Monday, March 30, 2009

A Brief Synopsis: How We Got Here and Where We Are Going

How We Got Here
  • Government - The problems were caused by the relationship between Fannie Mae/Freddie and the Community Reinvestment Act (pushed by social agenda politicians (think Bill Clinton, Barney Frank, Chris Dodd, etc.).  The result was that more and more high risk loans were made to financially unstable and under-capitalized borrowers under the guise of social justice.
  • Greedy Bankers - Pushed by the government, bankers soon realized that they could make more money lending to unstable and under-capitalized borrowers as a result of being able to make more loans and charging higher rates and fees.
  • Foolish Consumers - Consumers started viewing buying a home as an "investment".  While that may sound good, the problem is that what most people classify as an "investment" is really noting more than speculation (i.e. gambling).  As a result people took on more and more debt to buy bigger and bigger homes since they were "investments".  In reality, the only investment part of owning a home is that in the old days you would buy a home and eventually own it free and clear instead of perpetually paying rent.  Now, "homeowners" just perpetually have a mortgage which is not much different from perpetually renting other than you benefit if the price goes up and get hurt if the price goes down.  This is made much worse by leverage (think 0-5% down mortgages).  In reality, owning a home was never meant to be an investment other than you would eventually own the home free and clear and maybe get some appreciation, which would protect you from inflation (not 20-50% annual appreciation, but more like 3-7% per year).  Owning a home was primarily meant to provide a lifestyle.   People just had the common sense not to buy a lifestyle that they could not afford.

Where We Are Going
  • Some recent real estate news shows existing homes sales up 5.1% and new home sales up 4.7%, but home prices only improved 1.7%.  This is likely the result of more builders dumping their homes for cheap, but their median prices are still higher than resale homes so the overall prices went up a bit.
  • Despite sales increasing a bit the number of homes in inventory increased for the first time since July 2008.  This means supply will likely increase.  Not good for prices.
  • As soon as the general public thinks the market has improved there will be additional inventory added to the market as all those sellers that gave up on selling flood the market with their homes.  Again, this will not be good for prices.
  • The problem now is the absurd Obama stimulus plan, which will surely drive up inflation (and as a result interest rates) and drive up unemployment as investors and companies pull back investments (i.e. in start-ups, equipment, facilities, etc.) due to higher future taxes (necessitated by the huge government spending in the Obama plan) reducing their future returns.  This is what will likely break the back of the real estate market in the mid to long term.  So while prices may increase a tiny bit in the short term, in the long term they will suffer.  As a result I do not see the real estate market rebounding back to the pre-2006 price levels any time soon.

Saturday, March 7, 2009

Manhattan Real Estate Will Decline in Value to 50% of Market Peak

According to this New York Times article, Looking for Bottom in N.Y. Real Estate, Manhattan real estate prices hav already fallen by 25% according to some people involved in New York real estate.  In the summer of 2008 I told my wife that the Manhattan real estate market would collapse since it was absurdly over valued combined with the beginning of the financial meltdown layoffs.  I believe that prices will end up being 50% or less of the previous market peak.

More Job Losses Will Cause More Foreclosures and Bank Failures

According to this New York Times article, Job Losses Hint at vast Remaking of Economy, job losses are increasing rate.  This will definitely lead to more foreclosures and more bank failures.  The job losses have escalated since December with the job loss numbers for December and January being revised higher.  In my opinion this is proof that businesses and Wall Street have no faith in the Obama administration as it seems that things have gotten worse since he won the election with even more rapid deterioration since the unveiling of the "Stimulus Plan".

Thursday, March 5, 2009

Reuters: One in 8 U.S. homeowners late paying or in foreclosure

According to this Reuters article, One in 8 U.S. homeowners late paying or in foreclosure, 1 out of 8 US homeowners is behind on their mortgage, or already in foreclosure. This is absolutely stunning. According to the article even prime loans are experiencing higher foreclosure rates caused by job losses and overbuilding. The author of the article did not seem optimistic that Obama's foreclosure plan would work. I agree. This will certainly lead to more short sales and foreclosures and result in hurting the housing market even more. Since Tennessee has a higher than average number of foreclosures I expect the TN housing market to be hurt more than average over the next several years.

