Inventory is consistently low down from the most recent high of 1,380 units in October 2011 to 712 units on March 1. 2012. The absorption rate, how many months to sell the current inventory at the sales rate of the last month, is less than two months for single family and a bit over three months for condos. Low inventory absorption rates like this are usually indicative of a “seller’s market”.

Activity as measured by the number of units that are “in contract” shows a small increase of 6.2% over February 2011 and up 13.5% over January 2012. Completed sales show an increase over January 2012 of 17% but a 50% decline from February 2011.

In an article for the ABC15.com investigative report, Dean Wegner with WJ Bradley Mortgage Capital writes about his conslusion that you have to do what’s best for yourself and family rather than the mortgage company. He spells out the damage voluntary foreclosure will have on your credit score and makes the point that the money spent getting even on an uderwater property could force you to retire ten years later than if you default and move on.

I’ve been watching this issue for some time, first because of the “moral” weight put on homeowners that isn’t put on corporations making the stretegic decision to default on a loan. Then watching the housing value numbers as this recession has continued for the past four years I fear that millions of homeowners who are paying for mortgages that out strip the value on the property will add to the instability of our recovery.

With the ending of the mortgage forgiveness act there seems to be a new impetus to legislating debt reduction fincancing for all borrowers.

“I believe we should also develop a program for earned principal reduction for borrowers who are underwater but keep on making their mortgage payments,” Dudley said. “Such a program would strengthen the incentives for mortgage holders who are underwater to continue to stay current on their loans, and reduce the likely number of defaults” and real estate owned sales.

Here is a map showing levels of negative equity in America

From CoreLogic

She talks about using a simple calculation to determine if you should be considering walking away from you mortgage. She states that if you are 20% underwater on your mortgage it could be the best thing to do. Her example was a home valued at $200,000 with a mortgage of $240,000. In our area, where the median price is over $600,000 the amount owed above market value would more than $120,000.

Interstingly the time it takes for a property to regain the value owed using an assumed average of 3% appreciation is over 6 years. So if you are diligent in your payments on the interest owed and all properties appreciate over time you will be even again in 6 years or you can not service the debt and spend money putting your kids through school.

Obviously the downside is that you will not be allowed credit for seven years.

Also obviously anyone considering a strategic default should work with an attorney.

It seems that it would be better for all concerned to figure out a way for the 3 to 4 Million Americans who are making payments on loans that exceed the value of their homes to refinance the mortgage with debt reductions. Why do people need to go through the process of breaking a contract and suffer the full impact on future credit when the lender could retain 80% of a perfoming loan investment? Riddle me this . . .

I have to first admit that I felt the same way as I railed against below-market housing production and sales locally. Then I took an introductory course on urban planning and learned that all housing is subsidized by government. If you  consider taxes not collected and government programs to foster homeownership the entire market comes into a different light. Yes all housing is subsidized!

Look at the homeownership situation before the FHA was created. We were a nation of renters living in apartments. Add in the GI Bill which in many ways created the equity growth of the “greatest generation” and a perspective grows that nothing grows without government support.

If the Fannie and Freddie are eliminated, as is being discussed, the thirty-year mortgage will disappear. Really can anyone imagine a lender giving a fixed credit rate loan for such a term unless it is the government which recognizes the LONG term benefit of homeownership?

I hope that those who believe, as I did, that government intervention is wrong can see the truth in what I learned. The problem isn’t government intervention; the problem is greed pure and simple greed.

There was money to be made selling loans, there was insurance against loss of principal if the borrower defaulted, and we saw corporate leaders who made millions while destroying companies that had succeeded for hundreds of years. We see now that we had CEO’s of the GSEs who succumbed to the greed and went deeply into leveraged positions.

Please look beyond the most recent situation to understand the importance of government support in the stability of America’s community through homeownership.

Inventory, the number of residential properties available on the first of the month, is also down from the previous month and down by 67% over the same month last year. But the bright news is that the number of properties sold in December is up by 26% over the same month last year. The number of properties in escrow on the first of the month is also up over the prior year.

