Underwater Housing – Your Mileage May Vary…..

Like I was saying early, the underwater housing report was on a national scale and the mileage may vary.   Here’s proof that it does:

Technorati Tags: Underwater Housing, House Prices

Underwater Housing

An interesting report from Zillow on underwater housing.   A couple of thoughts about it:

• It appears that part of the reason the percentage of underwater housing is dropping is because banks are foreclosing on more homes.   I guess if you’ve lost your home, you don’t have a negative equity situation any more.
• The other reason is because the first time home buyer stimulus did exactly that, it generated interest and additional sales.

It also raises questions, though, what the report is going to look like going forward.   Are we just borrowing 2010 sales into 2009?   2011 Sales?   What does that leave for next year?

The next 6 months will prove to be interesting……

Tom Vanderwell

Rate of Underwater Mortgages Narrows in Q309, says Zillow : HousingWire || financial news for the mortgage market

Zillow indicated that, although more underwater mortgages dropped into foreclosure, home values stabilized somewhat in the quarter.

For the 11th consecutive quarter, home values shrank, falling 6.9% compared to the same time period last year. But the rate of decline narrowed in Q309, meaning home values did not fall as dramatically year-over-year as they did in the second or first quarters, according to the report.

Zillow’s Home Value Index flattened in Q309, dropping 0.4% from the end of the second quarter. The Index measures home values in 156 metropolitan statistical areas (MSAs).

Real estate owned (REO) property sales remained high, accounting for 21.4% of all US home sales in September. REO sales took up 74.2% of sales in Merced, Calif., 69.3% of sales in Stockton, Calif. and 67.5% of activity in Las Vegas. The report also added that 26.9% of homes sold for less than what the seller originally paid.

Stan Humphries, Zillow’s chief economist, said that a combination of stabilizing home values and foreclosures spurred the decline of homeowners strapped with negative equity.

“The next several months will be critical to the housing market. Previously, we’d been expecting to see increasing foreclosure rates during the real estate market’s slow winter season, a confluence of events that would likely drive inventory up and prices down,” Humphries said. “But now, with the extension of the $8,000 first-time homebuyer tax credit and a new $6,500 credit for some repeat homebuyers, we could see a bump in demand that could partially offset the increased supply of foreclosed homes on the market.”

Technorati Tags: Underwater Housing

7 Things Every Home Buyer Should Know – Part 2; Don’t Worry

Time to take a look at the second installment in the 7 things series.   If you recall, last time, we looked at the fact that, in a rapidly changing market like we are, 6 months ago is ancient history.    What someone paid 6 months ago…… Well, just read about that at 7 Things – Part 1.

So what’s Part 2 about?   Here’s what I wrote last time:

2. Don’t worry so much about what you paid for your house. Instead, look at the difference between what you can expect to sell your house for and what it’s going to cost you to buy the new one that you want. I expect you’ll find that those are much more important numbers (unless you end up without any equity, in which case you don’t sell).

There are a couple of things that I think still hold true and one big thing that I think doesn’t hold true any more.    First the things that hold true:

• If you are selling one home to buy another, the most important number is not what you paid for the existing home, the most important number is the difference between the two homes.   If the value of your home has fallen by $40,000 but you’re in a situation where you can buy a newer home with less maintenance and 1000 square foot bigger for a “net” difference of $20,000, then it might very well be a good deal.
• If your family situation has changed (i.e. – We got married and are expecting our second set of twins in the last 2 years! – Yikes!) then what you paid for your house doesn’t matter.   I’ve got a client who is negotiating on a house where the seller has to sell within the next three weeks but they are “hung up” on what they paid for the house.   If you need to do something, don’t worry about what you paid for your house, just focus on what the financial and logistical aspects and make the move.    I’m working with a client who is relocating for a new job.   His new position is a nice enough “step up” from his current position that they sold their home for approximately 20% less than they paid for it and still be able to buy a new house.   He told me that while he didn’t want to sell his house for less, the overall picture of the move is “the right thing” for them at that point.

