Go to page five. There? Good. Read with me, then…

1. The market for home purchases can be divided into segments of 26% for damaged REO, 23% for move-in ready REO, 14% for short sales, and 36% for non-distressed properties. That means about 2 out of 3 homes up for sale are distressed properties. There are even more homes owned by banks that aren’t on the market right now because the market’s already glutted enough.

2. Forty-three percent of homebuyers are first-time homebuyers, 29% are current homeowners, and another 29% are investors. OK, so yay for the first time homebuyers, but look at what they’re buying:

3. First-time homebuyers account for the majority of move-in ready REO sales while investors account for the majority of damaged REO sales. In other words, those damaged REOs aren’t getting snapped up as fixer-upper bargains. Will their prices fall further?

4. Current homeowners concentrate their home purchases on non-distressed properties and buy comparatively less damaged REO. Underscores the concern from #3.

5. Real estate agents expect appraisal issues to be the No. 1 reason for cancellations of signed Purchase and Sales agreements over the coming summer months. This is a big one. People are not going to agree with prices as they’re being set. Sellers want a higher price, and the buyers are hoping for lower.

6. Only 31% of non-REO home sale listings are unforced or optional; other major reasons for listings include financial stress (including short sales), long distance relocation, and divorce or estate sales. OUCH. This is a big one. This means about 10% of the market is “unforced or optional.” The economy is still in a very tough spot, and this shows it.

7. Homeowners are choosing to not list homes primarily because of “Falling prices”, followed by “Competition with distressed properties”. That means they want to sell, but they can’t get a price to equal what they put into it. Nobody wants to lose money on a huge deal, like a home sale.

8. For first-time homebuyers, “Government incentives to buy (tax credits, mortgage deduction)” is the No.1 motivation to buy. Take that motivation away, and the market takes a huge hit. Sad but true.

9. For current homeowners buying homes, “Retirement relocation” and “job relocation” are the No.1 and No. 2 motivations to buy, respectively. They’re not trading up, anymore. They’re either downsizing the empty nest or following that all-important job.

10. “Sale of residence” is the No. 1 impediment to current homeowners seeking to buy another home. OUCH #2. I know people that are selling their home, then renting it for about 3 months after the sale while they buy a home after having confirmed the sale on their current home.

11. “Down payment for mortgage” is the No. 1 impediment to first-time homebuyers seeking to buy a home, followed by “Slow answers on short sale offers.” If you can’t get the down payment together, you ain’t buying a home. In this economy, that’s going to be a big problem.

12. Seventy-six percent of first-time homebuyers accept a mortgage recommendation of the real estate agent, 68% of current homeowners accept a recommendation, and 53% of investors accept a recommendation. Not much to say there.

13. On average, mortgage servicers take 9.5 weeks to provide a “yes” or “no” response to an offer to buy a short sale property. Wow. That’s two and a half months of the home sitting on the market, doing nothing. That can’t be good.

14. According to real estate agent respondents, “Mandated one-week response time on short sales offers” is the No. 1 rated action that the government could take to increase home sales and stabilize prices. Sure, the real estate agents want this. But I can’t help but wonder if this wouldn’t somehow mess up the mortgage servicers.

15. According to real estate agent respondents, “Provide consistent one-week ‘yes’ or ‘no’ response to offers” is the No. 1 rated action that the mortgage servicers could take to increase short sales. Again, what’s going on in the mortgage servicing biz that’s keeping them from doing this?

16. According to real estate agent respondents, “Provide consistent one-week ‘yes’ or ‘no’ response to offers” is the No. 2 rated action that the asset managers could take to sell REO properties with lower overall losses; the No. 1 rated action is “Turn on utilities for inspections.” So people don’t want to buy distressed properties in the dark? I guess when banks feel like it’s worthwhile to switch on the lights, the economy’s good enough to move that house. Until then, we’ll all be in the dark…

If you go on past page 5, there’s some interesting anecdotal information about the condition of the market starting on page 19. One set of observations that caught my eye was that banks are wanting cash or conventional loans for their properties and are not taking FHA loans. Another lament was how the properties sitting off the market are getting more and more damaged and distressed, making them more difficult to sell.

The distribution of distressed properties is not even, not by a long shot. Some areas have no surplus of homes: others are awash in distressed properties, driving the market down hard. Banks are encouraging bid wars for their properties, but the homes don’t appraise for the bid value, causing a cancellation of the sale agreement.

One thing I see mentioned over and over is how prices are being driven lower and people are holding back from making purchases as they wait for the prices to go lower. That’s asset value deflation. That’s not a good thing at all. With ARM homes set for a reset this year and next, there will be even more downward pressure on home prices.

Government bailouts are supposed to be last-ditch resorts. Instead, they’re built into financial risk assessment as guaranteeing no negative returns for major players. Corporations bank on them – pun only slightly intended – to be there to prevent a sticky end for them at the expense of the taxpayers and all those businesses that weren’t too big to fail.

Worse, when the government tried to act like it wasn’t going to bail out the guys that gambled with everyone’s retirement money and let Lehman Brothers fail, the consequences were so horrendous that the government couldn’t show that tough love ever again. It had to keep the oligarchy of major financial institutions going, even if it meant abandoning the small businesses of America that were struggling just as much.

Moral of the story? First off, if you want to succeed, your corporation needs to be so huge that it can’t be ignored. Second, you have to gamble with other people’s money with guarantees from those people – or their government – to make good on your losses. Third, you need better political connections than Lehman had, so the government won’t let you fail… and so you can also get a preferred bid on the contract to buy up the remains of your competitor. Moral hazard all the way.

The market doesn’t always know best, particularly when it’s able to buy or otherwise demand government influence. Had there been no guarantees, those financial institutions would have had to been more careful, right?

Nope. There were no such guarantees in 1907, and the same thing that happened in 2008 happened then. That’s when we learned there was such a thing as “too big to fail.” The government then worked to keep financial institutions from getting that big again.

In the last 25 years, those century-old regulations were stripped away, and the financial sector became more and more reckless as it became bigger and less failworthy. The government promises to keep disaster from happening actually made the banks act as if disaster could never happen, and that’s the very definition of moral hazard.

Right now, Obama’s solution to the financial sector problems does not deal with the moral hazard that currently exists. Nothing’s on the table to get the industry back where it needs to be to keep another major collapse from happening.