Todd & Lisa Sheppard
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Archive for June 2011

Have We Forgotten Something?

June 30th, 2011   by lisasheppard

Over the past few weeks and months, the media,   so-called experts and most of our friends and relatives seemed to have almost soured  on buying a home at this time. With fear of a fragile economy and high unemployment rates, who can argue with caution?When the pervasive sentiment among even real estate and mortgage professionals is that home prices will continue to move downward and that mortgage interest rates don™t appear to be jumping significantly any time soon, the question remains¦ œWhy would anyone that doesn™t have to buy now, buy now?One commenter to a previous blog post even went so far as to challenge the entire industry for promoting the œhurry up and buy approach by asserting that buyers who listened to that advice six months ago are bemoaning taking that advice. That made me think: œAre people who bought six, eight, ten months ago kicking themselves because their home is worth less now than when they bought it?I had my team call some of  our recent buyers  and this is the feedback we received:

œLast year at this time, I was cooped up in a small apartment. Today, I am planning our Fourth of July celebration with 25 friends and family in our new home. Regrets? Are you kidding? We couldn™t be happier.œWe are glad we now have a place of our own. We have a few friends looking to buy and we are helping to get them excited. Five years ago, we couldn™t afford it¦.now, we have our American Dream.œWe were crammed into my in-laws™ home with no real privacy or room for the kids to just be kids. Now, they have a backyard to play in and they have settled in to their new school and made new friends. We couldn™t be happier.œYeah, I realize, I might have been able to buy a home for $10,000 less if I waited, but there are two things to remember. One, what memories would we have missed if we weren™t here? And two, I am not selling my home now. Who cares what it is worth until we look to move again in 5-7 years? By then, we believe everything will be back to normal. Right now, we have a payment we can comfortable manage and we have a home to build roots and a foundation. I would urge everyone to do it, if they can.A  home does remain a good long term investment. However, first and foremost, it really is a place for pride, peace, preference, and pleasure. We need to be reminded of the emotional component to buying a home may be more than simply the financial benefits. And from a financial perspective¦who in your life is a better financial mentor? Donald Trump or Uncle Joe? Warren Buffet or your local newspaper writer who makes $30,000 a year? Remember, conventional wisdom breeds mediocre results (at best).

Housing Market Casting A Smaller Shawdow

June 29th, 2011   by lisasheppard

The inventory of future short sales and foreclosures which will be coming to the market is known as ˜shadow inventory™. Future real estate pricing will be determined by the number of these distressed properties which eventually reach the market.These properties sell at major discounts: § short sales at a 10% discount § foreclosures at a 35% discountCoreLogic just reported this inventory is declining as more Americans are staying current on their mortgage obligations. Here is a graph from their latest report:

Bottom Line

There still are a substantial number of distressed properties that must be cleared. They will cause prices to soften in many markets. However, it is comforting that this number is finally begining to decline.

House Prices Through 2015

June 27th, 2011   by lisasheppard

Everyone seems to have an opinion on where home prices are headed. Housing bulls are saying prices may start rebounding as early as later this year. Some housing bears are saying that prices may still drop another 10-15%. What actually is going to happen? No one knows for sure.However, Macro Markets, a financial technology company, actually surveyed 108 economists, real estate experts, and investment and market strategists for their June 2011 Home Price Expectations Survey. They then averaged all 108 opinions. Here is what the report says about house prices over the next five years: § 2011: prices will depreciate 3.52% § 2012: prices will appreciate .46% § 2013: prices will appreciate 2.18% § 2014: prices will appreciate 2.92% § 2015: prices will appreciate 3.47%Accumulative appreciation (including this year™s projected depreciation) will stand at 5.71% in 2015.

Bottom Line

The experts say home prices will begin to see appreciation next year and return to historic levels of annual appreciation by 2015.

Are Short Sales Getting Easier?

