominium

Style: One Level, Other

View: Creek/Stream

Year Built: 1977

Community: Northwood

County: Orange

MLS#: S652046

Source: SoCalMLS

On Redfin: 173 days

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Excellent Short Sale Opportunity!! This is a beautiful 1BR/1BA unit on the second floor. This home has laminate wood flooring through out the house and is a must see. Hurry! Wont last!

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Proprietary IHB commentary and analysis

Resale Home Price …… $145,000

House Purchase Price … $288,000

House Purchase Date …. 7/23/2004

Net Gain (Loss) ………. ($151,700)

Percent Change ………. -52.7%

Annual Appreciation … -9.4%

Cost of Home Ownership

————————————————-

$145,000 ………. Asking Price

$5,075 ………. 3.5% Down FHA Financing

4.20% …………… Mortgage Interest Rate

$139,925 ………. 30-Year Mortgage

$48,118 ………. Income Requirement

$684 ………. Monthly Mortgage Payment

$126 ………. Property Tax (@1.04%)

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

$30 ………. Homeowners Insurance (@ 0.25%)

$161 ………. Private Mortgage Insurance

$242 ………. Homeowners Association Fees

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

$1,243 ………. Monthly Cash Outlays

-$62 ………. Tax Savings (% of Interest and Property Tax)

-$195 ………. Equity Hidden in Payment (Amortization)

$8 ………. Lost Income to Down Payment (net of taxes)

$38 ………. Maintenance and Replacement Reserves

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

$1,033 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$1,450 ………. Furnishing and Move In @1%

$1,450 ………. Closing Costs @1%

$1,399 ………… Interest Points @1% of Loan

$5,075 ………. Down Payment

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

$9,374 ………. Total Cash Costs

$15,800 ………… Emergency Cash Reserves

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

$25,174 ………. Total Savings Needed

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Tonight I will be giving a presentation on the Orange County housing market. Today's post examines why this data is important and how to use it.

Irvine Home Address … 166 West YALE Loop Irvine, CA 92604

Resale Home Price …… $464,900

We been together for a few years

Shared a few tears

Called each other nicknames

Like Sugar Plum and Poo Bear

Like IrvineRenter and Zovall

I know you aggravated

Walk around frustrated

Ya patience gettin' short

How long can you tolerate it

Listen ma I'm just motivated

I do this for us

Step on the grind

tryin' to elevate it now

Busta Rhymes — I Know What You Want

There are too many market indicators. Anyone who has studied technical analysis of stocks quickly realizes there are far too many ways of parsing data, and most of them are useless. As I pondered what I wanted to present to give an overview of the housing market, I considered many ways of looking at the data. I rejected many of the indicators I felt were irrelevant to answer the basic questions buyers have.

What do buyers want to know?

Most buyers want to know two things: (1) am I paying too much, and (2) are prices likely to go up or down in the future. These are important questions. People asked these same questions in 2006 and came up with the wrong answers. The people who answered these questions incorrectly in 2006 have either been wiped out financially, or they are trapped underwater in their homes for the foreseeable future.

Answering these questions accurately is important to any buyer's financial future. It's worth the time and effort to obtain the right answer.

We all know realtors don't have the answers. No matter the time or the circumstances, realtors will always tell you it is a good time to buy or sell. realtors are not concerned with accuracy, only commissions. Don't listen to them.

In all my writings for this blog, I have used accurate market data and formed an impartial opinion about both value and the direction of prices based on my analysis of that data. If the data says prices are too high and they should fall, I say so. If the data says prices are too low and they should rise, I say that too. Many try to stereotype me as a perma-bear because I have been bearish for so long. I'm not a perma-bear. The data has suggested prices are too high and they should fall for nearly 5 years now. When the data changes, so will my opinion — as it already has in Las Vegas.

Rental parity is a measure of value

To answer the first question, “am I paying too much,” I pioneered the rental parity analysis technique I briefly described in Using rental parity to find bargain properties. Rental parity is the best measure of value because it compares the cost of ownership to the cost of rental. This makes sense because either method will enable people to obtain the beneficial use of real estate. Patrick.net has a great rental parity calculator you can use to analyze any property. Check it out.

Rental parity by itself is not enough. Rental parity is not an absolute. Some neighborhoods always trade below rental parity, and some always trade above it. The neighborhoods that trade below rental parity are undesirable. Prices need to be below rental parity to attract owners to want to live there. The neighborhoods that trade above rental parity are very desirable. Buyers will typically take their accumulated equity from previous sales and bid prices above rental parity buy utilizing large down payments.

