There are many myths about housing markets perpetuated by banks and the financial press. Two of these myths include (1) keeping people in a house keeps up the values, and (2) foreclosures reduce neighborhood values.
Many believe that allowing delinquent mortgage squatters to stay in place improves the condition of a property. Perhaps in rough neighborhoods prone to property crime, occupancy is better than abandonment, but in most neighborhoods, when delinquent mortgage squatters stay on, they property gets run down. Why would anyone spend any money to improve or even maintain a property in which they have no financial interest? If people were prone to do this, then landlords wouldn’t need to spend money maintaining rentals. Delinquent mortgage squatters have no landlord to call, so when something breaks, unless it makes the house unlivable, it goes unfixed. A property in poor condition is worth less than a well maintained one.
Many also believe that foreclosures reduce neighborhood values. Another recent federal reserve study concluded the conventional wisdom is wrong, foreclosures don’t reduce neighborhood values. I have long contended that foreclosures are not the problem, they are the cure. The real problem is, and always has been, property debt. Foreclosure removes that problem. Further, once a house goes through the foreclosure process and gets sold to a new owner, the value of that home rises to the general level of the neighborhood. Either the flipper who bought the foreclosure or the new owner improves the property to fix the problems left over from the delinquent former owner who didn’t maintain it.
As lenders have played the amend-extend-pretend game, they have allowed people to squat for as long as five years in some of these properties. The longer lenders allow these people to squat, the more these properties become run down, and the more neighborhood values drop. It’s really that simple. Plus, the cure for this problem is equally simple: foreclose on the squatters and recycle the property into the hands of a new homeowner who will care for it. But don’t take my word for it, read the report:
Foreclosure Externalities: Some New Evidence
Kristopher Gerardi, Eric Rosenblatt, Paul S. Willen, and Vincent W. Yao
Working Paper 2012-11 August 2012
Abstract: In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in “above average” condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.
The decline in value, the “negative effects,” peak before the properties complete the foreclosure process. If the decline in value were caused by the foreclosure, the values would remain unchanged until the bank listed and sold the property. That isn’t what the researchers found. This has huge implications because now banks can foreclose under the guise of improving property values.
Just say no to foreclosure moratorium
The recent change in laws in Nevada which essentially caused a statewide moratorium over the last year. The reduction in inventory also caused house prices to bottom and rise nearly 10% this year. Such occurrences would suggest broader foreclosure moratorium would help prices bottom in other locations. That is not the conclusion of the federal reserve.
Because foreclosure transitions in a given area are highly correlated with the number of outstanding distressed properties in the same area, one would find a significant, negative correlation between the sale price of a non-distressed property and the number of surrounding properties transitioning into fore- closure. Based on such results, one might conclude that implementing a fore- closure moratorium would increase house prices. However, such a conclusion would be wrong. Delaying transitions into foreclosure does not reduce the to- tal number of distressed properties, which is what exerts downward pressure on prices according to the true model. Indeed, over time, delaying foreclosures without stopping transitions into delinquency would increase the total number of distressed properties and thus serve to lower prices.
Wow! That could have been written on this blog. I have made the same argument for years. It’s shocking to see this kind of common sense in an academic study supported by real data and analysis put out by the federal reserve. There is hope for them yet.
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Proprietary Irvine Housing News home purchase analysis
$475,000 …….. Asking Price
$528,000 ………. Purchase Price
11/24/2004 ………. Purchase Date
($53,000) ………. Gross Gain (Loss)
($42,240) ………… Commissions and Costs at 8%
============================================
($95,240) ………. Net Gain (Loss)
============================================
-10.0% ………. Gross Percent Change
-18.0% ………. Net Percent Change
-1.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$475,000 …….. Asking Price
$16,625 ………… 3.5% Down FHA Financing
3.55% …………. Mortgage Interest Rate
30 ……………… Number of Years
$458,375 …….. Mortgage
$130,478 ………. Income Requirement
$2,071 ………… Monthly Mortgage Payment
$412 ………… Property Tax at 1.04%
$67 ………… Mello Roos & Special Taxes
$119 ………… Homeowners Insurance at 0.3%
$477 ………… Private Mortgage Insurance
$225 ………… Homeowners Association Fees
============================================
$3,371 ………. Monthly Cash Outlays
($309) ………. Tax Savings
($715) ………. Equity Hidden in Payment
$19 ………….. Lost Income to Down Payment
$79 ………….. Maintenance and Replacement Reserves
============================================
$2,445 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,250 ………… Furnishing and Move In at 1% + $1,500
$6,250 ………… Closing Costs at 1% + $1,500
$4,584 ………… Interest Points
$16,625 ………… Down Payment
============================================
$33,709 ………. Total Cash Costs
$37,400 ………. Emergency Cash Reserves
============================================
$71,109 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Cost of Ownership Analysis
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Nearby Foreclosures
Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."Comparative Market Analysis
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Once banks stopped foreclosing, everyone in Florida stopped paying.
Does Florida Have A ‘Culture Of Delinquency’?
Not all of the “sand states” are equal when it comes to the share of borrowers who are behind on their mortgage loans.
A new report out Thursday from real estate services provider Zillow found that while Florida is not the worst state for negative equity, the Sunshine State’s borrowers have disproportionately high delinquency rates on their loans.
In Miami-Ft. Lauderdale, 43.7% of borrowers are underwater, while 24.9% of them have missed at least three months of payments. In Tampa, where 46.6% are underwater, 17.6% haven’t made payments for three months. In Orlando, it’s 51.9% underwater and 18.2% delinquent.
Compare that with Phoenix, where 51.6% of borrowers are underwater, but only 8% are seriously delinquent, or Atlanta, where 54.4% are underwater, but only 7.8% are seriously delinquent. Even lowly Las Vegas, where a whopping 68.5% of borrowers owe more than their home is worth, only 13.6% are 90-days delinquent. (Zillow’s delinquency figures — which come from credit rating firm TransUnion – jibe with the Mortgage Bankers Association’s figures.) So what is it about Florida? Why are so many more of the state’s borrowers delinquent on their home loans when fewer of them are underwater?
Part of the answer could lie in foreclosure timelines. Florida is the only one of the four notorious “sand states” (the others are California, Nevada and Arizona) that has an exclusively court-based foreclosure process, and the state’s courts have been jammed with thousands of cases. As a result, the foreclosure process is taking longer than ever – an average of 861 days in April – from start to finish.
So even if Florida has a similar rate of default to that of most other states, defaulters stay delinquent longer, so at any given time, there are more of them.
“There are a lot of people hanging out in that pipeline,” says Stan Humphries, Zillow’s chief economist.
Borrowers could also be encouraged to default by others whom defaulting has benefited – if you can live two and a half years rent-free, before they kick you out, why not, right?
“If you’ve been around people who’ve defaulted, you’re much more likely to default yourself,” Mr. Humphires said.
The report contained some good news overall: The number of underwater homeowners fell to 15.3 million, or 30.9% of U.S. homeowners with a mortgage, from 15.7 million, or 31.4%, in the first quarter of the year. That means 400,000 fewer people owe more than the value of their homes.
That’s great news for those homeowners whose household balance sheets are on the mend. It means they will likely have better access to credit (you can’t take out a home equity loan if you don’t have any equity), and multiple studies have found that underwater mortgages are a leading cause of strategic default, which is generally bad for communities.