June 22nd, 2011   by lisasheppard

Short sales (where the lender agrees to accept less than the mortgage amount due on the sale of a property by a seller) have never been easy to complete. We are not suggesting that they now will be easy. However, there is mounting evidence that the banks are seriously favoring short sales over the option of foreclosure. Here is the evidence that has led us to this conclusion.

Banks Net More Money on a Short Sale

RealtyTrac™s latest data tells us that a short sale sells at approximately a 10% discount. A foreclosure sells at approximately a 35% discount. Obviously, the bank will net more by agreeing to short sale than they would by bringing the home to foreclosure.

Banks Are Beginning To Pay Short Sale ˜Bonuses™

In a recent article, HousingWire reported on a new program being instituted by CitiMortgage an affiliate of Citigroup:CitiMortgage, is paying borrowers an average $12,000 after completing a short sale this year.Justin Rand, the senior vice president of loss mitigation at the bank, said servicers are putting more of an emphasis on streamlining the process and pursuing a short sale ahead of foreclosure. There is no better proof that some banks prefer a short sale than the fact that they are paying bonuses to homeowners who pick that option.

The Numbers Already Show an Increase in Short Sales

In the same article mentioned above, CitiMortgage said the percentage of troubled loans that now go to short sale route have quadrupled (4% to 16%) in the last two years.And in a separate article, Bank of America reported they completed over 95,000 short sales in 2010 which more than doubles the number in 2009. BofA also reported that they completed more short sales than it sold previously foreclosed homes every month for the last year and a half. Last month (May), BofA completed roughly 9,000 short sales compared to 7,000 foreclosures sold.

Bottom Line

There are many advantages to a short sale over a foreclosure for the seller (they get to plan their move, there is less embarrassment with friends and neighbors, the negative impact on their future ability to purchase is much less severe). Luckily, it now seems that the banks also think it is in their best interest to pursue a short sale.

A Window Of Opportunity For House Sellers

June 21st, 2011   by lisasheppard

There has been much confusion as to where housing prices are headed. We have actually blogged on the issue recently. Today, we want to give our opinion on this subject for the short term. We believe sellers have a window of opportunity for the next 90-120 days in which to sell their homes for maximum price. We believe there will be increased downward pressure on home prices later this year and the first half of 2012.

Why renewed downward pressure?

Any item™s price is determined by ˜supply and demand™. In many parts of the country existing housing inventory is already high and actually increasing. In addition, an inventory of distressed properties (foreclosures and short sales) will be coming to market later this year. This inventory has been delayed for the last several months because of faulty paperwork by the banks when they originally attempted foreclosure proceedings on these homes.Celia Chen, of Moody™s Analytics explains:œForeclosures are weighing on the outlook for U.S. house prices, and the slow resolution of issues surrounding the so-called robo-signing scandal is keeping distressed homes off the market.The New York Times also recently reported on this issue. They looked at the delays in certain states. As an example, this is what they found in New York:œLast September, before the documentation crisis, nearly 1,500 New Yorkers lost their houses as a result of foreclosure, according to LPS. The average over the last six months: 286. That is far lower than at any point since the recession began.

Banks are now correcting these errors.

There is evidence that the banks are getting their documentation in order and about to again increase their foreclosure repossessions. Housing Wire reported:œSince major lenders delayed foreclosures to fix a broken process late last year, the amount of filings declined, but in May signs emerged the effect might be wearing off.They went on to quote RealtyTrac CEO James Saccacio:œ¦lenders are somewhat unevenly pushing batches of bad loans through foreclosure as they overhaul their paperwork and documentation procedures and as they determine that some local markets are able to absorb more foreclosure inventory¦ Foreclosure processing delays continue to mask the true face of the foreclosure situation, although there were some clues in the May numbers of what lies behind that mask.

What will this mean to home prices?

