Smiling merchants, plenty of doors open for business, retail malls full of customers coming and going, carrying packages and doing their bit to move the bustling economy along.The city of Irvine was headquarters for many sub prime lenders and  their employees were writing a great deal of loans.   Loans for refinancing and home purchases were booming, and in the purchase market, they far outweighed the numbers of cash buyers.New homes were springing up, and construction jobs were plentiful.  Signs with smiling realtors pointed the way to model homes, resale homes and SOLD signs announced successfully completed transactions on carefully manicured lawns.Ah, wasn’t life grand!

That was then.  This is now.

That bustling, happy Orange County is not so healthy anymore.  The bitter dry wind that blew through in the form of  the 2008 financial crisis changed things.   Tremendously affected was the real estate market, and a turnaround in residential real estate is something the entire county dreams about.

When people dream, there is no lack of peddlers promising to make those fancies come true.  So dream peddlers now abound in the county,  pointing to blue skies, and rainbows to reassure the people that good times are here again.    But, pink clouds, and blue skies s don’t change mathematical facts, and the dismal facts are what led to the downturn.

The facts are that the bubble in housing, the credit boom connected to housing, the massive numbers of borrowers qualifying for home purchases were illusory and unsustainable.

Much as we might like to dream of a return to Orange County halcyon days, we live in the present and must face reality.  Back away from Orange County dreaming for a moment, and  let’s talk about that.

Things are getting better are they not?   Haven’t we heard that, here in Orange County, inventory is low and resulting in higher sales prices?   Isn’t the complaint from realtors that there are buyers, but not enough sellers?  Hasn’t this lack of inventory even resulted in multiple offers and sale prices higher than list?  And isn’t that supply and demand imbalance and reaction a sign of improving market conditions?

Actually, no, this recent drop in inventory is not a good sign.

According to Zillow’s last numbers, nearly 16 million American homeowners are underwater, which equates to 1.2 trillion dollars worth of mortgages. Being underwater will shut the door on any future plan of selling one’s house unless you want to short sale the home or just walk away from it. This isn’t a healthy reality in housing and wasn’t the case back in Orange County, 2005.    This large pool of underwater homes is another reason home sales are much lower than in 2005, in spite of the much lower interest rates of today.

Secondly, homeowners who don’t have a strong reason to sell aren’t likely to sell into a market with depressed prices.  Some want to hold off making any kind of move, until the market prices have gotten better.

This is contrary to a healthy market in which there are a number of reasons people choose to sell (as opposed to a forced short sale or foreclosure).    Reasons to sell in a healthy climate include moves for job relocations , a desire to move up into a larger home or, for those nearing retirement, into a smaller home. For now, these sellers are waiting on the sidelines.

What this has meant is lower inventory.   Laws of supply and demand still apply, so that if supply is lower than demand, prices will rise.  Since supply has dried up, even though demand is weak, supply is even weaker.  Hence, a rise in home sale prices year over year.

This recent rise in home prices has dream peddlers calling for the market turnaround and the start of a bull market in housing.

That imbalance between supply and demand would be cause for cheer in a normal market, but a normal market is not what we have.

In a healthy market,  we would not see actions being taken by the NAR and California state congressmen who are trying to block Freddie and Fannie REO bulk sales for rentals.   And whereas before, nobody was calling for this, now the cry now is to bring the foreclosure homes onto the market.

Nor  would  we see realtors knocking on doors with the suggestion to homeowners that they short sell their house, in order to take advantage of new short sale rules .   Today this is not an uncommon occurrence.   Is this effort to create inventory in such a manner a sign of a healthy market?  No, it is not.

Actions like the above, taken in order to create market inventory, outside of the normal market forces, creates a propped up housing sector that looks clumsy and inefficient.  When we abandoned all market principles in housing, this type of chaotic mad behavior is what we have to deal with.

I remember Orange County in 2005 very well and can assure you,  the housing market today bears no resemblance to the market in  2005. FHA loans weren’t popular, we didn’t have a shadow inventory, rates weren’t as low as they are today, there were no ideas for bulk sales for rentals and real estate agents weren’t asking you to short sale your home. Please  don’t be fooled into thinking that the low inventory is  a strong housing indicator.  It is a by-product of a dysfunctional housing market,  leading to multiple bids on a limited number of homes.  Organic sellers have become ghosts,  and there are yet long delays in getting distrssed homes into the market.

 Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial columnist for Benzinga.com and contributor for BusinessInsider.com