What is the value of my Home?
I am often asked “how is the market doing”, “is the market going to turn around”, “what is the value of my home”? To best understand the answer to both questions, we need to take a closer look at the factors that continue to put pressure on the market. Due to the abundance of post-event analysis out there, no attempt will be made to resurrect the issues (such as sub-prime loans) that put us in this position initially. Nor will discussion on the broader economic factors such as “jobs” be offered. Focus will solely be placed on the conditions of the marketplace that continue, and will likely continue, to effect housing prices and supply for the next few years.
The old tried and true “supply and demand” principle is underlying current market prices. With the traditional number of households who simply want to move into different homes based on family size, preference, or relocation being added to by the number of households who need to sell based on economic pressure, or homes that have already been foreclosed on, we simply have more homes available than the number of people who are “ready, willing, and able” to purchase right now. Note: The “willing” may be a factor of someone’s comfort level with the current uncertainty, causing them to sit on the sidelines until things change. While understandable, the opportunity to take advantage of the sell/buy gap may be lost. I will address this point in a future blog.
Over the next few weeks, we will focus on each of the factors that are affecting the market. The days of the typical Seller/Buyer sale has dramatically changed. Now, depending on which community you live in, bank involved transactions (short sale or foreclosure) can be the new norm. Stable markets such as Naperville, while having an abundance of inventory, which has its own impact of market times and price, still has a low percentage of bank involved transactions. However, the collar communities surrounding Naperville, such as Plainfield, Bolingbrook, Oswego, Montgomery…can have as many as 60% bank involved homes representing the available inventory.
The next two weeks we will focus directly on what a Short Sale is, the different types of Foreclosures, and how they affect the market. Today we will look at the situations that occurred to create the abundance of homes being sold under these scenarios.
In its simplest form, a Short Sale is a home that is being offered for sale for less than the mortgage liability to the Lender, and with the Seller communicating they are not in a position to pay for the gap between market value and loan obligation. A Foreclosure is a situation where the Seller failed to meet their loan obligation, and the Lender through legal means, evicted the Mortgagee and took legal possession of the property.
The abundance of “no money down, no income verification, short-term interest only, money back at closing” loans utilized at the height of the market put an increased number of people into a situation where they were “under water”, or below market value on Day 1. These loans were given with the logic that market values would continue to grow, and personal income would remain static or increase. When the market collapsed, people were no longer able to pay their mortgage liability. Whether created by a loss of jobs, or by the ARM loan coming due (with the inability to refinance based on the home not appraising to loan value). With no equity established, many homeowners are in a position of needing the bank to forgive a portion of the loan, or ultimately losing their home if payments could not be maintained.
The reason the collar markets listed above have such a high amount of these homes is these “boom towns” could not build homes fast enough to meet consumer demand. “Easy money” loans were being tossed out like candy, and first-time homebuyers who might have rented, or bought a lower priced home (using a traditional lending formula), were now buying homes of higher value than could be supported should the market conditions change. As a side-note, the reason core markets such as Naperville are not experiencing the same effect is due to a couple of factors. Higher price points during the market boom that drove buyers further out to collar markets, plus many owners purchased their homes with traditional loan structures and, while selling below market high numbers, they have the equity to absorb the gap of market value to loan liability.
With this backdrop, in the next installment we will focus first on Short Sales, what they are, how they affect the market, implications to personal credit, and what to do if you are in this position.
If at any time I can answer any questions, or assist you regarding your housing needs, please contact me directly via cell or text at (630) 631-2314, go to my website at www.HomeWithDavid.com, or via email at YouAre@HomeWithDavid.com.