New UVa Study on Foreclosures

Last week, William Lucy (author of the Safety in Our Cities study) and Jeff Herlitz have issued a new study on Foreclosures and the economy. The UVa professors put forth that as much as 66% of the total losses in real estate in 2008 occurred in California, and 21 percent from Florida, Nevada, and Arizona. California had 10% of the housing units and 34% of the foreclosures.

However, this does not come as any solace to the many who have lost their homes here in Virginia and Charlottesville in particular. I think what does surprise me is this thought.

Potential losses in housing values from 2008 foreclosures in all 50 states — if values decline to 2000 levels — were less than one-third of the $350 billion provided to banks and insurance companies to cope with losses in mortgage-backed securities, Lucy and Herlitz estimated.

Wow. That’s the shocking thing about leverage. We borrow money once, and the banks resell it 20 times, and the loses are staggering. Amazing.

Foreclosure or Comeback Kid?

Originally Published February 5, 2009

OK, so I’m not sure I fully understand the article / posting I just read. So, I throw it out to others in hopes that someone can enlighten me. I regularly read a blog called Seeking Alpha which is fantastic in its financial analysis of things current. They just posted an article about Hovnanian, the massive homebuilder who just lost their development in Greene County to foreclosure.

Hovnanian last month lost a total development of several hundred acres to foreclosure. The property eventually was bought back by the bank for only $5 million.

According to the post on SeekingAlpha, Hovnanian may come through the current housing crisis and look like a dream builder. Why? Because they have $800 million in cash!!! Some lawyer needs to chime in and tell me how and why a corporation is able to separate their assets to the extent that in Virginia, they can be decimated and leave a hundred home owners with no HOA, no developer to complete the amenity project that the homeowners bought into, and the next week have an analyst write about what a great company it is because they have so much cash.

I just don’t get it.

Stealing A Home

Originally Published February 1, 2009

I was reading The Bubble Blog as I do most days, and as normal there were various comments that readers made that I thought were interesting, insightful, and sometimes spot on. But there are also the comments that make me think for a while and say, “Why?” In general, readers of the Bubble Blog are in agreement with the authors and support the notion that Charlottesville prices are too high. Given the current stall in sales, I tend to agree that movement is necessary in prices. But I’m not sure why everyone on the Bubble Blog is so convinced that it is all the Sellers who need to move. No, I’m not arguing that we have hit the bottom and we are about to skyrocket to 2005 price appreciation rates.

A year or so ago I was approached by another local Realtor who asked if I would be interested in selling my home. I told her, “Absolutely.” And I then proceeded to quote her a price somewhere North of 40% above my assessment. She said, “You’re crazy, your house isn’t worth nearly that much.” Well, she was right and wrong. It wasn’t worth that much on an open market, and it wasn’t going to be worth that much to her client, but to me, it’s absolutely worth that much. I had no interest in moving, and I still don’t. If someone wanted me to move, they were going to have to make it so worth my while to move that I would never have thought twice about it. And for me, that was about a 40% premium. And frankly, I’m not even sure I would have sold it for that.

Right now, I have lots of buyers looking for a steal. They don’t want a fair market price, they want a steal. They want to know that in five years when they look back at this period, that they took advantage of some pathetic seller who had no choice than to sell, at an absurd price. Today’s buyers want to know that there was no blood left. Well, guess what… today’s sellers aren’t all that desperate. Some are, but not all.

I have sellers who want to sell for various reasons. Some to move up, some to downsize, some who have been offered jobs in other areas, some who are having more children and want a bigger house. But on the news, you hear all about the millions who are losing their houses to foreclosure, and the banks are willing to sell for less than the debt. Not all sellers are bankrupt, and not all are willing to bleed for you to get your steal.

Market value is not just the price that a buyer is wiling to pay. It is also the price at which a seller is willing to sell. When the seller wants too much, or the buyer is willing to pay too little, no transaction occurs. It doesn’t always mean that the seller is over pricing. It can mean that Buyers are not wiling to pay market value.

And that brings us to the last few months of real estate. Buyers are convinced that Sellers are going to drop prices, but they haven’t. And when you look at my research into the city neighborhoods, most have not fallen in price more than 5%. And that does not represent the “steal” that buyers are looking for. Sellers on the other hand, may or may not have to sell. No one wants to be taken advantage of. Sellers are willing to drop prices when offers are being made that are fair and represent a market value transaction. But few are asking to be robbed.

I am not saying that values have not fallen in the Charlottesville area. They absolutely have. On Thursday night on 29 News I said as much. Transactions are occurring below assessments, and in 2009 we should expect to see that spread widen. But there is no indication that we are in a free fall, or that we should expect 20% price reductions anytime soon.