Even before the housing bubble and subsequent crash distorted the down payment figures, the beach communities had the highest down payments, and the less desirable inland communities had the smallest. Irvine was somewhere in between.

Rental parity will accurately describe the degree of price inflation in the market.

To evaluate individual neighborhoods by city or zip code, the current measure of rental parity must also be considered relative to its historic norms. Basically, beach communities are always inflated, but how inflated are they normally, and how does current pricing compare? Those are the key questions of value.

If a neighborhood or property is trading at or below its historic relationship to rental parity, it is a bargain. If above, it is inflated.

I have been writing for over 4 1/2 years now, and I have consistently made the point that values were inflated. Times have changed. Many neighborhoods are still inflated, but several are not. Further, the degree of price inflation is much smaller than it used to be. With falling prices and historically low interest rates, Irvine is now at rental partiy for a buyer putting 20% down using a 30-year fixed rate mortgage.

Bullishness in a declining market

Many people have asked me how I can be bullish on markets like Las Vegas where prices are still declining. The question reveals an underlying bias toward appreciation I don't agree with. Valuation alone is reason to be bullish.

I am bullish on Las Vegas because properties there represent a great value. The cost of ownership relative to rent is very low. Since my holding time is much longer than it will take to cycle past the bottom, I want to buy while there is still plenty of available inventory and time for me to complete a large number of purchases.

If I attempted to time the bottom tick of the market in Las Vegas, I would undoubtedly miss it. Then I would be competing with more aggressive buyers in a market with depleted supply. By the time I acquired all the properties I wanted, prices would likely be much higher than they are today. Buying at the tail end of a declining market is actually the best time.

Orange County is not Las Vegas

My bullishness in Las Vegas does not directly translate to bullishness in Orange County. We are certainly closer to the bottom than to the top, but the valuations are not good — certainly not so good they would motivate a value buyer to act — and since lenders have not capitulated here, Orange County's housing market will likely bottom later than Las Vegas's. Las Vegas will be the textbook example of capitulation and recovery whereas Orange County will be the classic example of the slow deflation most like Japan's housing market from 1990-2005.

My views on Orange County have migrated from “don't buy” to “buy if you are paying below rental parity and you have a long holding time.” Basically, anyone buying today will have to wait out the bottom. It will likely be three to five years (or more) before prices rise enough to give today's buyers enough equity to sell and pay a broker without losing money.

I guess you could say I am bullish with qualifications.

Measures of price direction and momentum

The other question buyers want to know concerns the direction of prices. As I have stated on many occasions in many posts, I believe prices will decline further before reaching the bottom. In aggregate over the entire Orange County market, that is likely what will happen. However, when you start to localize the data, the price crash has proceeded at different rates in different areas. Only through a more detailed analysis will the truth of market price direction and momentum be revealed.

Some market indicators seek to measure supply and demand and the balance between them. These indicators are as follows:

• Inventory for sale (supply)
• Total sales (demand)
• months of supply (balance)

The months of supply is a useful indicator. To be accurate it be calculated based on total closed sales. One local realtor publishes a widely read and completely inaccurate months of supply based on pending sales. The effect of using pending sales instead of actual closings is to make the months of supply a smaller number. Since months of supply has a commonly accepted interpretation — over 6 months is bad and under 6 months is good — using pending sales always makes the months of supply look better than it really is.

This kind of manipulation of data is at the core of why realtors can't be trusted. I believe the use of pending sales to make the numbers look better is intended to create a false sense of urgency in buyers by convincing them the supply and demand balance is tighter than it really is. Why else would someone use the wrong data, particularly when the right data is easily obtainable?

If the data is accurate, the months of supply provides a short-term gauge of the direction of prices. When the figure is over 6 months, prices generally either flatten or go down over the next 90 days. When the figure is less than 6 months, prices may go up — assuming buyers are motivated and have ready access to financing.

Other market indicators measure price momentum such as:

• Median home price and year-over-year change
• Average resale $/SF and year-over-year change
• Average rental $/SF and year-over-year change

Whenever realtors want to make a bad report look good, they will focus on the month-to-month change in prices, particularly during the spring when this nearly always rises. Housing markets nearly always exhibit a strong seasonal pattern of spring rallies and fall declines. The only way to get an accurate handle on price momentum is to look at the year-over-year change.