As this inventory comes to market, it will impact prices in two ways:1.             It will provide discounted competition for buyers2.             It will impact the appraisal values of all homes in the areaAgain, we quote Celia Chen:œIt is quite possible that house prices will pick up slightly in the second or third quarter of this year, as foreclosure sales remain depressed while nondistress sales pick up¦By the fourth quarter of this year, however, the distress share will rise, sending the house price index back down¦House prices will founder until early next year and start rising in earnest at the end of 2012.

Bottom Line

There is a window of opportunity currently which sellers should take advantage of. Waiting until later this year or until next year will not guarantee a higher sales price. If anything, it probably guarantees the exact opposite.

Consumer Confidence: Which Way Is it Headed?

June 20th, 2011   by lisasheppard

There is no doubt that the housing market and the economy are intertwined. The economy will get better as housing improves. Housing will regain strength as the economy improves. How is the economy actually doing? One measure is the Misery Index  which combines the inflation and unemployment numbers.   According to their site:  The misery index was initiated by economist Arthur Okun, an adviser to President Lyndon Johnson in the 1960²s. It is simply the unemployment rate added to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation both create economic and social costs for a country. A combination of rising inflation and more people out of work implies a deterioration in economic performance and a rise in the misery index.The higher the index, the weaker the economy. Here is a graph of the index over the last 18 months.  

How does information like this impact Consumer Confidence?

Obviously, this index reflects on the factors that eat at consumer confidence. Bloomberg News reported on this saying:Confidence among U.S. consumers dropped more than forecast in June as households contended with higher prices that are eating into incomes amid slowing job growth. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 71.8 from 74.3 in May.

Bottom Line

It will be difficult for housing to rebound while consumers are concerned about their financial futures.

Will Falling Values Lead To More Strategic Defaults?

June 17th, 2011   by lisasheppard

As prices continue to soften, more and more homeowners will fall into a position of negative equity on their homes. This means that the balance on their mortgage is greater than the value of their home. The reason this is important is that people are more prone to strategically default on their mortgage when ˜underwater™.

What is a strategic default?

Let™s first define strategic default in simple terms. According to Wikipedia:A strategic default is the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments.This is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the house™s price such that the debt owed is (considerably) greater than the value of the property “ the property negative equity or œunderwater “ and is expected to remain so for the foreseeable future, such as following the bursting of a real estate bubble. Such borrowers are called œwalkaways.  This definition itself serves as the explanation as to why people will default.

How do Americans view strategic default?

In Fannie Mae˜s recent National Housing Survey, they shed some light on American™s thoughts on strategic default. § The number of underwater homeowners who believe it is okay to default on your mortgage if you are under financial distress has almost doubled in the last twelve months (14% to 27%). § 47% of people that are underwater and behind on their mortgage have considered strategic default. § Those who know a strategic defaulter are more likely to have considered defaulting. § 1 in 5 Americans knows a strategic defaulter

Bottom Line

As more people enter into negative equity, more will be tempted to ˜walk away™ from their mortgage obligations. If they do walk, that will increase the number of homes entering foreclosure.

Is The Economy Worse Than We Think?

June 16th, 2011   by lisasheppard

We are presented with conflicting data almost daily about the œhealth of the economy. And I am no economist, but I believe that I do possess some common sense.So, here™s what I have been thinking.It is obvious that millions of people are NOT paying their mortgage, rightly or wrongly, for their own reasons:1.             They can™t because of a job loss, death, disability or something outside of their control.2.             They won™t because it makes poor financial sense as their house is underwater.My question is that with so many people NOT paying their mortgage, how can there be an economic recovery of any fashion? And then it hits me, people who used to spend thousands of dollars every month on their housing are spending that money now on food, clothing, vacations, gasoline, cars and alike. With the lag time between the moment of not making a mortgage payment to eviction being as long as two years, it seems logical to me that the reported economic numbers have to be inflated.As foreclosures and short sales continue and people transition from non-paying homeowners to renters, millions of consumers will start having a housing expense again which will leave them less cash every month to buy other things. The result will be a slowing economy.If you are a home seller, I think it means continued lower sales prices for at least the next 18 months. Price aggressively and get top dollar now!If you are a home buyer, most of the recent data points to higher prices of everyday goods (largely because of higher energy prices), and that leads to inflation. Inflation is combated by the Federal Reserve with higher interest rates. So buy now, while the monthly carrying COST of a home is at near all time lows. Lower home prices sound good, but higher interest rates will nullify that benefit.I have learned that œCommon Sense Is Not Common Practice. Today, I wanted to share some common sense conclusions, to push you to make it part of your practice.

