Short sales can be a way out of your housing situation. The owner wins by selling and moving on with their life and their credit history can often be kept clean. After a short sale they can buy again in 24-36 months FHA. The bank wins when they recover more of the involved mortgage money as compared to foreclosure, which can take months to complete, usually causes the home to go vacant, the home is often stripped by thieves, and generally creates numerous problems for all people involved. Lastly, the buyer can often buy more home than they would ordinarilly qualify.
Unfortunately, the housing crisis could get a lot worse here. The next concern may be rising interest rates affecting the inventory of homes and money availability . Let’s cover the interest rate issue first because it is the easiest to explained. The rates were at a low of around 4.8% in May of 2009 and by August 2009 they were about 5.4% and will probably keep creeping up. The rates are low because our government is buying mortgage backed securities but according to
examiner.com 8-27-2009 in a speech by Richmond fed pres they may consider a premature end to its program of purchasing mortgage backed securities.
The availability of conventional money or lack of it is easy to explain too. Banks can decide against aggressively working the market now at 5.4% when in March the rate could be as high as 6 or 7 % fixed for a 30 year term. Plus the housing prices are still dropping at double digit rates, thereby devaluating the asset.
Now here are a few facts regarding a more complex subject, the de-valuation of an asset, and how supply and demand can effect the home inventory. It is said that we have about 12 months of inventory on the market right now at a time when we should have no more than about 3 to 6 months. So we have 2 times the inventory makes the houses worth less. Can anyone guess what that is called. Yes class, you’re right; DEFLATION.
Inventory is about to get higher for a number of reasons. First there is the shadow inventory. A Zillow servey of consumer confidence in August of 2009, 29% of home owners said they would be “somewhat likely” to put their homes on the market if they saw signs of a real estate turn around. That’s a huge number waiting of homeowners on the sidelines just waiting to jump in. Now they are seeing signs in the media of a turn around but they don’t tell the whole story. Some examples; the AP headline of August 26, 2009, “New home sales up 9.6% in July”. Cool stuff, huh? In truth, new home sales are still down 69% off the peek (not so cool now). The Wall Street Journal head line of July 29, 2009, “Prices Rise across the U.S.” . The same Wall Street Journal on August 22, 2009 spoke of Housing lifts recovery hopes…”but prices are still falling”.
Robert Shiller is aYale economist who helped create the Case-Shiller home price index, widely thought of as the bible in all matters home price related. Knowing that the pace of declines had slowed once before in early 2008 said in the Wall Street Journal on August 25, 2009. “its really is too soon to call this a turning point.” So in summary, this shadow inventory could slow a recovery, if this is THE recovery, and drive prices down even further, which will slow they recovery even more, if this is THE recovery . You getting the picture?
Single family mortgages set a new record delinquency rate of 13.16% in the second quarter of 2009, according to the Mortgage Bankers Association . The cure rate of for prime loans dropped to 6.6% as of July, down from an average of 45% for the years 2000-2006 (Wall Street Journal 8/24/2009. If you look at the highest quality mortgages, 6.2 % are seriously delinquent, and while that number may sound low, it represents a jump from 1 % two years ago. In Ohio we rank 10th in the nation on percent of loans delinquent and in foreclosure according to seeking alpha 8/24/2009.
While sub prime mortgages sparked the opening round of housing problems two years ago, according to Joshua Shapiro, chief U.S. economist at MFR Inc “troubles are lurking further up the food chain” and . …”It leads me to believe that the next leg down on home prices is going to come from the top”
The top causes of mortgage foreclosures in the 2nd half of 2008 were negative equity (#1) followed by unemployment according to the Wall Street Journal of July3, 2009. Nearly 25 % of all U.S. mortgage holders owed more than their homes were worth by the second quarter of 2009 and that figure may rise to as much as 30 % by mid 2010 as job losses and foreclosures climb. Stan Humphries, Zillows chief economist said in an interview “The negative-equity rate will rise and spin off more foreclosures”.
Karen Weaver, global head of Deutsch Bank’s Securitization Research said 48 % of U.S. mortgage owners will end up owing more than their home is worth by 2011, with home prices falling as much as another 14 % before hitting bottom.
And just where is the point that homeowners start falling into foreclosure RAPIDLY? Once you get to the point where negative equity is significant, 25 % or more. Beyond that studies suggest that you get more strategic defaults. (Fortune. Com 8/12/09.)
In plain English, at some point a home owner will say “never mind this”, and “I can move down the street and rent cheaper then owning”. Soon that thought could be followed by “if I sell short I can buy the same house I live in for substantially less in two or three years as long as I keep my credit clean.”
And it’s a delusional form of optimism to believe that the government CAN / WILL step in and solve this issue. Homes at risk of foreclosure out paced loan modifications; at risk over 3,000,000; modifications completed less than 500,000.
This is why short sales are the de-facto solution for the future. The home owner, the bank and the buyer all win.