Now, the one big thing that has changed since last year.   Let me lay it out this way:

• On March 4, 2009, Bloomberg reported that More than 8.3 Million Home Owners were underwater.
• On October 20, 2009, I was on a conference call where Dr. Nouriel Roubini said that if housing prices drop another 7 to 10% over the course of the next year, by the end of 2010, there will be 25 million home owners who are under water.   Oh and he said that it’s almost guaranteed that they will drop because of the imbalance between supply and demand.   There already is too much inventory, credit is still tightening, foreclosures are still climbing and jobs are still getting eliminated.   That means the inventory problems aren’t going to go away any time soon.

Let me make that perfectly clear.   There are approximately 51 million home owners in the United States who have mortgages on their homes.   By the end of 2010, almost half of them will owe more on their homes than what they are worth.

If you’re sitting in a coffee shop reading this on your laptop, look at the guy at the table next to you.   Now look at the guy on the other side.   1 out of the 2 of them owes more on his house than what it’s worth.    Ouch.

That means a number of things that are different than last time:

• There will be sustained upward pressure on foreclosures.
• There will be marked lack of geographic mobility.   A lot of people who would consider and/or actually relocate to get a job/a better job won’t be able to because they can’t sell their house.   Or they’ll relocate, give the old house back to the bank (lots of credit ramifications – topic for some other time) and rent.
• Over the years, the “old rule of thumb” was that the average home owner would move every 7 years.   Now with almost 50% of the homeowning population “trapped” in their homes, we’re going to see people staying in their homes a LOT longer and we’re going to see a lot less move up buyers, a lot less move “over” buyers and a lot less downsize buyers.    That’s going to accentuate the inventory problems and keep downward pressure on house prices.
• That also means that there will be a lot less opportunities for builders, Realtors and lenders because of the decreasing mobility of the American population.

So, on the one hand, things are similar to what they were last year in that if you are going to make a move, what you paid for your house isn’t that important, it’s the difference that matters.   But, for more and more people, the changes in the market since last year mean that if they want to move, they have no good options.   They can stay put or they can do the short sale/foreclosure/rent for a long time option.

The market is different than it was in the summer of 2008.

Tom Vanderwell

P.S. Stay tuned for Part 3 – Is this the market for Do It Yourselfers?

Half? Wow – That’s a lot of underwater housing….

While I’m not one to argue with analysts (even if I don’t agree with them), this is a bad number for the housing and mortgage markets.   But, let’s say that they are off by a factor of 10%?   So it’s only 38%?   It’s still not a pretty number.

When you combine that with the potential problems (actually they aren’t potential, they are real problems) at Fannie and Freddie, it doesn’t bode well for the mortgage and housing markets.

So what?   So:

• Don’t expect underwriting guidelines to loosen up any time soon.   Like any time in the next 3 to 5 years.
• Don’t expect mortgages to get cheaper – yeah, rates will fluctuate, but the costs involved, the pricing adjustments for different risks and such will continue to get more expensive.

It’s going to be a wild ride, stay tuned.

Tom Vanderwell

About half of U.S. mortgages seen underwater by 2011 – Yahoo! News

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime “conforming” loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

Underwater Housing

Wow! We didn’t make the list!

Seriously, this is one negative list that doesn’t mention Michigan……..

U.S. Cities With The Most Underwater Mortgages – Slideshows – CNBC.com

1. Las Vegas-Paradise, NV
Homes with negative equity: 67.2%
Of Homes Sold in Last 12 Months:
Foreclosure transactions: 46.9%
Short sale transactions: 6.5%

Zillow Home Value Index: $158,839
Year-over-year change: -30.3%

Last time market was at current levels: 2003-Q2
Change from market peak: -49.3%

Underwater Housing

Underwater Housing….