The large number of sales can be a sign that buyer activity is increasing and coupled with the low inventory sellers can move properties if they do the right things.

According to the National Association of Realtors^® the median value of existing single-family homes fell from $196,600 in 2008 to $173,100 in 2010. That’s a drop of 14% and while significant the other side of that is that 79% of the value remains.

What’s the benefit to the mortgage holder (lender) of foreclosure versus making the adjustment to the lower value and have the owner continue to pay on the remaining 86% percent?

While there are many reasons for borrowers to default on mortgages, there are many people who are currently making their payments but see that it makes more sense to strategically default and walk away because the value is so far below what they owe (underwater property).

While Congress and the Obama Administration offer band-aid type fixes like the Housing Affordability Refinance Program (HARP) which allows an underwater borrower to get access to the Federal Reserve’s market-incentivizing low interest rates. (A market controlling attempt to pump additional capital into consumer spending) They’ve missed the point that the existence of all this negative equity will continue to over-shadow the economy for years to come.

A recent report from CoreLogic shows the continued force of foreclosures on the American economy. The number of property loans that are in default and proceeding through the foreclosure process (shadow inventory) has remained steady despite the 3,000,000 homes foreclosed and sold since January 2009. Any market that has over supply has pressure on prices to fall, real estate isn’t any different.

With the high rates of sustained unemployment and recessionary consumer non-spending there will be more defaults on mortgages, both circumstantial and strategic. If the people who are still working and moving for the usual life-change reasons are forced to see strategic default as their best option, it will take even longer to end this recession. Yet one bold strike by lenders, write down 14% of the debt thereby removing the strategic defaulters motivation, could jump start the economy. Taking action now would allow household spending to increase also.

Recently there was a flurry of news about the correctness of data and the methodology of the numbers behind them. The National Association of Realtors^® was taken to task by CoreLogic^®for claiming that sales were increasing when CoreLogic^®  was reporting that the sales were decreasing.

The discrepancy exists in the formulas and base assumption methodology used. Without going into a long explanation of the correctness or faults of either methodology it points up the real need for local knowledge and expertise.

When national, state or even regional numbers are reported there are aspects that might not represent the facts as they exist where you live. For example the areas reported as “San Francisco” can be the nine Bay Area counties, the San Francisco-Oakland-Fremont Metro Statistical Area (MSA), the San Francisco-Marin-San Mateo MSA or the San Francisco-San Mateo-Redwood City Metropolitan Division. The numbers might include single-family homes, single-family attached or detached, all homes, new homes, only previously sold homes but no condominiums. For San Francisco the questions start with why no condos? Are all of our zero-lot-line houses viewed as attached and lumped in with townhouses and other planned unit developments? Did my house decrease 30% or should I only expect to pay two-thirds of the last sale price in 2007?

If a home owner or prospective home owner is looking for data to inform their decisions it really needs to be local and then hyper-local. This is why it behooves you to work with a local agent who is aware of the market and who can track and explain the data swirling around.

While there is important information on the compensation of employees at Freddie and Fannie (the enterprises) the information that bears the most inspection is the lack of action in Congress in designing a stabilized future mortgage securities market that will function to the benefit of American home buyers and not allow greed to overpower long term self-interest again.

Although the Obama administration has stated it favors privatization of the secondary market very little if any movement has occurred in that direction although the FHFA, formed in 2008, has held the enterprises in conservatorship for three years now. Over 90% of new mortgages are sold to the enterprises to the tune of over a trillion dollars annually.

Other news contained in the report, FHFA is asking for information in conjunction with HUD and the Treasury on possible programs to offload foreclosed housing inventory to support rental and affordable housing needs. While not looking for a uniform approach to offloading inventory they are looking for “proposals tailored to the needs and economic conditions of local communities”.
While Congress dithers and enriches its member’s consumer confidence continues to stay in the toilet driving housing demand further down causing more people to lose housing value which in turn prevents refinances. More money to flow to security investors at those higher rates than what is available if the values hadn’t fallen keeping families on tight budgets.

Hmmm. What’s wrong with this situation?