Archive for May, 2008

Is Texas the Litmus Test of the Real Estate Market?

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The Lone Star State was the scene of the original land rush back in the 1800s and now, more than two hundred years later it is no different. Beachfront properties, ranches and lakeside homes are being snapped up in the great State of Texas where house prices have kept a steady if somewhat slowed growth and foreclosures have risen but nowhere anything like the rest of the continental USA.

So what’s up? Why is Texas so different?

Well, for starters it is big and it is popular and it has everything. It has lakeside properties, beachfront, mountains and plains, rivers and creeks. It seems you name your ideal kind of property and Texas has it.

Because of this variety Texas is a litmus test for the health of real estate in the rest of the country. Variety and the quality of properties on offer have meant that Texas home prices rose in a more steady, sustainable manner than in the rest of the country. At the same time supply has kept pace with demand and the number of foreclosures experienced across the Lone Star State have been relatively low given the number of home sales.

It is precisely because of this even mix that Texas has highlighted that we can see that the state of the real estate market across the country will soon be in a phase of recovery which will need to a natural upswing.

This means that the foreclosures we are seeing are part of the natural correcting mechanism that is built into the real estate market and is intended to release the necessary, frozen capital needed to revitalise the market and allow first time buyers to get their foot on the property ladder.

With foreclosures beginning to release a fresh batch of reasonably priced homes lenders are beginning to loan money to new owners, at better terms, thereby injecting a new momentum in the real estate market which will start to pick up steam again and expand as rapidly as it had before the current credit crunch with the sub-prime mortgage sector began to bite.

It is highly likely that the picture of gloom we are seeing at the moment is part of the natural inertia of the system which is slow to show recovery and better home sale figures. It is definite however that, as the foreclosed properties are released, sold and bought, a fresh batch of home owners will inject much needed cash into the market and there will start again the steady rise in the confidence of buyers and investors in real estate and the inevitable creep of house prices, elements of which we already see in many areas of Texas. 

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Debt Mountain and Foreclosures are a Related Phenomenon

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Last I looked the debt mountain of the USA was on the increase with more and more money being piled on it as consumers seemed either unwilling or unable to curb their spending and lenders continued to lend money.

With the tens and tens of trillions of dollars being piled upon this consumer debt and the number of foreclosures at an all-time high it is safe to assume that first foreclosures and debt are related and second that both foreclosures and debt are a bad thing.

Well, the truth is that the first assumption is right and the second assumption is wrong. Yes, foreclosures are directly related to rising debt. As people borrow more and more their ability to repay it becomes less and less as their margin for error gets thinner and thinner until it vanishes completely. At that point they just need one bad experience, one bad deal or one bad incident in their life and their ability to meet their borrowing commitments becomes severely compromised.

So far so good. Debt can lead to foreclosure and the two are related but not in the way that might be immediately obvious. Let’s examine the second assumption that borrowing and foreclosures are bad.

Borrowing happens because lenders assess individuals and establish that they can pay back the money they borrow. So if borrowing is on the increase this means that the economy as a whole is booming as there are then a lot of consumers who are able to buy credit. Rising debt is not as bad as falling lending which actually signifies a reduction in consumers’ ability to buy credit and a possible shrinking of the economy.

Foreclosures are not bad for the same reason. They release back into the market tools, for lack of a better description, for tapping unspent power. So, let’s say if home-owner X is unable to make payments on house Y, then house Y which is frozen in the market, is released back into the general housing pool at a reduced price, it is then snapped up by someone who would not otherwise have spent that money because they could not afford to buy a higher-priced house and the cycle begins again.

For those predicting dark days for the real estate market as a whole I need to say that while this may seem to be a bad phase to be in it is part of the natural cycle we undergo as the real estate market corrects itself and it will soon be over and the better days of real estate as a fantastic form of investment will come round again, making real estate a sound form of investment once more.  

