Is it fair to say that people are not as concerned with keeping up with their neighbors as they used to be? Maybe because the Jones family (to use the name from the popular phrase…) owes more against their home than they could sell it for these days. When they bought that Class A recreational vehicle, put in the gazebo with hot tub and traveled to Hawaii three years in a row, keeping up with them was stressful. Hearing Mr. Smarmy Jones over the back fence say he just scored big at the horses also made you feel a bit jealous back in the day.
You were striving to live within your means, not throwing money around on things you didn’t need. And where did it get you? Today it got you into position to have equity in your home and in reasonable shape financially. No HELOC second mortgage payments for you, no sir. And the Joneses? They have had their share of salary adjustments; since they owe more against their home, they are having difficulty keeping current with bills. And savings? Forget it. They sifted through that months ago.
Peoples lives are not always stable enough to know if they will remain in the same home for years, much less decades. Yet some supposed experts are predicting that home prices or values might not regain the 2005/ 2006 peak until 2021 (according to Celia Chen of Moody’s Analytics). To quote her from an interview in a recent article, in 22 metro areas, mostly in California and Florida, home prices will not return to those peak levels until 2030. Some areas are expected to take LONGER than that. Good news: all real estate is local and our area is not hurting as much as those warm weather states.
Rather than lament how long it might be until home prices regain the levels they enjoyed just 5 years ago, why not change the conversation into finding ways to keep homeowners in the homes? You can quickly find an example of an owner that owes $450,000 against a home that would sell today for about $300,000. But that family has to live somewhere and they already have much time and some money invested in that home. Why not find a way to rework the mortgage such that the owners might stay and the lender gets some amount every month to apply to the debt? A work out plan that keeps people in homes and keeps a little cash flowing toward the lender would require continual review of the loan terms. The payment amount might change every year or so. Eventually the home is sold and the debt repaid or the owners get back on top and start building equity again. The lender will never recover the amount of principal they are short, but they will also never have to own that home and find a way to keep it pretty while trying to sell it. There are obvious advantages for the homeowner too.
The common perception that lenders make money selling a foreclosure needs to be put to rest. While we are at it, also please understand that gaining instant equity by purchasing a home out of foreclosure is not often a winning bet. You can “make money” and get a bargain priced property that has gone through foreclosure, but you have to make your move before the line even starts forming. Often property owned by or almost owned by lenders are leftovers with the good stuff already gone.
Back to the plan… what wonders might evolve without all those potential foreclosures coming on the market to be offered for sale. If owners stay in homes, those homes will not increase inventory & keep the market from improving. As long as there are years of inventory available for sale, would-be buyers feel no urgency to start writing checks. The math is not complicated. Nationally, the best guess is around 20% of all homes are either in danger of foreclosure or will witness owners walking away from the home they cannot afford to pay on. Picture a 20% increase in our inventory numbers. Absorption Rate will get longer, not shorter and that will extend the length of time to resolve the housing mess.
This plan paves the way for a buildup of good will with the positive effects of movement in the marketplace. If home sales start to pick up, that creates more demand. Buyers sooner or later find the home they want to buy. But if their first choice gets sold before they make their move on it, they will be more motivated on the next one. Momentum builds and we can eventually resume a balanced market. There is a saying in real estate that sales begat sales. “SOLD” signs tacked onto for sale signs hasten a buyer’s pulse and stimulate demand, which we desperately need. The imbalance in the market (a buyer’s market all the way) is going to keep a lid on any recovery. This plan is one way to attack the problem. I don’t know how well it will work, but it sure beats sticking our heads in the sand and hoping our problems will go away. What is your plan?