One of the many misperceptions that emerged from the housing bubble and its associated collapse is the idea that house prices during the bubble were normal and sustainable and that the lower values today represent a depressed value from which the housing market must “recover.” In the case of asset bubbles, prices become greatly elevated from fundamental values, and the price collapse merely restores prices to their fundamental values. In reality, the housing market “recovered” during 2007 and 2008 when prices crashed back down to price levels sustainable by local incomes. Since a true “recovery” with pre-bubble prices also means an imperiled banking system and many unhappy loan owners, the government and the federal reserve have been feverishly trying to reflate the housing bubble to restore collateral value backing the banking industry’s many bad loans.
What is commonly referred to today as a “recovery” in housing is nothing of the sort. It’s a reflation of an asset bubble through artificial means designed to save the banks from future losses and placate the masses of sheeple who foolishly participated in a financial mania. Perhaps these semantic distinctions seem unimportant, but misperceptions such as this guide public policy and contribute to the moral hazard likely to result in another painful housing bubble.
Published: Wednesday, 2 Jan 2013 | 11:33 AM ET
The housing market is on firmer ground today, as two major tax provisions survived the “fiscal cliff.” Congress did not touch the mortgage interest deduction, and it extended tax relief for one year on mortgage debt forgiveness.
It’s worth noting that the debate on the mortgage interest deduction is merely delayed. In all likelihood, the mortgage interest deduction won’t get touched directly, but when Congress takes up tax reform later this year, we may see an overall cap on deductions will will render the home mortgage interest deduction much less valuable to the high-wage earning households that utilize it.
“An extension of the tax break is positive for home values by reducing the number of foreclosures and helping more troubled borrowers stay in their homes,” wrote Jaret Seiberg of Guggenheim Partners. “That means less supply on the market.”
This is just wrong on many levels. First, if the tax break for short sales and principal reduction were not extended, it would have done far more to reduce inventory on the MLS. No loanowners would have listed their homes if the sale was going to result in a giant tax bill. The extension of this tax break ensures we will continue to see short sales make their way onto the market. Second, banks have already demonstrated that the number of foreclosures has nothing to do with the number of delinquent borrowers. If more borrowers defaulted and fewer sold through short sales, shadow inventory would have grown larger as banks continue their slow processing of foreclosures at a pace designed not to crash the market. And third, foreclosures are not a problem. In fact, foreclosures are essential to the economic recovery.
Under a law signed in 2007, debt relief on loan modifications, short sales, and foreclosures were no longer taxable; that break expired at the end of 2012. The fear was that if the tax break was not extended, home owners would not agree to short sales (when the home is sold for less than the value of the mortgage) because they would then face a tax bill. They would also not agree to principal reduction loan modifications, which have proven to be far more successful than other modifications that leave the principal balance as is.
To that I say, so what? We shouldn’t be subsidizing these people anyway, particularly the Ponzis who took out free-money loans and spent it as income. To subsidize them with a tax break will merely encourage the worst of this behavior again in the future.
Under the $25 billion mortgage servicing settlement, borrowers have received $6.3 billion in mortgage principal relief through September, according to the settlement’s monitor, Joseph A. Smith, Jr. The average loan balance reduction, $150,000. Banks completed 13,351 principal reduction loan modifications in November alone, according to Amherst Securities Group, a 62 percent jump from September.
The banks are busy forgiving pricipal on deeply underwater loans in hopes the squatters may start paying again. By making the light at the end of the tunnel a little nearer (these principal reductions still leave them underwater), a few deadbeats might start paying again. The banks really don’t have much to lose because the chances of recovery on these deeply-underwater loans was near zero anyway.
Short sales also surged toward the end of the year, thanks to streamlined procedures and a more aggressive stance by the big banks, again in part due to the mortgage servicing settlement. More than 98 thousand short sales were completed in the third quarter of 2012, according to RealtyTrac.
Banks hope to resolve more bad loans through short sales because they get credit for the losses against the settlement agreement. Once their obligations under the agreement are met, they will likely increase foreclosure rates to force out the squatters, assuming the housing market is strong enough to absorb the flow of properties.
The “fiscal cliff” deal also allows borrowers to deduct the amount they pay for private mortgage insurance, which has become increasingly prevalent in today’s tighter mortgage market.
I had no idea this was slipped in to the deal. Starting next week, I will reflect this change in my cost of ownership calculations. Previously, only interest and property taxes was deductible. This will make houses with expensive PMI a bit more affordable which should help the weak move-up market.
