July30, 2009
By: Stephen J. Nash, Esq.
Nash
& Lodge, PLLP
nash@nashandlodge.com
Many
real estate professionals have avoided short sale and foreclosure transactions with all their might. Many agents have
attempted dabbling in them, but have refused to take the difficult step of committing themselves to learn how to work in this
area without taking tremendous risk. Many professionals point to the numerous articles that tend to indicate the market
may have bottomed out as another reason to not fully immerse themselves into the short sale and foreclosure markets.
I believe that those who continue to ignore these markets or continue to dabble in these markets without educating themselves
so they can keep themselves and their clients out of trouble are making a huge mistake – the short sale and foreclosure
markets are not going away any time soon! The latest statistics from RealtyTrac show that one in every eighty-four
homes in the U.S. received a foreclosure notice in the first half of 2009! The foreclosure rate is not going
down, it just continues to climb. How can the market turn around if we can't stop the foreclosures?
I hope
I am wrong but the following six factors lead me to believe that the real estate market is not going to truly right itself
any time soon.
I. Six Factors
Factor
One: A Record Number of Foreclosure Filings Keep Coming
I keep hearing that foreclosures are slowing down yet the numbers
are saying something entirely different. RealtyTrac recently stated there were 1,905,723 foreclosure filings on 1,528,364
U.S. properties in the first six months of 2009 (this computes to 1 in 84 housing units in the U.S. Received a foreclosure
notice during this time period). This is up 9 percent over the last six months of 2008 and 15 percent of the first
six months of 2008. June of 2009 was the fourth straight month where over 300,000 properties received foreclosure notices.
In other words, foreclosure filings continue to climb and continue to set new records. The month of June 2009 set another
record – 336,173 properties were subject to foreclosure filings in June!
What
is really scary about these numbers is that during the last nine months we have seen the roll out of plan after plan to help
prevent foreclosures and numerous moratoriums, yet the numbers continue to climb. As long as the foreclosure filings
continue to climb so will the number of short sales and REO's.
Factor Two: It is Tough to Borrow Money
As near
as I can tell, the increase in numbers of properties sold directly relate to the incentives given to first time home buyers,
coupled with the fact that the first time home buyer does not have their own home to sell. The nicer the property the
more difficult it is to sell because people cannot qualify, do not have the cash needed for the required down payment, or
are unwilling to part with that much cash in a depressed economy. While it is great that the market for first time home
buyers has been given a boost, until loans are available at all levels of the market we cannot have a truly healthy marketplace.
Even
if you find a buyer for a more expensive home, they still have to sell their home which is often upside down and the property
has to appraise. Appraisals can be a challenge when there are so few properties selling at certain price points.
Factor Three: Loan Modifications Are Only a Small Part of the Solution
Every
home owner wants a loan modification, yet few get them and many of the lucky ones who obtained a loan modification, found
themselves back in default within the next six months. Loan modifications cannot be a bigger part of the solution unless
and until lenders are willing to forgive part of the principal of the loan. Without lowering the loan amount, the modification
can only lower the monthly payment so much and will trap people in their present home for however long it will take for the
values to increase enough to actually cover the existing debt. So even if the homeowner gets a loan modification to
keep them in their present home, the home owner will be trapped into staying in that property for a long period of time or
until the homeowner can sell the property through a short sale.
Another problem with the loan modification programs is that none
of them adequately address the situation where a home owner has more than one mortgage. As the real estate problem continues
to escalate, the value of the homes that are in trouble are increasing and the likelihood that multiple mortgages exist on
the property also increases. It is difficult enough to get the cooperation of one lender but once you add one or more
lenders to the mix, the difficulties become that much worse and the chance of obtaining a loan modification is likewise reduced.
Factor
Four: Inventory is Artificially Down
Prices of homes, at least on the lower end, have gone up as the number
of properties on the market has declined. While this is good news, it might also be a mirage. For quite some time,
it has been apparent that the number of properties that lenders have obtained through foreclosures has not matched the number
of properties that the lenders have put back into the market. In other words, the lenders own more properties than they
have put into the market. There has been much speculation as to why the lenders are holding back on putting these properties
into the marketplace but I don't know if even the lenders themselves know. The fear is that if the lenders release these
properties into the marketplace all at once, it will only drive the prices of homes down further and result in a prolonged
period of time for the marketplace to absorb these properties and delay any potential economic recovery.
In looking
at the amount of new foreclosure filings and in speaking to numerous REO agents, it appears that the lenders maybe getting
ready to dump another batch of properties into the market this fall. A number of REO agents have been told to expect
a significant number of REO listings this fall. If this happens it could very well drive the prices back down again.
Factor
Five: The General Economy Woes Hit Us While We Are Down
When the real estate market started to implode we were not in a recession.
