There is a common misperception that foreclosures are pushing home prices down. I see this all the time in quotes like “Stemming the number of foreclosures will go a long way to stabilizing the market” which was part of an otherwise solid article at Inman.com. I actually made this mistake myself for quite a while until I watched home sales pick up as REO inventories increased – a feat which flys in the face of basic laws of supply and demand. Then it hit me:
People simply don’t buy homes based on price, they buy based on
payment.
When loan products change, the price a buyer can afford also changes.
100% of the price correction to date can be perfectly correlated to the
change in available lending products and has little, if anything, to do
with foreclosures.
Sales sucked in 2007 because people couldn’t afford the homes at
those prices given the available financing. As prices have come down to
meet available financing sales have risen. I actually said at one point
that foreclosures were bringing back affordability to CA. But that was incorrect – the return to traditional financing has pushed prices down, not foreclosures.
Those of us who sat through econ 101, and look to past housing
cycles get fooled into thinking the current price declines
have something to do with too much supply. And we therefore believe
that stopping foreclosures and limiting supply will stop price declines or even bring prices back up.
But outweighing supply and demand is the simple ability to pay.
Turns out this is what is driving prices down. And it turns out we
still have strong demand at prices people can afford to pay (sales have
risen each month as prices have declined here in CA).
The important take away is that by focusing on stopping foreclosures
we take our eye off what could be a more serious problem – rising interest rates. Interest rates are up this week.
That will directly correlate to either slower sales at current prices,
or lower prices. Why? Buyers buy based on payment, not on price, and
higher interest rates lower the price they can afford. As homes become
less affordable, less sell.
I see only two things that can return prices to their peak levels, neither of which is terribly exciting:
1. Taxpayer backed home loans in the 2-3% interest rate range. At
least in CA, that is what it takes to make these loans affordable at
peak prices. And, one could argue, that is essentially what is
happening now with the bailout. Countrywide, for example, is currently
doing 5 year, 2%, interest only, loan mods.
2. Wage inflation. To get house prices back to their peak levels
with traditional financing we could dramatically inflate everything
else to catch up with peak home prices. Think 15%/year inflation for 5
years.
Best bet is to at least insure that traditional financing remains
available so that we can put a floor on the losses. The federal
government has already taken extreme steps to shore up home financing
with the takeover of Freddie and Fannie. Yet they will need to attract
capital to continue buying these mortgages or rates will rocket
upwards, and prices downwards – foreclosures or not.
I agree that people buy homes bases on payment. Oh, I think they look at the price – but that is only secondary to “Ok, how much can we afford each month?” Once they know what they can pay, they back that into the price of the home.
Thanks for the post Dawn. I enjoyed looking at your blog: http://gettingninehundred.blogspot.com/.
Sean… You make a good case, and I agree that interest rates and availability of money is what makes the machine operate. Ability to pay represents demand.
In my view, buyer’s attitude is the third part of this equation. Like fishies in the sea, without any apparent leader, buyers make sudden changes in direction and move individually as a group. In 2007, sales sucked… buyers could afford homes. Maybe not the ones they wanted, but homes were available in their price range. The problem is no one wants to buy while prices are going down. Buyers waited for prices to further decline, and as a result they did… because of inventory build up. When buyers believe prices are heading up, they will buy whatever they can afford to avoid missing the next train.
I think your earlier blog about Cap Rates setting the low value was excellent, but Fishies in the sea still rule…
I always appreciate your insightful writings, and ForeclosureRadar 2.0 Rocks!
Thanks Gary. I don’t disagree that at times the “fishies” do swim against the tide. Emotion and momentum are certainly factors to keep in mind.
