Strategic default

Home prices have to go down, banks need to reduce prices they ask for foreclosures until market accepts the new level, only then will people be willing to risk both their capital, future income, and be willing to subject themselves to the rigorous underwriting process.

This is a deflationary trend. These are underutilized assets. Bank assets, fnma, freddie mac, and any mortgage assets held by gov't overvalued. Bofa's zombie bank creation should reflect this deflationary trend through write-offs going forward.

Gov't is trying to inflate away debt problems and show a USD based profit on the mortgage assets (or break-even) all the while the dollar is losing it's value, and inflation is rearing it's ugly head elsewhere. The Bernank sees inflation is already out of control but is too scared to raise interest rates too quickly. Sadly this divergence between home prices declining and food/fuel costs increasing will net a weird CPI that will vary based on two conflicting trends.

Optimistically at some point economies recover from defaults (which is what printing money amounts to) jobs return at a lower salary base but at least people are employed. Banks must write-off losses and reduce home prices. Local governments have to figure out where else to obtain tax revenue other than property taxes.

“At this point new homes are likely to continue to lose to existing homes because distressed properties pose a better bargain for buyers,” said Millan Mulraine, senior U.S. strategist at TD Securities in New York. “We’re not seeing a strong rebound in the horizon because permit approval is just marginally above starts.”

“Many potential home buyers are finding mortgages difficult to obtain and are also worried about additional declines in house prices,” Bernanke told lawmakers March 2.

For housing, employment “is the most important part today or biggest impediment,” said Larry T. Nicholson, chief executive officer of Ryland Group Inc. (RYL), a Calabasas, California-based homebuilder catering to first-time buyers.

Whether potential buyers “have a job and they’re going to keep their job or whether their hopes of employment are out there is still the biggest challenge for us today,” Nicholson said at an investor conference March 8 in Orlando, Florida.