At the time of this writing in September of 2011, the market has gone up for the last three or four months on a month-to-month basis. However, on a year-over-year basis, the market is down. The month-to-month increase reflects the seasonal pattern while the year-over-year decline reflects the macro trend in the market. Month-to-month fluctuations only become noteworthy when they move against the seasonal pattern as they did this spring when they declined during a period when prices generally rise.

Of the three indicators of momentum above, the average rental $/SF year-over-year change is the most revealing. As we have seen, resale prices are quite volatile and reflect the irrational exuberance of buyers and the collective foolishness of lenders. However, rental rates closely track wages and the underlying employment picture which ultimately drives resale demand. For this reason, I favor rental $/Sf as the best leading indicator for the direction of house prices.

Monthly presentations and IHB posts

Back in March, I wrote the post The future of IHB news and real estate analysis. In it I spelled out my vision for continuing with the IHB:

Data is important, isn't it?

It's a shame the NAr has gone down the path it has. Few reliable sources of real estate analysis and information exist, and few signs the NAr is going to become one of them. That leaves a void. Uncharted waters buyers must navigate without a reliable guide. It's a void we seek to fill here at the IHB.

We are in the process of assembling our own private database of housing and related economic statistics. Over the next several weeks as I have time to digest the new information, I plan on a number of new analysis posts to truly illuminate the activity in our local housing market.

I have no agenda to spin the data. Let's see what is really going on. I want to be accurate. People can make their own decisions and draw their own conclusions from accurate data. If approached without the built-in bias of a realtor, data analysis can be revealing rather than deceiving.

I will still have a dog in this hunt. I do run a business that makes money from real estate transactions. I am subject to the same biases as any other human being. I sell real estate, but I am not a realtor. The truth needs no salesman. I will present data as accurately as I can. If reality motivates you to buy or rent, the IHB can help you. I have no desire to manipulate data in order to make a quick buck. This is a part-time hobby for me, not my livelihood.

I have assembled enough data to begin more frequent posts and monthly presentations to provide my take on the local housing market. The IHB is poised to enter the next era.

Writing the IHB has been great fun for me over the last 4 1/2 years. I have turned my enjoyable hobby into a source of supplemental income without draining the joy out of the activity. However, there comes a time when I ask myself if it's worth all the work. Am I really providing any value?

Telling people not to by and saving them from ruin was worth the work so far, but without the urgency to save the masses, I need another reason to keep going. If I'm not adding any value, I will just fade away.

Now that I am surrounded by a great team, I feel I am part of a new way of delivering real estate services. We believe buyers and sellers need accurate information to make informed decisions. Our clients approach the transaction with appropriate expectations, and client satisfaction is high because of it. We're not perfect, and we make mistakes, but we offer our honest opinions and advice and do our best to serve.

Presentations tonight

I hope to see you tonight at JT Schmids at the District. I will be there by 5:00 for happy hour. The OC housing market presentation is at 6:00 and the cashflow investment presentation is at 8:00. I hope to see you there.

An “Extremely well priced home”

The agent believes this property is “extremely well priced.” It is a short sale teaser price to be sure, but it is priced to what I believed bottoming values would look like back when I pondered the crash back in 2006-2007. Of course, the numerous government interventions and super low interest rates have prevented prices from reaching reasonable levels, but those low interest rates have also made higher prices more palatable.

Today's featured property is priced at $242/SF in a neighborhood with no Mello Roos. For a conventional buyer putting 20% down, the cost of ownership is under $2,200 per month. If anyone can find a 1,900 SF 3/2 renting for $2,200, let me know because I would take it. This is a typical median-income kind of property asking below rental parity.

Is it just a teaser? Will a bank allow it to sell for this price? Will others bid it up to a higher number? Only time will tell. The effectiveness of the teaser listing is wearing off, and lately, I have seen many properties where low listing prices have been moving even lower. If lenders start releasing these properties rather than holding them in limbo indefinitely, prices will fall to where prices like this are taken for granted.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 166 West YALE Loop Irvine, CA 92604

Resale House Price …… $464,900

Beds: 3

Baths: 2

Sq. Ft.: 1900

$245/SF

Property Type: Residential, Condominium

Style: Two Level, Other

Year Built: 1977

Community: Woodbridge

County: Orange

MLS#: S672608

Source: SoCalMLS

Status: Active

On Redfin: 3 days

——————————————————————————

Extremely well priced home in the highly desired Woodbride area of Irvine. This is a townhome that lives like a SFR with 3 bedrooms and 1900 sqft. Homeowners have done some upgrades but house does need some TLC to show at its very best. Popcorn ceilings removed, pergo flooring, some crown moulding, fireplace in Living room and family room, tile in entry area, updated kitchen with granite counters, nice enclosed yard, master bath with jacuzzi. Needs paint and possible update carpet. Walk to the lake and to the local schools. Close to shopping and easy transportation access.