Many argued that the real estate problems would not have a significant effect on the economy as a whole. Since that
time, however, the economy has settled into a longer and deeper recession than any of us have ever seen in our life times.
Whether the real estate problems brought down the general economy, or not, it is clear that the general economic woes are
also contributing to our real estate meltdown.
Even without the credit problems we have seen and the fact that so
many houses are upside down, how many people can actually even afford to look into buying a different home when unemployment
rate is fast approaching 10 percent, and when small and large businesses alike are struggling to survive? Many of the
people losing their jobs or who are being forced to take unpaid time off, are the same people who once had well paying jobs.
Many are with companies that have never before laid anyone off. When people start seeing others being laid off from
jobs that everybody considered to be great jobs, it makes a person wonder if they might be next. So even if someone
does have a great job today, they are more likely to save their money and not spend it in case of a future loss their job
down the road.
Factor Six: What Happens When the Incentives Disappear?
The first time buyer market has
been active but what will happen to that market when the government incentives expire? Will the government continue
to provide other such incentives to keep the market performing? If so, where will the money come from to fund these
new programs? I don't have any answers to these questions, but if the incentives played a big part in stimulating the
first time home buyer market, whether they continue or simply go away will dramatically impact market. We have already
run out of money for the "cash-for-clunkers" program and the first time buyer incentive is due to expire at the
end of November. Many have said the stimulous program was not big enough to truely get our economy back on track; however,
there was great opposition to the first stimulous package so will anyone have the political will to push for more? If
more money is not pumped into the economy what will happen to the markets that have benefitted from the stimulous?
II.
How Long Can This Possibly Continue?
If
we have learned anything over the last 2 to 3 years, it is that our problems can end up being much worse and lasting quite
longer than any of us could have ever imagined. We don't have a historical precedent to apply to the problems we face,
but it took Japan over a decade to recover from when their bubble burst. The Great Depression did not end for a decade
until World War II fueled the economy. While I am not suggesting that either of these events were caused by the same
factors that led us to where we are today, or that our recovery will somehow mirror the recoveries in those other situations;
it would be imprudent to automatically assume that our troubles are almost over.
So many things that affect real
estate are broken and must be fixed before we truly can have a full recovery. We have to chew through all of the foreclosures
and short sales before the market can stabilize and start recovering. Unfortunately, the number of foreclosures keeps
on rising and adding properties to the market. In addition, we have thousands of lots that developers and/or lenders
are holding because there is no market for them. People have to be able to borrow money on reasonable terms or there
can be no recovery. This problem is further complicated by the fact that millions of people who have always paid their
bills are now being forced to default on their loans and watch their credit rating plummet in a matter of months (for instance,
your credit rating can go down up to 200 points just because you got a loan modification). The property values need
to rise to a level where owners can once again sell their current home without the need for a short sale. Finally, the
economy itself has to recover. If people do not have jobs or are worried about losing their job, they are reluctant
to make any kind of purchase.
III. Conclusion
Given what we have seen in the
last three years it is difficult to predict what is going to happen in the future but we are not going back to 2006 any time
soon. While we have seen some good signs this summer, I don't believe it signals a broad, long lasting recovery.
Because of the many facets of this problem that need to be fixed, I believe the wave of foreclosures will not stop any time
soon. Before the home values can truly start to increase, we need to get through all of the distressed properties.
Mark Zandi of Moody's Economy.com has estimated that 15.4 million homeowners owe more on their homes now than what they are
worth. This equates to 20 percent of all homes that have a mortgage on it. And, finally, the property values
have fallen so dramatically that it is going to take years for the values to ever get back to the 2006 values and until they
do, millions of properties are going to continue to be upside down.
Practice
Tip: To make money and avoid liability in the short sale/foreclosure market you must learn everything you can
about these markets. You have to have a basic understanding of the foreclosure process and potential issues. You
need to develop a team of professionals that are available if an issue comes up that needs to be addressed. The professionals
you need available at a minimum are a tax accountant, lawyer, remodeler and financial planner. Each of these professionals
have to undersatnd what is happening today and be willing to work together for the common good of the client. If you
don't have a basic understanding of the issues that can arise you will miss them and will create liability for your client
and you - these are not your typpical real estate transactions. If you don't have a team of professionals available
it is more difficult to tell your client that you can not help them with these issues and the likelyhood of the transaction
closing is low and if it does close the likelyuhood that there is a hidden bomb that will go of sometime in the future is
high.
Practice Tip: Short sales where there is only one mortgage are the best short sale to become involved
in. You are much more likely that the short sale will be approved and closed than when you are dealing with multiple
mortgages. The less the property is upside down, the grreater chance the short sale will be approved and closed.