The article listed below is from the Wall Street Journal.   There can be some arguing about the actual numbers depending on which “pricing model” is used, but there is no arguing a couple of points:

• There are a large number of people in the United States who owe more on their properties than they are worth.
• If someone is “underwater” on their house, they are more likely to walk away from the house if they face a “major” life event like a death, divorce or unemployment.
• If someone is “underwater” on their house, it restrains their geographical mobility.   They can’t take a job in Atlanta Georgia if they can’t sell their house in San Diego California.

I’ve got some comments in the article and then a little more after it…..

Tom

House-Price Drops Leave More Underwater – WSJ.com

The downturn in home prices has left about 20% of U.S. homeowners owing more on a mortgage than their homes are worth, according to one new study, signaling additional challenges to the Obama administration’s efforts to stabilize the housing market.
Tom here – 20% is a national number.   I’ve heard estimates that in Michigan it’s closer to 48%, so there are other parts of the country where it’s less.

The increase in the number of such “underwater” borrowers comes amid signs that falling prices are making homes more affordable for first-time buyers and others who have been shut out of the housing market.
Tom here – to me, this is one of the signs that the housing market isn’t in as good of health as many make it out to be.   If the market was healthy, we’d see the number of “underwater” homeowners leveling off or going down.   But we need to clear up more inventory before that happens.

But falling prices also make it more difficult for homeowners who get into financial trouble to refinance or sell their homes, and for others to take advantage of lower interest rates.

Government officials are considering an increase in that limit. “It’s a question that we’re looking at,” said James Lockhart, director of the Federal Housing Finance Agency, which regulates Fannie and Freddie. 

Tom here – James Lockhart is talking here about increasing the limit on the 105% refi plan so more people can use it.   A couple of thoughts about that:

• Isn’t this kind of highly leveraged lending a large part of what got us into this mess to begin with?
• From personal experience, it’s not so much the balance of the first mortgage in relation to the value of the property that’s the problem.   In that case, 105% seems adequate in many markets.   Where the big problem arises is home equity loans.   Many borrowers bought their house with an 80% first mortgage and a 10 to 20% second mortgage.   Assuming their house value dropped by 20%, they are still at less than 105% of value on the first mortgage, but combined, they are close to 120%.   Due to the prevalence of home equity loans, that’s the bigger challenge in refinancing.
  

Real-estate Web site Zillow.com said that overall, the number of borrowers who are underwater climbed to 20.4 million at the end of the first quarter from 16.3 million at the end of the fourth quarter.  Think about that number a minute.  4.1 million homes had equity in them in December and don’t now.   The greater Chicago area has just over 9.7 million people in it.  Assuming every home had 3 people in it, that means that all of the equity of a group bigger than Chicago was wiped out in the last 90 days.

The latest figure represents 21.9% of all homeowners, according to Zillow, up from 17.6% in the fourth quarter and 14.3% in the third quarter.

Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, said underwater estimates can be too high if they use price data that includes a large number of foreclosures. Foreclosed homes tend to sell at a discount, he said, making it appear that prices have fallen more than they actually have. 
Tom here – read that last sentence again.   Foreclosures sell at a discount making it appear that prices have fallen more than they actually have?   Isn’t that misleading?  How do you tell what the market value of a home is?  You look at the entire market.   You can’t say, well, if we eliminate 50% of the market statistics, then we’re going to see better numbers.   Isn’t that sort of like saying, “If you eliminate the 14 times that Miguel Cabrera struck out so far this year, his batting average would be even higher.”

Three more thoughts to wrap up this one:

• Underwater housing is going to be a big issue for a long time going forward and it’s going to have some fundamental effects on people’s employment, retirement and investment planning.
• Ignoring those facts won’t make them go away.  Facing those facts, adjusting your personal, financial and business goals for it will help you and those you impact to be wise about their choices.
• If the government chooses to implement higher loan to value guidelines for refinance transactions with Fannie Mae and Freddie Mac, I sincerely hope that they set up substantial “guidelines” that would make those type of loans eligible only for those where it would truly help them stay in their house.   How would I approach it?   A couple of ideas:  1) There needs to be a “minimum” drop in payment to be eligible.    I believe that should be set up as a percentage of the loan, so something along the lines of $100 in savings for every $100,000 in loan amount.   2) There needs to be a minimum payback time.  For instance, it costs $2,000 to get the loan and you save $200 per month, that recoups the costs in less than 1 year.   Without those kinds of “guidelines” in place, we are asking for more trouble…..

