Not only that but the govt. should not waste our tax dollars trying to keep people in overpriced homes. Their efforts should be focused on helping people in forclosure or bankrupcy get back on their feet, getting people who can afford to buy a fair market priced house to buy that house with reasonable financing, and to create jobs, which is what is ultimately going to get us back to growth. I mean I didn’t see Uncle Sam prop up Cisco stock when it plummeted from 80 to 50 on its way down to 11 a share or Pets.com or Webvan when they went to zero, why should we be doing it for another overpriced asset like housing?

But they don’t. Real estate liquidity is a prime example. The economy would benefit from maximum liquidity, minimum friction. Get the foreclosed homes sold, let prices reach levels where inventory moves, let pick-a-pays and alt-a loans fail if the borrower can’t afford them, clean out the detritus. If prices need to fall another 30,40,50% in some places, so be it.

But banks don’t want liquidity right now – those loans on their books would drop in value by several times their available capital – which means the banks themselves would go under. The foreclosed homes they already own and will own would be deflating assets. They want less liquidity, if not to let employment recover, then simply to stay in business, buying time since the alternative is to shutter the business.

So you get these “workouts”, ways to keep insolvent borrowers from defaulting, at a minimal hit on the bank’s books, and keep that house off the market. Locks people in to an investment that already has failed, and will continue to fail, locks up the house so it can’t be sold to someone who can afford it (at a better price) – its a classic misallocation of capital and assets.

Toss in Prop 13, which creates huge friction in the market – keeping people in houses they don’t want because of perverse tax incentives. You’re elderly, retired, your kids have long since moved out, but you keep a house that is three times the size you need, because selling and moving to a smaller place would send your property taxes skyrocketing. And property taxes on new buyers are ridiculously high because the bulk of owners are locked in to ridiculously low valuations.

So you get barriers to selling, depressing inventory, barriers to buying, depressing sales, keeping first time buyers locked out and existing owners locked in. Classic example of perverse tax incentives distorting a market in every bad way possible.

Which begets things like municipalities zoning for very little housing (lousy long term tax revenue) and far too much retail (easy sales tax money), further distorting the economy. Ugh, its a picture no economist could love, or even bear.

One small thing he is right about, is that Citibank was giving out easy credit. I know they were, because I’m on Social Security Disability and did not own a home and yet they gave me five thousand dollars credit at Home Depot which was ludicrous. (I know this is not about housing specifically, but about the economy).

The State of California is harming their most vulnerable; elderly and disabled and blind on Social Security Supplemental income. It’s been cut twice this year, and rental housing assistance has not kept up at all for Californians in poverty. I am on Disability, and recently Social Security tried very hard to cut my $200 a month of SSI out, by being untruthful and very shady. I had to fight them with a lawyer. The employees act like they are going to save California by cutting out as many poor people as they possibly can.

Why are some areas still holding their own, such as nice areas of Long Beach? I grew up in an area there where houses have held at 1/2 mill. for many years.

We chose to stop making our payment in September and still haven’t recieved a NOD. We have heard many rumors surrounding how to negociate modifications during foreclosure, but would love to learn more. We are particularly curious if it is too late to modify after a NOD has been issued.