Good article. Spot on. Most people do not realize that they can stop foreclosure even if they stopped paying their mortgage. Many recent cases have been filed improperly and an experienced attorney can assist with the identification and filing of substantive and procedural defenses with the court and vigorously defend your case. Due to the lender’s actions, omissions or other facts surrounding your case, you may be able to stop making mortgage payments and stay in your home while your attorney vigorously defends your property. This does not necessarily mean that you will not have to pay the loan back or completely Stop Foreclosure. HYPERLINK “faq.html”HYPERLINK “page6.html” It is possible to completely Stop Foreclosure if the bank or lender is in violation of the Florida Unfair Lending Act or other predatory lending practices. If the lender has committed such a violation, the entire principal and interest balance may be waived and the mortgage may be voided. This may not be relevant in your case. But, at the very least, a successful defense can do is buy you precious time to:
* Stay in your home
* Negotiate a work-out with the bank
* Sell your home for a fair price
* Refinance your home at a fair rate
* Continue to collect rent on the property
* Apply for a Court Ordered repayment plan
* File a Chapter 13 or 7 Bankruptcy
When home owners are faced with the reality of facing a potential foreclosure, many experience a state of paralysis. They don’t know what to do. Selling the home may not be an option since the equity appears to have vanished. To fight foreclosure or not? That is the question. Clouding the answer is perhaps the biggest misconception, “Hiring an attorney is not a cost-effective option.” If I can’t afford to pay my mortgage, then how in the world can I afford to hire a competent attorney? And why should I, if I am upside down in my home? First of all, EVERYONE can and should hire an attorney to represent them in their foreclosure case. There are many competent attorneys who specialize in this area. Due to the growing number of these cases, many attorneys have become “experts” in this area. Due to the fact that most of these cases are very similar, many excellent attorneys have experienced staff and can offer extremely affordable payment arrangements. Most people don’t know that once the foreclosure proceeding has started, the bank will not accept any future mortgage payments – doing so may adversely affect their ability to foreclose on your property. Furthermore, the bank pays any delinquent real estate taxes and the insurance on the property. In summation, once the bank files a foreclosure lawsuit, most of the homeowner’s expenses are being paid by the bank (mortgage, taxes and insurance). However, as the legal owner of the house with full possession, you have all the rights associated with same including residing in your home, collecting rents on the property, etc. Imagine the “EQUITY” you can save / build, if you fight the foreclosure case for a year or more. The cost of qualified legal representation is a drop in the bucket compared to your typical home ownership overhead. Time is money and the real estate and financial markets are likely to turn around. The hiring of the right attorney will save you thousands of actual dollars, in addition to thousands in time value of money. Its really a no-brainer.
Respectfully,
Frederick A Neustein
http://StopForeclosureLawyer.com
Hi,
I own the website http://www.savemyhouse.org and I am developing a nationwide law firm to help people in foreclosure. The company is probably 5-6 months from opening but There is a website http://livinglies.wordpress.com/ (I don’t own this one) that has some very good information that people can use. Great foreclosure defenses there
With regards to these last two comments above I thought about removing them as they appear to be essentially ads, not direclty related to my post. Generally I think these programs are more about making an attorney a few bucks than “saving” your house. Lots of variations here, but bascially they involve
a) getting delays due to technicalities, or by using bankruptcy,
b) helping you negotiate a loan modification,or
c) best case finding a mistake in the loan itself and getting late fees or interest waved.
Problem is that all of these fail to address most homeowners reality – the house is ridiculously upside down. No “foreclosure defense” makes a bit of difference in that case. An attorney, no matter how good, can’t simply eliminate that debt.
I’m not saying there is never a time to use an attorney. Generally I find that a really good attorney is worth the expense. But you do need to have realistic expecations – they aren’t going to make your loan magically disappear.
I have a friend who got into the loan modification business, he has been at it for a few months now and he seems to think he is an expert. I agree with Sean, most of these programs are going to delay the inevitable, people are going to lose their homes, and should lose their homes. The economy isn’t getting any better any time soon, and why people put the blinders on thought that they would magically be able to make these enormous house payments (as well as their two new car payments and other toys) is beyond me. I am a builder/developer, and we would pay homeowners mortgages for a certain amount of months, whatever they negotiated in their contract, and I would say that 15 to 20 percent of those homeowners lost their homes once they had to start making the payments on their own. I have a real hard time swallowing this mess when most of the politicians are acting like the people that got themselves into these ridiculous house payments aren’t adults, and blame the lenders. Last I checked we live in the USA where you are free to make you decisions, bad or good, but it is pretty clear our government is moving us to a place where they will be telling us what to do soon. And we will be paying them to do so. Watch out!
Sean,
I think you need to be careful not to minimize the importance of these three things that you aknowledge an attorney can help (defending the foreclosure – working to find substantive and procedural defenses and taking the bank to task , negotiating the loan modification and reducing the debt). All these things are incredibly important and make all the difference in the world. In my experience, the banks dont really “negotiate” until they are forced to. Its a very difficult situation, but homeowners should not attempt to negotiate a loan modification on their own once the foreclosure process has begun – it would be synonymous to negotiating with a gun against your head. When the homeowner exercises their legal right to defend the case, it puts the “negotiation” on a level playing field. You are correct to point out one of the benefits to defending the case is that it buys the owner time to accomplish the most beneifical resolution (whether its a dismissal, successful modification, sale or short sale). The home is the most important investment most people will ever make. Simply walking away from the situation would not be responsible.