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Lenders May Have Had a Significant Part to Play In the Foreclosure Issue We Experience

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As foreclosures begin to get a lot of press coverage, inevitably, what comes under scrutiny is the lending practice, criteria and even advertising methods of some of the lenders in the real estate market.

A recent news item on CNN, for example, highlighted the fact that many borrowers in trouble were pulled in by deceptive ads such as LowerMyBills.com. The ads featured dancing figures, apparently happy about low-loan rates. One ad claimed a “$145,000 mortgage for under $499 a month!” Few, if any, borrowers actually scrolled to the bottom to see payments actually double over time.

It is exactly this kind of advertising practice and the fact that very recently a top level mortgage broker publicly admitted that they were under pressure to meet tough monthly targets by practically helping self-certified borrowers fill-in mortgage application forms in a way that would make it possible for the borrower to apply for a much higher loan than would otherwise have been possible.

With practices like this it is no wonder that borrowers caught in the hard world of the sub-prime mortgage market are in trouble, nor is it any wonder that lenders are over-exposed. Lawmakers and cynics are already talking about greed being the undoing of the lenders but that, right now, is beside the point.

What is required here are two distinctly different forms of action, none of which has anything to do with the knee-jerk reaction of banning sub-prime mortgages, as some have been calling for in the news.

The first, is already been taken, President Bush and members of Congress as well as 37 State Prosecutors have began to pressure lenders to be a little less eager to foreclose on properties and actually work with struggling home owners to resolve the issue where possible.

The second, and probably the hardest to implement, is the enactment of regulation which will safeguard, in future, borrowers from exactly the kind of sharp practice they have been exposed to this time round. Whether this is a self-regulatory or a legislatively-driven kind of regulation is, at this stage, immaterial. We clearly need something in place if we are to preserve the healthy growth in home ownership figures and the fact that the existence of sub-prime mortgages gives the opportunity to borrowers who would not otherwise be able to buy a house, to benefit from the great American Dream.

The state of our economy is only bolstered from home ownership and to contemplate anything that negatively affects that is clearly a short-sighted, knee-jerk reaction which will do more harm than the foreclosure and mortgage debt problems it tries to avoid.

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Debt Mountain and Foreclosures are a Related Phenomenon!

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Last I looked the debt mountain of the USA was on the increase with more and more money being piled on it as consumers seemed either unwilling or unable to curb their spending and lenders continued to lend money.

With the tens and tens of trillions of dollars being piled upon this consumer debt and the number of foreclosures at an all-time high it is safe to assume that first foreclosures and debt are related and second that both foreclosures and debt are a bad thing.

Well, the truth is that the first assumption is right and the second assumption is wrong. Yes, foreclosures are directly related to rising debt. As people borrow more and more their ability to repay it becomes less and less as their margin for error gets thinner and thinner until it vanishes completely. At that point they just need one bad experience, one bad deal or one bad incident in their life and their ability to meet their borrowing commitments becomes severely compromised.

So far so good. Debt can lead to foreclosure and the two are related but not in the way that might be immediately obvious. Let’s examine the second assumption that borrowing and foreclosures are bad.

Borrowing happens because lenders assess individuals and establish that they can pay back the money they borrow. So if borrowing is on the increase this means that the economy as a whole is booming as there are then a lot of consumers who are able to buy credit. Rising debt is not as bad as falling lending which actually signifies a reduction in consumers’ ability to buy credit and a possible shrinking of the economy.

Foreclosures are not bad for the same reason. They release back into the market tools, for lack of a better description, for tapping unspent power. So, let’s say if home-owner X is unable to make payments on house Y, then house Y which is frozen in the market, is released back into the general housing pool at a reduced price, it is then snapped up by someone who would not otherwise have spent that money because they could not afford to buy a higher-priced house and the cycle begins again.

For those predicting dark days for the real estate market as a whole I need to say that while this may seem to be a bad phase to be in it is part of the natural cycle we undergo as the real estate market corrects itself and it will soon be over and the better days of real estate as a fantastic form of investment will come round again, making real estate a sound form of investment once more.  