For Sellers, my recommendation is to seriously look at your reason for moving, and set your price accordingly. It could be that you won’t sell your house. But if you don’t need to sell, you certainly don’t need to be robbed in the process. For Buyers, assess why you are purchasing a home. For many, this is purely an investment decision. To you, I say watch for the short sales and foreclosures. You may not get the perfect home with the perfect view in the perfect school district, but you will find a good deal. There are many to be had. But don’t search for the perfect home, and then expect to steal it. It rarely happens that way.

2009 Market Projections

Originally Published January 4, 2009

Just saw an article that was published by CNN that showed the 2009 projections for the worst 10 cities in America for home prices in 2009. Of the 10 cities listed, 8 were in California, plus Miami, and Washington DC. 8 in one state. Yes, it is the largest population, but that is seriously messed up. Foreclosures were the biggest problem cited in the article. In Stockton, CA one in every 94 homes got a foreclosure notice IN NOVEMBER. Over 1% in one month… Can’t be good. I am blessed to be in Charlottesville.

The Davis Plan

Originally Posted October 9, 2008

Seeing as we as taxpayers now have access to $700 Billion of federal money to play with in the mortgage market, I thought it would be irresponsible of me if I did not put forth a legitimate plan for what to do with this money. Yes it involves restructuring debt loads, but I think it does more to solidify the real estate market more than anything I have seen thus far from our friend Sec. Paulson.

This post began, as did the preceding post, as a reaction I had when listening to the debate on Tuesday. Sen McCain offered that as part of our helping the middle class, we should use the $700 billion to buy back the mortgages of sub-prime and Alt-A debt that are having difficulty paying back the debt. Once purchased, we would re-set the principal to the new value of the home, so that people are not underwater in equity.

In all fairness to both parties, Obama has said he wishes to do the same, although I did not hear him say it on Tuesday.
This is a horrible idea. A miserable idea of massive proportions.

Let’s dissect the value of this proposition and why it is being bantered about. The goal is that if we don’t have foreclosures, we won’t have diminishing property values. If we halt the fall in prices, it will restore confidence, and thus the world will be all good. Well, the other obvious thing is that people love getting something for nothing, and that’s just what this does. It rewards people who borrowed too much and are now unable to pay for it. Further, if we remove the burden of being underwater, what is to stop people from dropping the sales price of their house dramatically to get out from under the loan.

So, what is The Davis Plan?
Rather than adjusting the principal, adjust the interest. This has multiple purposes. If a borrower qualified for the teaser rate in the beginning, he (theoretically) should still be able to do so in most cases. So, the borrower should be able to make the monthly payments. Because he can make the payments, he won’t get foreclosed. However, because his mortgage is still underwater, he can’t sell. This is a GOOD thing. Because he can’t sell, he stays. This reduces inventory on the market. This produces a stable market. This provides for liquidity to those persons who can sell and wish to sell.

How does this really play out? Well, if a person bought a $400,000 home with 100% financing at 5.5% teaser, his original payment (assuming no negative amortization) would have been $2,271 + Taxes and Insurance. With interest rates resetting, that rate could be 8.5 or 9.5%. If we assume 8.5%, then the borrower is now paying $3,075 +T&I. Under the current plan touted on Tuesday night, the principal would be reduced to the market value. Let’s say it’s dropped 25% in Ohio, that borrower now owes $300,000 at 8.5% interest and the payment is all the way down to $2,306 + T&I. And the cost to the taxpayer is an instant $100,000. With no chance of ever seeing that money again.

Now, under The Davis Plan, the borrower returns to paying $2,271 (less than the proposed plan). The borrower stays in his home. He doesn’t sell because he can’t afford to; remember, he still owes $400,000 on a home that has dropped in value. But he still has his home which is really what he wanted anyway.

Now, I know what you are thinking: what if the borrower needs to move because of work or family. Well, I have that covered.
Remember how I said people like getting something for nothing. That doesn’t exist in The Davis Plan. People will have the option of putting their house into The Plan or not. If they choose not to, they can be foreclosed upon, face bankruptcy, and see what the court allows them. That’s fine. I don’t think most people will take that route. I think they’ll opt for The Plan.

Upon agreeing to this workdown of debt, the borrower agrees to one simple change in their mortgage. Just like government insured student debt, you won’t be able to bankrupt your way out of this one. It is with you to your death.

So, if in five years you need to sell your home and you only get $350,000 for it, you still have a $50,000 – 30 year note with the Government. You can take it to your next home. You can prepay it if you would like. It will be tax deductible to the same degree that any other mortgage is – provided that loophole remains.

We now have a method for helping out the middle class, keeping them in their homes, removing excess inventory from the market, stabilizing the housing market, restoring confidence to the markets, and all of this without giving away something for nothing.

How much would all this cost? I have no idea. But I don’t think anyone really knows if $700 billion is enough to do what little they want to do anyway.

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