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Proprietary IHB commentary and analysis

Resale Home Price …… $464,900

House Purchase Price … $635,000

House Purchase Date …. 6/9/2004

Net Gain (Loss) ………. ($197,994)

Percent Change ………. -31.2%

Annual Appreciation … -4.3%

Cost of Home Ownership

————————————————-

$464,900 ………. Asking Price

$92,980 ………. 20% Down Conventional

4.20% …………… Mortgage Interest Rate

$371,920 ………. 30-Year Mortgage

$105,310 ………. Income Requirement

$1,819 ………. Monthly Mortgage Payment

$403 ………. Property Tax (@1.04%)

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

$97 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$402 ………. Homeowners Association Fees

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

$2,721 ………. Monthly Cash Outlays

-$298 ………. Tax Savings (% of Interest and Property Tax)

-$517 ………. Equity Hidden in Payment (Amortization)

$139 ………. Lost Income to Down Payment (net of taxes)

$78 ………. Maintenance and Replacement Reserves

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

$2,123 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$4,649 ………. Furnishing and Move In @1%

$4,649 ………. Closing Costs @1%

$3,719 ………… Interest Points @1% of Loan

$92,980 ………. Down Payment

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

$105,997 ………. Total Cash Costs

$32,500 ………… Emergency Cash Reserves

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

$138,497 ………. Total Savings Needed

——————————————————————————————————————————————————-

Trapped in houses worth less than their mortgages, many loan owners are unable to move to take jobs or accommodate their growing families.

Irvine Home Address … 134 ECHO Run #48 Irvine, CA 92614

Resale Home Price …… $199,900

Trapped in a box of tremendous size

It distorts my vision, it closes my eyes

Attracts filthy flies and pollutes in the skies

Sucks up our lives and proliferates lies

Trapped in a box

No Doubt — Trapped in a Box

The people who have endured foreclosure, sold in a short sale, or walked away from their mortgage debt are the lucky ones. For them, the ordeal is over. They still have ramifications with bad credit, but they now enjoy the freedom of renting — and lower housing costs to boot. The underwater loan owners who stay in their homes are the ones living in quiet desperation trapped in a stucco box.

Generation of homeowners stuck in first houses

By Rick Daysog

rdaysog@sacbee.com

Published: Monday, Aug. 29, 2011 – 12:00 am

They're trapped, like so many members of their generation.

Steve and Tasha McLaughlin have had two kids since they bought their two-bedroom “Brady Bunch”-style house in South Natomas seven years ago. They need more room, but they can't move: The house they bought for $256,000 is worth just $90,000, and an attempt to sell it failed.

This family would be foolish to remain. The shortest path to equity is through strategic default. It will be 25 years or more before a $90,000 home triples in price to the $270,000 it would need to sell for in order for them to cover their closing costs and get out at breakeven.

“We are literally stuck,” said Tasha McLaughlin, 33. “There's no light ahead.”

The McLaughlins and tens of thousands of others like them in the Sacramento region are unable to take the traditional second step on the American home ownership ladder. They are captive to outsized mortgages born in a real estate bubble, which have balances much higher than the homes are now worth.

During the boom years, young families could sell their first homes to buy larger ones, using the equity they built up in their starter models. But for those who bought at the height of the market, plunging prices have wiped out their equity and then some.

Many of these people haven't lost their jobs and aren't behind on their mortgage payments, so they don't qualify for a loan modification that could shave off big chunks from their monthly housing payments.

“If you bought in the last few years, you're not going to have a lot equity, and you're going to be stuck for a while,” said Andy Thielen, a Realtor with Lyon Real Estate's downtown office.

That's an optimistic assessment. Unless borrowers put 20% or more down, nearly all buyers from the last decade cannot sell their house for enough money to pay off their loan and their realtor. If people feel they have to move, they can either attempt a short sale, or they can strategically default.