Underwater housing

Long and Short Term Ramifications….

The trend in this report is troubling both in terms of short term and long term ramifications:

Short term – 20% of the people who have a mortgage are underwater on their house.   That means that 20% of the people who might potentially be buyers of a new home aren’t going to be able to buy a new home.   I’ve heard it said that the average life of a mortgage is 7 years.   If you take that to mean that on average homeowners move every 7 years (and I know that’s not the whole picture) then that means we’ve got about 3% less people per year who would move but can’t due to negative equity.    That 3% calculates to about 145,000 sales according to existing home sales for 2008.   So we’ve got about 145,000 home owners who can’t buy a new house even if they want to.   Add to that the people who won’t buy a new house because they are concerned about their jobs, and it doesn’t bode well for the housing market.

Long term – If people see that they are under water and don’t see a reversal of that trend, are they going to continue to pay on the house or are they going to just walk away and start over?   Where do the morals of our country’s homeowners stand in terms of the obligations they signed up for?   Is a foreclosure going to have the “moral stigma” 5 years from now that it did 5 years ago?   What does that mean for the housing market? 

It’s going to be an interesting “ride.”

Stay tuned.

Tom Vanderwell

Report: 20% of Home Mortgages Were Underwater in December – WSJ.com

Twenty percent of all U.S. residential properties that had a mortgage on them were underwater at the end of December, with mortgage debt greater than what the homes were worth, according to a report released Wednesday by First American CoreLogic.

That’s more than 8.3 million mortgages that were upside down at the end of the year, compared with 7.6 million three months earlier. It’s a problem that is expected to get worse as home prices continue to fall.

Underwater Housing

Where Homes Are Worth Less Than the Mortgage aka “Underwater Housing”

The New York Times has an interesting graphic with information on the percentage of homes that are “under water.”

Where Homes Are Worth Less Than the Mortgage – Interactive Graphic – NYTimes.com.

A couple of thoughts about this report:

1. For the last several years, we’ve seen an increasing “wealth” effect where people felt more inclined to spend money because the value of their homes was going up.

2. Now we are and will for a long time see the opposite effect as people feel less wealthy (poorer?) because they don’t have as much equity in their houses.   I expect that the retailers are feeling that today as the “black Friday” sales are not going to be nearly as good or as profitable as usual.

3. The true effect of people who are underwater on their houses haven’t yet been felt.   Here’s my view of it:

• Those who owe just a little more and plan to stay for a long time AND their finances seem to go okay will be fine.
• Those who owe a HUGE amount more than what their house is currently worth and don’t plan on staying there a LONG time, are going to be increasingly likely to walk away from it.
• Those who owe a HUGe amount more than what their house is worth and run into financial problems (layoffs, medical issues etc.) are going to be more inclined to say, “I’m out of here.”

What’s that going to mean for the housing market?   A couple of things:

• Increasing levels of foreclosures, especially in states with a high percentage of underwater home owners.
• Increasing downward pressure on home prices.
• Reduced sales of homes going forward because of the number of people who can’t move because they can’t sell their home.

4. The other thing that this graphic shows is how the new Paulson plan, the plan of the week, the plan where he’s buying mortgages that Fannie and Freddie own will not be as effective as it would otherwise because:

• Many homeowners can’t refinance because they owe more than what their house is worth.   I’ve already had a number of past clients who want to refinance but can’t because of the value.
• Many of the people who might want to buy a new home if rates dropped substantially aren’t necessarily going to be able to because their house isn’t worth enough for them to be able to sell it and get a downpayment out and move on.

I’ll have more later.   Let me know if you have questions.

Thanks!

Tom Vanderwell

Underwater Housing

Courtesy of the SanFrancisco Chronicle: