Housing Market Bounces

As the news today that housing resales dropped in August sent stocks spiraling downwards, those within the real estate industry were faced with a really interesting reality. The housing market rebound may not be as linear as once hoped.

Existing home sales fell 2.7% in August after a record increase of 7.2% electrified the industry in July. However, there are many factors that likely played into the change. The federal tax credit of $8,000 for new home buyers is due to expire soon, likely contributing to the glut of deals in July. Jobless rates continue to be high, as do foreclosures. With many foreclosures yet to hit the market (likely knocking home prices down), it seems reasonable to think that the market may not climb steadily, but rather peak and valley as it restarts.

This may just mean that government programs and incentives (such as the tax credit) are important to getting consumers back in the market, and that sellers may just need to watch timing to match the ups and downs of the market. Even when home sales increase, the inventory of houses on the market is still high and unlikely to dissipate rapidly. But sellers can likely work within the curves of the market to best optimize when to sell their home (and at what price).

Finally, the coming winter means that it’s unsurprising that home sales will dwindle. Home sales generally increase during the spring and summer, with the warmer temperatures. Sales will probably decrease as fall changes to winter.

Foreclosures Affect Animals as Well as People

The media has recently been full of stories about homeowners losing their homes to foreclosure, but there is a side that has received relatively less exposure: the effects foreclosure has had on many pets.

While a story in the Chicago Tribune several months ago discussed a pet food pantry that was helping homeowners who could no longer afford to look after their pets, a sadder tale is emerging in Arizona. As the two co-owners of Robin Hood Animal Rescue face foreclosure, 70 cats and dogs are at risk of being euthanized. Some of the animals have special needs (as is the case in most animal shelters), and the shelter has housed some of the animals for four or five years.

There is a lot of irony in an animal rescue shelter needing rescuing itself, but after so many years of speaking out against euthanizing unwanted animals, the shelter is now the one in need of rescuing. The heartbreaking story can be found at abc15.com. Those wishing to help can also visit Robin Hood Animal Rescue’s website.

Prices Slide Even in America's Most Expensive Zip Codes

An article on Forbes revealed today that even within the Forbes list of America’s 500 Most Expensive Zip Codes, home prices have taken a large hit in the past year. The top 3 zip codes on the list experienced declines of 23%, 23% and 24% respectively. The list as a whole saw a 7% drop on average.

But one of the things that is interesting about the list is that prices were not necessarily being pulled down by foreclosures. Several zip codes (in Atherton, CA, Hastings-on-Hudson, NY and East Hampton, NY) were used as examples of places where prices have dropped significantly without homes being in foreclosure. No homes are in foreclosure in Hastings-on-Hudson, yet prices have dropped 9%. In Atherton, only 10 homes are in foreclosure with prices dropping 23%. Rather, it appears the glut of homes on the market has helped to drive prices down. In East Hampton, at the current rate, it would take 25 years before all the homes currently on the market are sold. This cannot help but have an affect on home prices.

The five most expensive zip codes in America:

1. Alpine, NJ ($4,139,041)

2. Atherton, CA ($3,849,133)

3. New York, NY ($3,521,514)

4. Duarte, CA ($3,444,773)

5. Beverly Hills, CA ($3,367,167)

Increasing Number of Homeowners Upside Down on Mortgages

At the end of June, 24% of homeowners were upside down on their mortgages. In other words, 24% of homeowners owed more on their mortgages then their homes were worth. When added to those with no equity remaining in their homes, the percentage climbs to 32%. Nevada, Arizona, California, and Colorado are the biggest offenders with rates of 40%, 37%, 33%, and 31% respectively of homeowners whose homes are worth less than their mortgages. In some of these markets, homeowners are walking away from homes where they may owe twice as much as the home is worth or more. And when the home is worth less than the mortgage, borrowers no longer qualify for some of the programs that might be able to help them, such as a reverse mortgage.

In response, some are urging the government to begin reducing loan balances to help borrowers cope with the problem. Lowering loan payments or rates will only make the mortgages drag out interminably, and still not recoup the home’s equity (unless it appreciates again over time back to levels that are higher than during the time of the boom). If the government reduces the loan balances, borrowers will be inclined to continue to invest in their homes and stay in their residences, rather than walk away. This will reduce foreclosures, hopefully, as well as abandoned properties.

What do you think?

NAR Raises Concerns About Appraisals and Proposes Expanding Tax Credits

In a report published on Wednesday, the National Association of Realtors (NAR) proposed that Obama’s tax credit for first time buyers should be expanded across the market to all buyers. Concerns were also raised about appraisals. Lawrence Yun, the NAR’s cheif economist, cited the appraisal problem as “serious,” and characterized by buyers using appraisers who are not from their neighborhood or who are comparing their property to distresed or damaged homes. These appraisal problems are allegedly pulling down home values, and hurting the industry.

Complaints about appraisals are nothing new. However, the importance of a good appraisal is especially crucial in this economy, where there are so many distressed properties on the market that a home could be compared to. It is nonetheless true that, as we reported, have a foreclosed home within 500 ft. of a property decreases its value significantly. As the number of foreclosures increase, more properties will be affected. Nonetheless, it is also true that a home that is not in foreclosure should probably not be valued the same as a home in foreclosure. One is a distressed property, the other is not.

In terms of expanding Obama’s tax credits, the NAR proposes an interesting idea. It is true that an expanded tax credit would probably drive more buyers into the market. However, the influx of buyers would not necessarily cause the market to rebound. We have already seen an increase in home buyers, but property values still remain low and there still remains a lot of properties on the market. Introducing more potential buyers would likely not change these facts when there are still so many foreclosures dragging down property values in many areas.

The Difficulties of Mortgage Modifications on the Front Page of the WSJ

The front page of today’s Wall Street Journal featured a touching article about the difficulty of getting a mortgage modification. We have stated the facts in this piece many times, including the crucial fact that 9% of 45 million American homeowners were delinquent on mortgage payments in the first quarter of 2009. Yet, only about 500,000 loans have been modified thus far, leaving at least 3.5 million people without a much needed modification. It has also been stated often that a modification is hard to come by. While the article goes into more specifics, the stories of piles of paperwork and miles of red tape are already widespread.

Given what is clearly a problem, I wonder if there is not some solution that would do a better job of solving these issues. If a customer has applied for a mortgage modification, is getting stuck in red tape, and there is already a glut of houses on the market, why not order a temporary halt to the foreclosure until the situation can be resolved? It is hard to believe that it is a best practice to penalize a customer for the bureacracy surrounding the new programs that Obama has created (as well as existing ones that are seeing a surge of interest).

As the article pointed out, there are many parties with stakes in a foreclosure. The lenders and investors care about the outcome of an overdue loan as well. However, harried bankers and servicers need to be given the time to adequately resolve these claims. Unfortunately, as more and more homeowners head into foreclosure, time appears to be sorely lacking.

Obama's Homeowner Relief Program Still Excludes Many

While the Obama Administration’s Home Loan Modification Program was supposed to help homeowners who have lost their jobs and are having trouble making their mortgage payments, the NYTimes wrote an article today highlighting the many people whom the banks have been unwilling to help because they have never been late on a mortgage payment before. Some of these homeowners are upside down on their mortgages–others are having trouble simply due to the circumstances of the recession.

Although it is often dangerous to make generalizations solely based on the case highlighted in the story, it is extremely plausible that banks are unsure how to handle customers with good payment histories who are now running into financial difficulties. The banks and government programs seem to be waiting for people to get into a lot of trouble before bailing them out, rather than helping prevent those problems in the first place.

Furthermore, the number of subprime and Alt-A mortgages refinanced in May fell 11 percent from April, according to research by Alan White at the Valparaiso School of Law. Given the record number of homeowners behind on their mortgage payments or facing foreclosure, this statistic is problematic and disturbing.

Many of those affected include seniors. The woman profiled in the article, Eileen Ulery, is 63, old enough to qualify for a reverse mortgage. However, her property is upside down, meaning she would be likely to face a shortfall.

While I agree that on a scale of priorities we should be helping those whose circumstances are most dire first, it does not seem to correlate that homeowners who have been responsible are being penalized. Bank of America Home Loans is quoted in the article as saying they are still putting the programs in place for those not facing a severe threat of foreclosure. I would hope that those programs are as inclusive as possible, and put together soon so that these individuals do not end up in a dire situation before they can get help.

