Real Estate by the Numbers

A Tale of Two Cities “It was the best of times, it was the worst of times…” so begins the novel a Tale of Two Cities. Or in the case of real estate, it is the tale of two markets. On the one hand inventory for unsold homes in MLS remains fairly stagnate at 56,000 homes. On the other hand, pending sales continue their trend upward currently hitting 8099 – certainly a record high this year.

In fact there are really two real estate markets at this time. Homes that are correctly priced for their condition and properly marketed, are selling. In some cases we are even seeing offers within days of listing or multiple offers. On the other hand, there is the second market of homes that are not at current market value for their condition and location. Those homes are stagnating and accumulating market times of 300+ days with no sale.

Is this good or bad news for sellers? Well, we think overall it is good news because the factors that control the sale actually remain unchanged from any earlier markets. Fortunately, all of those factors are under the seller’s control – price, condition, and marketing. Pricing is established by the seller (hopefully with the aid of a qualified agent), condition is controlled by the seller, and even marketing is determined by the active FSBO or by selecting a qualified agent.

So what is making this market appear so different from earlier markets?? We think it comes down to the number of “qualified” buyers. It is said that the seeds of failure are sown in times of success, and that certainly applies to the real estate market. Let’s review how the seeds were sown. Prior to 2003, buyers were using traditional financing to obtain homes. Yes, there were buyer programs to allow buyers to purchase with nothing down (VA, Nehemiah, etc.) but still they had to qualify. They needed income, a decent credit history, and a reasonable debt load that supported their proposed house payment. Those standards in lending began to change in 2003. Standards began to weaken as the housing market roared forward. Foreclosures were low because the increasing values allowed sellers who couldn’t make their payments to sell as the market built their equity rapidly. Lending confidence grew stronger and caution, weaker. And so the seeds of failure were sown. Both lenders and buyers threw caution to the wind, since the market seemed Teflon coated. Investors sensing the potential for quick money, jumped in to the market with a vengeance. This created an artificially high number of buyers – buyers never before seen in this marketplace. These buyers were unqualified, whether owner occupants or uneducated investors.

Eventually the lending market imploded in August of 2007, and it took a large pool of buyers out of the marketplace. Let’s look at some numbers to put this in perspective. At the peak of the market in 2005, there were over 10,000 transactions closing a month. In the first half of 2007, average closings per month were down to approximately 5500. After the lending meltdown in August, the numbers dropped monthly until hitting a low in January 2008 of only 2877 MLS sales. Since January’s low, February posted sales of approximately 3436, and March rose to 4302.

Probably the most troubling trend is the number of short sales (homes that are being sold for less than the amount owed to lenders) and REO’s (real estate owned – more commonly called foreclosures). Currently, foreclosures (both pre and post) amount to approximately 25% of the market – both in active listings and solds. Sadly, foreclosures are predicted to continue to mount through this year. However, Congress and both the current and each of the possible new presidents are proposing a myriad of legislation to attempt to halt this trend. This is why predicting the future can be so difficult. However, it seems fairly clear that we are at near bottom, if not bottom of the market.

So what does a seller do in this tale of two markets? First, if you need to sell, be assured that there are still buyers out buying and your home can be sold. On the other hand, if you are not buying as well as selling (in which case any loss on the sale is neutralized on the purchase) and can wait – wait! Real estate markets operate in cycles, and this too shall pass.

The Mortgage Blues: A Few Options

foreclosure signOf all the sellers we talk to on a daily basis one of the most heart wrenching conversations we have is the one about the possibility of foreclosure. A tragic side effect of declining values has been the number of homeowners facing the real possibility of losing their homes. Declining values can prohibit the sale of the home or refinancing due to the property now being over-encumbered for today’s value. This can leave homeowners struggling who cannot afford the payment or who must sell due to changed circumstances. For those who are confronted with this situation or who know someone who is, the options are limited.   These options include keeping the home, renting the home, loan restructuring (also called loan modification), a short sale, or foreclosure. For the sake of brevity, let’s examine a few of these options.

Loan Modification: Loan Modification is perfect for homeowners who have met with a temporary setback and cannot catch up on the back payments but can pay the current payment amount. In this case you can contact your lender who may agree to fold any past-due amounts, including interest and escrow, into the unpaid principal balance. This new amount will be re-amortized over a period of time. Or, if you are unable to make payments at the current payment rate, your lender may agree to extend your loan for a longer period of time, modifying the payment amount to a more affordable level. In either scenario, a Loan Modification will bring your account current.

Short Sale: The definition of “short sale” is a property where more is owed on the property than the current market value. In this scenario, a seller with a legitimate qualifying hardship (loss of a job, marriage failure, etc) in cooperation with their current lender(s) sells the home for less than is owed. The bank(s) then agree to lower the payoff amount of the loan(s) to facilitate the sale. Numerous banks are currently participating in these short sales in order to avoid the often greater loss of proceeding with a foreclosure.  However, not all sellers qualify. It is always best to speak with your lender to confirm they will participate with you in a short sale. Here are the typical requirements to qualify for a short sale agreement with your lender:

  1. The property needs to be a primary residence or second home. Some lenders will not do short sales with investors. If you are an investor, make sure you meet the remaining qualifications and contact your lender to determine their policy.
  2. Your payment is delinquent or about to be. Most lenders will not work with homeowners who are successfully making their loan payments.
  3. You have a qualifying hardship. Examples that qualify are divorce, loss of a job, medical bills, etc.
  4. You have no other assets. Lenders who see homeowners with 401Ks and large bank accounts are less likely to cooperate on a short sale.
  5. The loan has been in place close to one year or more. If the loan is not approximately one year old or more, the current lender may choose to charge the loan back to the originating lender.

If a seller meets the lender criteria for a short sale, they then place their home on the market for sale. Once an offer is accepted, the offer and supporting documentation is submitted for lender approval. One caveat, currently the Loss Mitigation Departments at most lenders are overwhelmed with the number of files submitted for approval. Lenders are taking anywhere from one to three months to approve these files. These delays can be frustrating to both buyers and sellers of these properties. If you are a seller, your best option is to hire a real estate agent who does short sales to guide you through this process and explain the pros and cons.

Foreclosure: The last option is foreclosure of the home. This is where the owner simply ceases making payments and walks away from the home. Currently, the government and the lending industry are taking aim at “walk-away” home owners who stop making payments and months later send the house keys back to their lender.

If you or someone you know is considering a short sale or foreclosure, it always a good idea to consult an attorney first. This article should not be construed as legal advice. Our goal, as always, simply remains to help our clients through this challenging market. If you would like the numbers for both local and national homeowner hotlines or are considering a short sale, please contact us so we can further explain your options. Or contact us and we will send you our Mortgage Relief Kit. Above all remember, this too shall pass.

Russell & Wendy