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Foreclosures are on the Rise but are You Talking to Your Lender?

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The moment the US government under President Bush, members of Congress and no fewer than 37 top State Prosecutors pile pressure on lenders to communicate with struggling home owners rather than simply pull the plug and automatically foreclose on a property the owner of which has missed a number of payments you know that just because a home owner’s finances have taken a bad turn it does not mean that nothing can be salvaged.

Let’s look at the facts that usually govern a situation about to go to foreclosure: 1. The homeowner has missed a number of payments and is facing some financial difficulty. But he was able, prior to that to actually make payments and keep things together so there is a good chance that given some leeway he can do it again.

2. The lender is following an in-house process which flags up a property for foreclosure. There is a built-in safety margin in this process which varies from lender to lender but times are tough and lenders these days are afraid that if they wait any longer and house prices dip they will lose even more money as the homes they have foreclosed on fetch a lot less than they might fetch now.

3. For a lender to foreclose on a property and decide to take possession and sell it on marks a certain desperation. Lenders are not really geared up to sell houses. Foreclosed properties are always less than perfect and even a prime example in a really good location usually fetches up to 40% below its market value, many times far less.

You will ask, quite naturally, why are there foreclosures then? Well, because it is the only tool left to lenders after borrowers fail to make a number of payments that ensure that they get some of their money back and send a strong message to other home owners regarding making their payments on time.

The point here is that with lenders under pressure from official channels to be a little less quick to foreclose on properties, struggling homeowners now have the opportunity to fight to keep their property by talking to the lender and seeing if they can come to some arrangement.

The rules here are: be honest, be creative and be prompt. Do not wait until the eviction agents are at the door to ring your lender. Call or write. Explain the problem in detail and, above all, offer a solution. In the foreclosure stakes Officialdom, for once, is very much on your side so make sure you capitalize on it and keep the communication channels open. After all it is your home that is at stake.

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New Home Sales Figures Reveal True State of Real Estate Market

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There is always a risk analyzing real estate sales on a month-by-month, year-by-year basis precisely because the underlying factors are fluid and nothing is really the same in the comparisons. However, it is always important to understand the state of the market and until a better way presents itself this will have to suffice.

With sales of new homes in the Seattle area the lowest in five years it might be tempting to say that yes, the housing market is slowing down. Pundits have even begun contemplating the dreaded ‘R’ word in relation to the economy.

I am going out on a limb here but my guess is that the economy is as far away from a recession as it has ever been and that while new home sales figures may be slow buyers are just taking longer to pick new homes for two distinct but related reasons:

First, foreclosures are beginning to bring into the market a steady stream of homes which can be picked up at a bargain price. Homes which are brought to the market as a result of foreclosure are more complicated to sell, the buyer needs to line up credit and a survey needs to be done if it hasn’t already and because the homes are almost always in less than perfect condition buyers tend to take longer to make up their mind as they weigh up all the options available to them.

Lenders also are more careful these days. They take longer to line up credit, carry out all the due diligence checks they need to and are less eager to accept self-certified borrowers because this has been one of the causes which have led us to the current state of the market here.

So, what is the real picture you are going to ask me? While it is true that overall new home sales are down compared to the same month’s figures of a year ago we have to take into account the factor of foreclosure releasing a lot of competitively priced properties in the market plus the length of time required to complete a purchase.

The real estate market has slowed down a little in terms of growth but it is not shrinking by a long shot. As we are heading towards the end of year the figures will begin to rally a little and there will be a partial recovery. It is safe to say perhaps that the real estate market will be like this for some time as lenders and borrowers try to avoid the mistakes which have led to the current level of foreclosures and that, in my book, is a good thing to happen for everyone concerned.

