Hold the Champagne: The Foreclosure Figures Aren’t The Ones To Watch

That rushing sound you hear is the collective sigh of relief at the latest RealtyTrac numbers: foreclosures are easing…though keep that bottle corked, because there are plenty more distressed properties in the pipeline.

Still, as the housing market limps along, foreclosures are starting to change the context of homeownership valuation…and that means, how much your house is worth.

Here’s why.

Banks and investors are renting out millions of foreclosed houses. Rents deliver cash flow. And even if the investor or bank intends to eventually sell, renting out a house even for a minimal monthly charge, lets them postpone selling the house until home values are on the rise. With rentals so prevalent, and homes stuck in the sale pipeline, the new yardstick for measuring home value is linked to rent. Rents simply are a more accurate reflection of current market values.

That means that you can use current rental rates to estimate the market value of your house. Lucky for us, the feds have already done the heavy lifting on this one. The Consumer Price Index tracks rent trends; currently, rents are rising at a annual rate of 1.2% nationally. 

The CPI rent calculation is based on the “owners’ equivalent rent of primary residence.” That means, how much would it cost you to rent your own house? Track local rents via ads. When rents for homes equivalent to yours start to rise, you’ll know that home values in your neighborhood are stabilizing.

Image courtesy of Morguefile contributor gracey.

Always Check the Math

Really? Really? Can it really be true that money managers and investment bankers are so callous, so blasé about the distress of fellow Americans that they actually blame homeowners for the foreclosure paperwork mess?

Foreclosures have ground to a halt across the country. It’s kind of like the rats taking a break in the middle of the bubonic plague. Pretty soon the foreclosure machine will rev up again and the sheriffs will have to knock on the front doors with the notices and the kids’ toys will be out on the lawn.

But for the moment, the attorneys general are riding to the rescue and saying, in essence: you loan processing folks were very sloppy with your paperwork. You signed stuff you didn’t read. And seeing as people are losing their houses on the basis of your eyes-closed signatures, why don’t we just stop for a minute and double-check your work, shall we?

But if Reuters is to be believed, Wall St. honchos are going all church-lady on us.

"If you didn't pay your mortgage, you shouldn't be in your house. Period. People are getting upset about something that's just procedural." said Walter Todd, portfolio manager at Greenwood Capital Associates.

Some said the issue is one of personal responsibility for one's own debts. "Everyone's responsible for following the law. If we all don't have to pay our mortgage, should we just stop paying taxes, too?" said Anton Schutz, president of Mendon Capital Advisers. "Your mortgage didn't get to a robo-signer by accident, it's because you're not paying."

News flash, Mssrs. Todd, Schutz and assorted pals: some of those foreclosures are completely in error. Innocent homeowners are getting caught up in the Niagra of paperwork. Others stopped paying their mortgages to get the attention of the robo-processors. Paying your mortgage can actually disqualify you from getting a loan modification. If you need help, you have to look like you’re about to go under. It’s perverse, but that’s the way most of these programs have been structured.

And just a closing thought about the irrelevance of underlying paperwork: guys, do you double-check the math calculations to make sure that every penny owed you is in your fat bonus check?
I bet you do. And you should. Mistakes can happen. You’re in the mortgage industry. You should know.

Image courtesy of Morguefile user Xanert.

Sales Up, Prices Flat: Not as Contradictory as it Appears

Back when economics textbooks were printed on paper, I absorbed the basic truths of supply and demand. The more supply, the lower the price. The more demand, the higher the price.

It’s a good thing that textbooks are going digital, because if the latest reports from the National Association of Realtors are to be believed, the basic laws of economics are being rewritten as we speak. Or are they?

Yesterday the NAR announced that year-over-year, existing home sales rose 9.8% in June. (Of course, that is still a fluffy number, as most of the sales under contract by April 30 closed by the initial June 30 deadline to claim the Federal homebuyers’ tax credit. But let’s not rain on the NAR’s parade. )

The NAR number crunchers also revealed that the national median sale price was $183,700, an anorexic one percent higher than a year ago.

So, back to the Cliffs Notes: higher demand should equal rising prices, right? Why didn’t prices rise even more…especially considering that the tax credit gave sellers a little more gumption to hold the line in negotiations?

The answer is implied in another number that the NAR helpfully supplied: that distressed sales accounted for 32% of all sales in June.

We are all familiar with the thwarted attempts of folks trying to buy distressed properties - those would be foreclosures, short sales and the like. Lenders are slow to sign off on the sales; tangled liens, homeowners’ association fees and taxes in arrears threaten to derail deals at every turn. How is it that so many distressed properties are being sold that they account of nearly a third of all home sales?

One factor clears up all these perplexities: investors.

Investors with pots of cash are buying distressed properties in great swaths. Anybody who has been to Costco can confirm that the whole point of buying in bulk is getting lots for little.

Voila, all our mysteries solved. Investors are driving up volume and keeping prices flat (in some regions, prices continue to decline). I hope those investors have pockets down to their ankles. The forecast calls for more waves of bank-owned properties coming soon to a market near you….to markets near all of us.

Image: Phillwatson via Morguefile