All of the above will help to lower the number of foreclosures and support the slow rise in home prices.
Again, the number of foreclosures has nothing to do with any of the above. The number of foreclosures is completely determined by bank policy designed specifically to limit the flow of properties to the MLS.
The number of homes in the so-called “shadow inventory” (properties that have seriously delinquent mortgages, are in foreclosure, or are owned by banks but not yet listed for sale) fell to 2.3 million in October, according to a new report from CoreLogic. That represents a seven-month supply at the current sales pace, and is a 12 percent drop from a year ago.
The month’s of supply metric is a poor way to report shadow inventory. It implies the problem will go away in seven months. It won’t. Apparently, the months of supply was 7.7 months a year ago. At current rates of disposition, shadow inventory will be a problem for another 10 years. It will undoubtedly be with us much longer than most realize due to the can-kicking behavior of loan modifications which will mostly fail.
“We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold,” said Anand Nallathambi, president and CEO of CoreLogic in a release.
That would not have been the case, had tax relief on debt forgiveness in short sales and principal reduction modifications come to an end.
It’s true that shadow inventory would have grown larger if the fiscal cliff deal did not include the short sale debt forgiveness provisions because more borrowers would have chosen to squat and fight foreclosure rather than sell. The delay on a decision to address deduction limits will create a lingering uncertainty that may negatively impact markets like Orange County where high wage earners will be most impacted by a cap. Enough buyers will ignore the risks to have any tangible negative effects though.
In the end, the fiscal cliff deal favors the reflation of the housing bubble. The lending and real estate industries should rejoice their short-term victory.
Eaten by the Sharks
The former owners of today’s featured property lost their home under rather unusual circumstances. The purchased the property for $1,012,500 on 10/10/2003 using a $708,750 first mortgage and a $303,750 down payment. On 7/5/2011, they refinanced with a 740,000 first mortgage from Val-Chris Investments, a hard-money lender. Then on 2/3/2012, they obtained another loan from The Evergreen Advantage LLC, another hard-money lender for $650,000. Three months later, they were served an NOD, so they quit paying one or both of those lenders right after closing on the second loan. They were quickly foreclosed on, and now the property is on the market for enough to make whoever foreclosed a healthy profit.
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|Baths||4 full, 1 half|
|Home size||5,167 sq ft|
|Lot Size||16,698 sq ft|
|Days on Market||156|
Golfer's Paradise! This magnificent midcentury modernist home is situated directly over the 15th fairway of the prestigious Los Coyotes Country Club. This architecturally stunning home offers unparalleled views through the expanse of floor to ceiling windows across the entire rear of the property. It has been remodeled with upgrades galore including marble tile, wood flooring, custom cabinetry, granite counter tops, stainless steel appliances and a 12 seat media room. At 5,167 square feet, this 5 bedroom, 5 bath stunner is an entertainers dream. The 17,000 square foot cul-de-sac property offers direct golf cart access and 180 degree views from your multi-tiered patios, gazebo or pool deck. Bring your golf cart and move right in!
Property Type(s): Single Family, Residential
|Last Updated||6/7/2013||Tract||Custom (OTHER (OTHR))|
|Year Built||1959||Community||Buena Park|
Listing information deemed reliable but not guaranteed. Read full disclaimer.
Proprietary OC Housing News home purchase analysis
$1,708,800 …….. Asking Price
$1,012,500 ………. Purchase Price
10/10/2003 ………. Purchase Date
$696,300 ………. Gross Gain (Loss)
($136,704) ………… Commissions and Costs at 8%
$559,596 ………. Net Gain (Loss)
68.8% ………. Gross Percent Change
55.3% ………. Net Percent Change
5.7% ………… Annual Appreciation
Cost of Home Ownership
$1,708,800 …….. Asking Price
$341,760 ………… 20% Down Conventional
3.98% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,367,040 …….. Mortgage
$325,892 ………. Income Requirement
$6,511 ………… Monthly Mortgage Payment
$1,481 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$427 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$8,419 ………. Monthly Cash Outlays
($1,343) ………. Tax Savings
($1,977) ………. Equity Hidden in Payment
$471 ………….. Lost Income to Down Payment
$447 ………….. Maintenance and Replacement Reserves
$6,017 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$18,588 ………… Furnishing and Move In at 1% + $1,500
$18,588 ………… Closing Costs at 1% + $1,500
$13,670 ………… Interest Points
$341,760 ………… Down Payment
$392,606 ………. Total Cash Costs
$92,200 ………. Emergency Cash Reserves
$484,806 ………. Total Savings Needed