Or course, in our culture of entitlement, borrowers who consider short selling believe lenders should approve the short sale and simply eat the loss. Lenders in California now have no recourse after a short sale, so very few will be approved unless borrowers agree to repay what they can. Or course, most borrowers believe they shouldn't repay anything. They liked keeping the upside, but borrowers don't want to take the pain of the downside they didn't think was possible (real estate always goes up, right?) Most borrowers would be far better of strategically defaulting then declaring bankruptcy.

One of the only ways to move with intact credit is to rent out the first house and buy a second, bigger one to live in. But only those owners with enough money for a second down payment can afford to pursue that course.

The forced absence of so many young adults from the homebuying market has eroded demand for move-up houses, a crucial piece of the local real estate economy.

This doesn't only trap young adults. It traps the older adults who went Ponzi and spent their equity in anticipation of ever-increasing home prices.

Andrew LePage is an analyst with DataQuick, a San Diego real estate information firm. He said the lack of move-up buyers can easily be detected by looking at what's happened to sales of homes in the $250,000-to-$600,000 range.

In 2006-07, when the local market was near its peak, that segment accounted for 70 percent to 80 percent of all sales in the Sacramento region, according to DataQuick. These days, homes in that price range account for less than 19 percent.

Part of this reduction in volume is because fewer homes are priced in that range due to the crash, but his point is well taken: there is no move up market because there are so few with any equity to make the move. This has been exacerbated by the way lenders have chosen to foreclose at the bottom of the market first. Lenders have crushed the segment of the market they needed to support in order for borrowers to have equity to afford the more expensive homes to come later. When lenders finally get around to liquidating their high-end properties, the buyers they need will be trapped in their starter homes.

Sacramento-area home sales have picked up lately, but they tend to be for rock-bottom deals in neighborhoods thoroughly scoured by foreclosures and short sales.

Traditional move-up neighborhoods, such as Sacramento's Land Park and Greenhaven-Pocket, are seeing less activity. In the ZIP code that includes Land Park and Curtis Park, for instance, sales volume today is 36 percent below the neighborhood's 10-year average, according to DataQuick. Sales in the Greenhaven-Pocket area are down 31.7 percent.

David Moultrie, 31, a painter who lives in the Pocket, said the sluggish housing market has prevented him and his wife, Emily, from moving into a bigger home. The couple paid about $350,000 six years ago for a two-bedroom, which Moultrie said is now worth about $200,000.

They looked at several homes in the $280,000-to- $325,000 range last spring, but all of them were either “backed up against a freeway or were fixer-uppers,” said Moultrie, who needs the extra space for his growing business and his 2 1/2-year-old daughter.

He's now in the process of adding a bedroom and bathroom to his existing home, paying for the renovations through savings. A home equity loan, he said, is out of the question given his house's loss of value.

“It's just a bad situation,” Moultrie said.

Prior to the housing bubble, people used to fund home improvements from their own savings. It's only the rampant HELOC abuse of the 00s that convinced people houses self-fund their own improvements. Many now view HELOC funding from appreciation as an entitlement.

For Julia Himovitz, the reality check came in June when she and her husband, Gregory Ries, put their two-bedroom, one-bathroom house in Tahoe Park on the market.

They listed it at $269,000, only to discover that a similar house across the street had sold for less than half of that.

LOL! I wonder if they listed it with a realtor who told them they could actually get their asking price? It should be an embarrassment to both the sellers and the realtor to put an asking price in the market so clearly delusional that buyers ask, “WTF?”

They later dropped the price to $240,000 – about what they paid eight years ago – before pulling the house off the market altogether.

Himovitz, 32, an attorney, said she and her husband have decided to rent out their Tahoe Park home and use their savings to help buy one that's big enough to accommodate their family, which now includes a 2-year-old son and a 70-pound golden retriever.

“We love our house and I love the location. It's a wonderful place,” she said of her current house.”But if we want to have more children, it would be hard.”

Tasha McLaughlin, the South Natomas homeowner, says her situation is already hard, and she doesn't know what to do about it. The market fall has left her stuck with a house that's too small and a mortgage that's too big. She and her husband pay $2,000 on their interest-only loan; that payment will rise to $2,400 a month in 2017.

McLaughlin, who runs a small business that organizes lacrosse tournaments and clinics, said she tried to get her loan modified in recent years. The first time, she waited months before receiving preliminary approval, only to find out that her loan was sold to another bank before the modification could be completed. Earlier this year, she approached the new lender for a loan modification but was rejected because she hasn't missed a mortgage payment.