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Foreclosure Increase Drives Down Median Home Price

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The median price per square foot is a vital measurement of the overall state of health of the real estate market. Here’s why: First builders and developers use it in order to estimate their costs and return on investment in new properties they build and older properties they acquire, re-model, and sell on.

Second, home buyers use it to determine their budgets and buying power.

Third, it is used by Realtors as a measurement if the way the market is heading so that they can calculate what is happening and what the overall trend is.

Fourth, it is used by appraisers and lenders as a means of calculating the value of a home against a loan or early sale.

Fifth, it is used by foreclosure experts who use it to calculate the bargaining power they have.

For all of these reasons the moment the median price goes up or down the market as a whole shifts accordingly to compensate. At the moment in Seattle, for example, the news is that the median price per square foot fell by a whole $3.00 from $240 (which, incidentally was a record high) to $237.00.

It is tempting to read too much in this shift and argue that the market is in decline, values are dropping and the real estate market is shrinking, but then when we actually remember that it is still above last year’s levels we realize that the perceived shrink is against current price performance level expectations which may be unrealistic, rather than a decline as such.

In addition to this the fact that the foreclosures hitting the market are releasing house stock which is selling well below its market value and therefore well below the per square foot price it would get if it was sold through normal channels, must indicate that the value of homes is still rising otherwise the per square foot drop would have been a lot steeper.

All this becomes relevant only if you are thinking of selling your house or buying a home. Unless there is an urgent need to sell a house waiting for foreclosures to settle and the market to find an even keel again will only benefit you. If you are buying perhaps now is the time to find a real bargain in either a brand new home or one of many bargains hitting the market as part of the property foreclosure sales.

Foreclosures are a hot item at the moment with a lot of attention being given to the fact that they appear to be on the increase. Foreclosures also play a vital part in stimulating the housing market by allowing new home owners to come in at a level which perhaps they would not otherwise afford. As long as they do not get out of hand and start having a negative impact on the market then they are nothing to worry about.  

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Foreclosure Threshold Gets Narrower as Real Estate Market Tightens Up.

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Foreclosure figures are rising right across the continental USA and any county or State in particular, once it is normalized for regional variations, can act as a reliable weather vane for what is happening in every part of the country.

In California, the number of foreclosures is on the increase. Foreclosures are a distasteful but unfortunately necessary part of the Real Estate business. Lenders use foreclosures to send a strong message to borrowers who would otherwise default on their payments at the first sign of trouble with their finances.

To be honest, lenders do not like having to foreclose on a property and will, initially, exhaust all other avenues they have, trying to communicate with the property owner before they decide that it is now time to call it in and take possession of the property.

There is something here, at this highly emotive stage, that may people lose sight of: once a property moves into the foreclosure zone all is still not lost. Lenders may not be the kindest organizations on the planet but they work best when they lend money and receive payments back. Taking possession of a property, creating a huge administrative load dealing with a hard-to-reach house owner who has suddenly fallen on financial hard times, and then moving in and selling the property, are all loss-making activities.

The lender, by default, is geared up to try and find ways to minimize this loss. Precisely because of this there exists the possibility of a home owner moving out of the foreclosure zone and saving their property and credit rating by engaging in any of the following activities: 1. They could bring their payments current. 2. They could refinance either by taking another loan or a second mortgage which releases equity in their property 3. They could sell their property, pay back what they owe and move on.

Now all of these are viable options in a market that is still buoyant. However the moment the market tightens up the choices available to a home owner looking to save their property significantly narrow. This then leads to an increase in foreclosures as those in financial trouble are unable to get out of it.

The current figures available for California show that roughly half (54.6 percent) of the homeowners in default emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was 88.0 percent. The decrease is significant because it shows that we are now in the grip of a bear market for real estate which will only get worse as lenders are forced to dispose of the properties they have acquired at a loss and then proceed to tighten their own lending procedures further restraining the growth of the home buyers’ market.