Bull. People buy homes based on price, not on payment. Few are so short-sighted so as to fail to realized that price is forever, interest rate is temporary. On the high-end, interest rates are completely moot as most transactions are cash.
I often get this kind of response from folks that no longer live in the real world. Friends at venture capital firms, or at large software co’s. Though even most of them usually “get it” now.
Spend 5 minutes talking to any Realtor or mortgage broker in middle class markets and you’ll find that people buy as much house as they can afford. And what they can afford is a simple matter of income — especially given the fact that most American’s have little, if any, savings.
Finally… how exactly does the high-end matter at all in this crisis, or in foreclosures?
What a terrible, rediculous idea – a helpless home owner now gets tospend money on a greedy lawyer instead of the bank. Do not believe for a second that the lawyer is trying to help you. Instead of the bank the greedy laywer will take your life savings. Don’t recommend you listening to Fred Neustein.
I sell homes in Orange County – my main market is in tthe “mid-range” around $750K (down from $950K average two years ago!) Fully 50% of our listing business is short-sales. (Upside down homeowners who need to get out.) The distraught sellers usually call us after several months of first denial, then having gone through or attempting a loan modification, only to be told they can’t get one, or the loan mod they get is clearly not sufficient… Once they come to the realization that they just can’t “save their home”, and get over the anger and loss stages ( the psychological stages of loss – as this truly is a “loss”), they come to “acceptance” and realize they should go down the road of the lesser of two evils…. A short-sale – instead of a foreclosure. If successful, (and 90% of ours have been), they will have to rent for a couple of years, while they start rebuilding and repairing their credit … and there’s light at the end of the tunnel. If they let the property foreclose, the credit repair part will be a lot tougher. Additionally, the psychological component of just giving up and not going out with a little dignity (which the short-sale seems to provide for many).. is what my clients end up choosing – even though they could stay a while longer for “free” if they let the property foreclose. The landlords they will be renting from also have more respect and look at “short-salers” vs “foreclosure” tenants with more respect….so they’ll have a better chance at finding a good rental. Just a little input from a realtor in the trenches of the OC… Sheri
Thanks Sheri! I couldn’t agree more. It makes no sense to me that we see so few short sales. They clearly provide a better outcome for both the homeowner and the lender. Thanks for contributing.
Under the new Obama Foreclosure & Housing Reform Plan, change will occur rather slowly because lenders must understand the new subsidies and incentives offered to lenders to modify loans. It could be months before lenders implemented the modification program, since they would have to train representatives and update internal procedures. While this training is going on numerous borrowers will be calling to see if their loans can be modified overwhelming the system even further. Furthermore it is estimated that only 17% of home owners in need will be helped by the plan. Consulting a legitimate and professional loan modification company, like Friendly Financial Services, provides assistance to a community in need by working diligently and effectively to modify their client’s loans. Every single case is treated as an urgent matter; the staff truly develops personal relationships with their clients throughout the modification process. Unfortunately, most companies entering into this field do not have the experience and knowledge needed to modify these files successfully. Modifications are very different than standard refinances and a lot more cost effective. We are an accredited business holding an “A” rating with the better business bureau and have a 98% success rate with our attorney, Robert V. Rossenwasser. Friendly Financial Services separates from the competition with a staff comprised of underwriters and processors who worked for lenders and have an insider understanding of what banks want to see in order to approve modifications.
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My parents were able to save their retirement plan and their savings by asset protection before the house they lived in went into foreclosure. The got the information from a book by steven sears attorney asset protection irvine. It seemed to work right and save them alot of grief and headaches.
Although declining home prices are not completely due to foreclosures, they do play a role. It goes back to the supply and demand rule. Excessive foreclosures equal excessive supply and with the banks tightening up on lending, it reduced the ability for demand to increase.
Hey Sean, You gotta post dates around your blog posts.
Sitting through Econ 101, we also learned about barriers to entry in a marketplace. Mortgage qualification is a barrier to entry for demand or customers…
Thus it is a supply and demand issue, as you have rightly pointed out. The media and pundits are once again wrong in identifying who is who and what is what in the housing market.
What else is new when our media and political class constantly spread fallacy as fact?
Great point – easy to assume demand=desire, but you are absolutely right, demand requires both desire and capability.
Monthly payment is a big factor in driving people to buy, but I do believe having extra homes being dumped on the market at reduced prices does have a negative impact on overall home values. If people can move into foreclosed homes that are priced to sell, why would they pay more for a similar home down the street? This of course forces other sellers to lower their prices to compete.
Hi!. Hey for the blog. I