Financial Counseling May Help Homeowners Avoid Foreclosure

A recent New York Times article focuses on Fannie Mae’s HomeSaver Advance Program, a now-deemphasized program that gave borrowers up to 15,000 in unsecured personal loans to cover missed mortgage payments. However, 70% of the borrowers who took out these loans defaulted. This instance helps highlight the importance of financial counseling. The article closes with the example of a New York City program that makes foreclosure avoidance loans available to borrowers who have undergone counseling. This program has given out 15 loans so far, none of which have defaulted.

Reverse mortgage counseling has come under fire recently, and several states have been debating whether to pass legislation requiring counseling before all reverse mortgage transactions. It is often argued that counseling is necessary in order to ensure that the senior borrower understands the reverse mortgage transaction, but if one looks closely, it appears that counseling has the potential to do a lot more than that. As counselors at the NRMLA Orlando Road Show explained, the purpose of counseling is partly to make sure that the borrower will still have enough money to live on after the reverse mortgage. The financial counseling portion of the reverse mortgage counseling process is perhaps underestimated, but it articles such as the one referenced above help show that financial counseling may be another way to help homeowners avoid foreclosure–and ensure that the steps they take in the short term will not penalize them in the long run.

Record 12% Of Homeowners Behind on Mortgage or in Foreclosure

In more depressing housing news, the Mortgage Bankers Association announced Thursday that a record 12% of homeowners are behind on their mortgage or in foreclosure. They do not expect the number of foreclosures to crest until the end of next year.

In an interesting twist, the foreclosure rate on prime fixed-rate loans has doubled in the last year. They now comprise the largest share of new foreclosures. The financial crisis has also hit many of those previously thought to be invulnerable: Nearly 6% of fixed-rate mortgages to borrowers with good credit are in the foreclosure process.

The foreclosures also appear to be clustered: 46% are located in California, Florida, Arizona, and Nevada.

We’ve tried to keep much of the blog focused on how to get out of foreclosure for those who are affected by the crisis. Those over the age of 62 can qualify for a reverse mortgage, which can help many avoid foreclosure. There are also many state resources that can assist, such as the one in Illinois discussed here.

If there are any options I’ve left out, please comment with them.

Minorities Disproportionately Affected By NY Foreclosures

The NYTimes published a very interesting article this weekend documenting how minorities have been disporportionately affected by foreclosures in NY. The article points to systematic abuses within the system that appear to be partly responsible for the split along racial lines, and can hopefully be prevented in the future.

85% of the worst hit neighborhoods in the New York Metropolitan Area are predominantly black or hispanic. These neighborhoods are areas where the foreclosure rate is at least double the regional average. However, perhaps more surprising and troubling is that the crisis is affecting the African American middle class more than the lower classes. Black households making over $68,000 a year annually are more than five times as likely to hold a subprime mortgage than whites of similar or even lower incomes. These mortgages are the ones most affected when the housing bubble burst.

Furthermore, the African American lending universe is generally constituted of about a dozen banks and lenders, constituting half the loans given to black middle income borrowers in 2005 and 2006. The terms of these loans were generally less favorable and more risky, with costs that can vary by thousands of dollars depending on the variability of the interest rate. Furthermore, 33% of the subprime loans given out to borrowers in 2007 went to borrowers with credit scores that should have been high enough to qualify them for a conventional loan. There is normally a three percent interest rate difference between subprime and conventional loans, which can add up to a difference of tens of thousands of dollars for the consumer. The NYTimes points to a $272,000 difference in the interest on a $350,000 loan. They also mention well-off African Americans with nine to eleven percent annual interest rates on their mortgages, rates that are surprisingly high for the group.

Now in NY, whole neighborhoods are under assault. Fears of disinvestment are climbing, as homes once owned are becoming rental properties and vacancies increase.

What strikes me so strongly about this story is that it seems like a strong case of discrimination. While part of the problem stems from members of the African American community not trusting traditional banks in the wake of decades of discrimination, pushing them to subprime lenders, part of the problem is that it appears that these populations were particularly targeted with unfavorable terms and loans. Now, we are seeing the consequences and these are the neighborhoods that will be most affected. There is a direct correlation between the increase in the number of foreclosures and an increase in violent crime, making the situation only more dire.

These lenders need to be held responsible, hopefully many of these borrowers will be able to get their mortgages refinanced, and hopefully the city and the country will take steps to ensure that this kind of racial discrimination in the loan market does not continue.