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The Real Estate Market is Undergoing a Correction

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During the 20th century much of the real estate market was a case of boom and bust cycles which repeated themselves without anybody ever learning anything. This certainly was the case of the boom-and-bust cycle of the seventies and then the repeat of that in the eighties.

The nineties, however, appeared to introduce a different story. Real Estate prices started to rise gradually and steadily, credit became increasingly cheaper and easier to obtain, the price of many items fell as globalization introduced the notion of negative equity and many home owners opted for the good life and took out second and third mortgages releasing equity stored up in their homes and deciding to live the good times.

The 21st century, it seemed, would be a time for enjoying life to the full without having to worry about huge fluctuations in the markets. But money does not just come from nowhere. Borrowed money needs to be paid back which seems to argue that, at some point, the party has to stop and someone will have to pay the bill.

The cynics amongst us will say that this is exactly what is happening with the current tightening up in credit and an increase in the number of properties going to foreclosure and being sold off with their owners’ credit rating seriously damaged for a long time.

But that is not the real story nor is it true at any rate. Yes, foreclosures are on the increase and, in all likelihood, will continue to rise for some time. What is really happening here is that the overheated housing market is undergoing a correction with house prices not falling (the bust part of the old cycle mechanics), but stabilizing in a slower growth which more closely reflects their true value and affordability by those who are now looking to purchase a home.

Unlikely as this may seem this is actually good news. Foreclosures release homes which are trapped in the housing market at an artificially high price which had been fuelled by demand and make them affordable again for first time buyers. In addition, because there is a greater supply of more affordable homes than before the low prices attracted by foreclosures have a dampening effect on the rest of the housing market which then stops from growing faster than the ability of the underlying credit to support it.

Don’t get me wrong. Foreclosures are never good news for anyone but, as part of the real estate market’s and mortgage lenders’ activities; it is yet one more market correction mechanism that is in place. We should neither under nor overestimate its impact and we should see the figures for what they are: an inevitable consequence of a market that was over-stretched, now bringing itself back to level ground.

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Avoiding the Foreclosure Trap – A Quick Guide

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Here’s a nightmare scenario: You have bought your dream property and you are mortgaged to the hilt but managing. Just when you thought that you could make ends meet you lose one of your jobs and your wife begins to get ill. This is just the kind of situation which can turn a manageable credit crunch into a catastrophic scenario which leads to foreclosure.

It happens more often than it should and the question is, what can you do, if anything to avoid it?

For a start let’s get one major thing straight: lenders hate foreclosures. It means they will end up with a property on their hands they will have to sell at a loss, their administrative costs will sky rocket and their workload will shoot up and they will end up losing money. They do face a dilemma however as they cannot just let things slide either. After all, they are able to make sure everyone pays what they owe on time precisely because they are able to force a foreclosure and take a property in default away from its owner.

So where does that leave you? As a property owner who has, for one reason or another, fallen behind on payments you need to start opening up communication lines with your lender and fast. I understand that the moment you begin to fall behind on house payments you are struggling with many different issues and you are under pressure and the temptation not to respond or talk to your lender is great but that is the fastest and surest way to lose your house.

So, whatever pressures you are facing you need to make sure you establish contact with your lender. Be honest about the situation, explain what the problem is and see if something can actually be arranged. After all the lender does not really wish to foreclose on your house and if you come up with a temporary solution which will satisfy the lender and give you the room you need.  This will lead to the both of you being satisfied and you will greatly increase your chances of saving your property.

Each lender, of course, has different guidelines and procedures regarding missed payments, mortgages in arrears and negotiating with house owners. The thing here is to be realistic, resist the temptation to take advantage, offer genuine solutions, stress how temporary they are and why you need the breathing space, and see how far you can actually get and what arrangement you can come to.

Remember that this is a temporary situation designed to produce a win-win scenario: you get to save your house and the lender is satisfied that they will get their money back and you will bring the payments back up to what they should be. Approach it in this way and the chances of a foreclosure are greatly reduced.

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