House Prices Will Continue To Tumble

June 15th, 2011   by lisasheppard

We have written several blogs recently quoting numerous sources saying now is the time to buy a home. We agree that now is definitely the time to buy. This is NOT because we are calling the bottom for real estate PRICES. What we have said is that the COST of purchasing a home is probably near a bottom or has hit the bottom.The difference is that COST is determined by two components: the price of the home and the expenses associated with mortgaging that home. As we have put forth in several posts, we believe that the expense of obtaining a mortgage will increase as the year goes on.We also believe strongly that, in most parts of the country, prices will continue to soften. Here are the reasons why:

Existing Months™ Supply of Inventory Is Still Too High

A balanced market (where prices are stable) can handle 5-6 months worth of active inventory. Anything less than 5 months constitutes a seller™s market as there are not enough houses to meet buyer demand. This usually results in price appreciation. Anything more than 6 months constitutes a buyer™s market as there are not enough buyers for the number of houses on the market. This usually results in price depreciation.Currently, as per the National Association of Realtors (NAR), there is a  9.2 month supply of inventory. This alone would put downward pressure on prices.

Distressed Property Inventory Is About to Enter Market

There are over over 4 million homes that have the potential to become a distressed property sale (foreclosure or short sale) over the next few years. A percentage of these properties are set to enter the market before year™s end. No one knows exactly how many will come to market in each region but the common belief is that the number will be substantial.These properties will sell at a discount thereby attracting a portion of buyers in the market. After they close, they can also be used in an appraisal to help establish values of other homes which sell in the area. A short sale sells for approximately 90% of it™s non-distressed value. A foreclosure sells for approximately 65% of full value.

Bottom Line

The inventory of homes currently for sale added to the inventory of distressed properties about to come to market will far exceed demand for the next twelve months. When there is less demand for any item then there is supply of that item, prices fall. Check with a local real estate professional to see how this may impact the value of your home over the next year.

Why They Are Saying To Buy A Home Now….

June 14th, 2011   by lisasheppard

Despite what appears to be a non-stop wave of tough news regarding real estate, four major media players have come out this month with the same advice: It Is Time to Buy a Home! Here are the four articles and a breakdown as to why the advice makes sense.The Wall Street Journal: Why It™s Time to Buy  CBS Money Watch: Why the Time to Buy is NowForbes Magazine: 9 Reasons to Buy a House NowNational Public Radio: For Many, It™s Still a Good Time to Buy a HomeWith prices continuing to depreciate in most regions of the country, some may wonder why these four entities are suggesting to their readership that now is the time to buy. Each organization realizes that PRICE is not as important as COST. The cost of a home can go up even if prices continue to fall. Unless you are an all cash buyer, you must take into consideration the expense of mortgaging when calculating the full cost of a home. Here is some information to consider.

Interest Rates

Currently, interest rates sit at historic lows. However, Fannie Mae, Freddie Mac, PMI and the National Association of Realtors are all projecting approximately a 1% increase in mortgage rates over the next year. A one percent increase in rate negates a ten percent fall in prices.

Lending Standards

The government has proposed a tightening of lending standards called Quality Residential Mortgage (QRM). If accepted as proposed two things will happen:1.             The qualification process for loans will become more difficult2.             The cost of a loan will increase

Bottom Line

There is a reason more and more financial organizations are suggesting to their followers that now is the time to buy a home: because the cost of purchasing a home is about to increase (even if prices continue to fall).