New Government Programs to Reduce Home Foreclosures

According to the article U.S. Sets Big Incentives to Head Off Foreclosures on the New York Times website the Obama Administration unveiled two new plans that will help many in people in foreclosure.

In my opinion neither plan will not solve the foreclosure problem.  The problems with the plans are as follows:
  1. Investors are excluded.  Since many foreclosures, particularly in Florida, Nevada, Arizona and California were from investors (actually speculators) those foreclosures will continue.
  2. Second homes and vacation homes are excluded.  Since many people not only purchased too much home for their budget, but also too many properties (i.e. second homes and vacation homes) they got into financial trouble.  Since the plans do not cover these owners the foreclosures will continue.
  3. Many people who are in foreclosure are there as a result of not being financially responsible.  I have personally seen people with combined incomes of almost $100,000 not be able to pay mortgages payments of $2,000 to $2,400 per month (includes principal, interest, taxes and insurance).  The Obama plans allow for mortgage payments to be as low as 31% of a person's income via paying matching funds to the lenders.  The numbers I show above are less than 31% yet those people still did not pay.  The reality is that the housing payment is only one part of the problem.  Typically, these people had a lot of other debt and just spent recklessly.
  4. Both plans require that the home owners have enough income to pay the modified payment.  This is meaningless if the people have lost their job due to health issues or the current economy.  For a while now health issues which cause a person to lose their job have been a big factor in foreclosures.  Since the plans require that people have a job people in this position will not be helped by the plans.
  5. Plan 1 (Refinancing for Strong Borrowers) limits the total new loan to a maximum of 105% of the home's current market value.  Since many people now owe far more than their home is worth even if they are current on their mortgage payments they will not see any help from Plan 1.  The result will be that these homeowners will eventually slip into foreclosure as the market value of their home declines.
  6. Plan 2 (Loan Modifications for At-Risk Borrowers) does not place a limit on the loan amount with respect to the market value of the home, but it limits the reduced modified payments to a term of 5 years.  After 5 years the interest rate will probably reset to today's market rates.  The problem is that for may people they still will not be able to pay the market rate in 5 years.  Also, this Plan fails to address the issue of what happens when the people cannot pay the modified mortgage and the loan amount is still greater than the market value.  In short, this plan is betting that the market values will substantially improve in 5 years.
  7. Neither plan addresses the core reasons of why we are in this mess to begin with.  The core reasons are: (1) Homes and real estate just got too expensive as a result abnormal demand caused by what I call "housing euphoria" which resulted from an increase in the homeownership rate that was enabled by loose credit standards.  (2) People started buying homes that they could barely afford even with a 2 income family so there was no room for any job loss.  (3) People purchased homes with risky adjustable rate mortgages in order to allow them to buy more home in the short run without regard for any rainly days or "what if's".  (4) People just borrowed and spent too much in general.

Tuesday, March 3, 2009

Top 5 Reasons to Pursue a Short Sale versus Letting Your Home Be Foreclosed

  1. Stress - A short sale is less stressful than a foreclosure.  With a short sale you have some say in the outcome.  With a foreclosure you are at the mercy of 3rd parties.
  2. Credit - A short sale is less damaging to your credit.  Either way you will have late payments on your credit report, but with a successful Short Sale the debt will usually be listed as satisfied.  A foreclosure will show up on your credit report.
  3. Time - If you notify your lender that you are trying to sell your home many times they will give you more time to stay in your home while you are trying to sell it.  You will likely not have to pay your mortgage during this time.  You should use this time to save your money so you will have some money to move and find another place to live.
  4. Release - If you successfully close a short sale you will usually be released of remaining unpaid debt.  In many states, with a foreclosure the lender can continue to legally pursue you after the foreclosure proceedings are over in order to try to recover the amount of the debt they were still owed after the lender sells the home (it is called a deficiency judgment).  Walking away without having any further obligation to repay a debt is reason enough to pursue a short sale.
  5. Responsibility - The responsible thing to do is to pursue a short sale.  Most homes are foreclosed simply because the owners refuse to face reality and will not deal with the situation.  This hurts the homeowner and the lender.  There is no reason for this.  The responsible thing to do is to mitigate the lender's loss and give yourself a chance at a future without that remaining mortgage debt weighing you down.