McLaughlin said she and her husband, Steve, also tried to sell their home last fall when he took a job in New Jersey as ticket sales manager for Rutgers University.

But nobody bought. Her husband opted to quit his job after nine months, and the family returned to Sacramento. He now works as an alumni director for a local high school.

How much longer will this family continue to struggle? They will not have any equity in that home in their adult working lives. How much longer will they continue to pay the price for that mistake? How long should they?

I believe they should default. Lenders created this problem, and strategic default is moral imperative to prevent future housing bubbles. The fear of strategic default is a necessary deterrent to foolish lending. Without it, lenders are emboldened to make all manner of bad loans because they believe they will get paid back. Lenders will make nearly any loan if they believe they will get their money back with interest. It's only when they feel they won't get repaid are they prompted to loan responsibly.

Irresponsible lending has trapped the generation of bubble buyers in their homes. These people will not be rescued by rising prices unless we inflate another harmful housing bubble. Lenders must pay a heavy price for the foolish lending of the 00s.

Borrowers must pay a price too or moral hazard will encourage more irresponsible borrowing. Loss of the home through foreclosure, short sale, or strategic default, and damaged credit are appropriate consequences.

Both lenders and borrowers have been soliciting government bailouts to avoid the consequences of what they have done. Moral hazard makes in imperative that politicians do not give in to either side.

How would you like to be stuck in 715 SF?

The former owner of today's featured property had a choice to make: (1) stay in her tiny debtor's prison she couldn't afford, (2) walk away from her debt and escape to renter's freedom. She walked.

This property was purchased on 6/14/2005 for $319,000. The owner used a $255,200 Option ARM with a 1% teaser rate, a $31,900 HELOC, and a $31,900 down payment. The use of the Option ARM strongly suggests she really couldn't afford the property.

On 5/19/2006 she obtained a $55,000 stand-alone second. She quit paying in May 2010 or perhaps earlier.

Foreclosure Record

Recording Date: 12/07/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/24/2010

Document Type: Notice of Default

The bank didn't waste any time once they issued the NOD. This is an instance where the borrower's circumstances were improved by foreclosure. Her payments would have greatly exceeded the cost of a rental, and it would have been quite some time before the value of this property gets back above $319,000. She was spared a decade of renting from the bank.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 134 ECHO Run #48 Irvine, CA 92614

Resale House Price …… $199,900

Beds: 1

Baths: 1

Sq. Ft.: 715

$280/SF

Property Type: Residential, Condominium

Style: One Level, Contemporary

Year Built: 1980

Community: Woodbridge

County: Orange

MLS#: S655443

Source: SoCalMLS

Status: Active

On Redfin: 126 days

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Desirable Woodbridge condo with Huge balcony. Nice sized 1 bed 1 bath condo with laundry hook laundry closet!! Recently painted & new carpet installed!! All you have to do is unpack your stuff!! Be in before summer and enjoy all the amenities that Park Vista HOA has to offer. Why wait on a short sale when this great condo is ready for you now!!

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Proprietary IHB commentary and analysis

All you have to do is unpack your stuff!! And you better not have much if it must fit in 715 square feet.

Resale Home Price …… $199,900

House Purchase Price … $319,000

House Purchase Date …. 6/14/2005

Net Gain (Loss) ………. ($131,094)

Percent Change ………. -41.1%

Annual Appreciation … -7.4%

Cost of Home Ownership

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$199,900 ………. Asking Price

$6,997 ………. 3.5% Down FHA Financing

4.26% …………… Mortgage Interest Rate

$192,904 ………. 30-Year Mortgage

$68,045 ………. Income Requirement

$0,950 ………. Monthly Mortgage Payment

$173 ………. Property Tax (@1.04%)

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

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

$222 ………. Private Mortgage Insurance

$371 ………. Homeowners Association Fees

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$1,758 ………. Monthly Cash Outlays

-$150 ………. Tax Savings (% of Interest and Property Tax)

-$265 ………. Equity Hidden in Payment (Amortization)

$11 ………. Lost Income to Down Payment (net of taxes)

$45 ………. Maintenance and Replacement Reserves

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$1,398 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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

$1,999 ………. Closing Costs @1%

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

$6,997 ………. Down Payment

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$12,924 ………. Total Cash Costs

$21,400 ………… Emergency Cash Reserves

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$34,324 ………. Total Savings Needed

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