A Stunning New Prediction: Get Ready to Be Upside-Down on your Mortgage!
Friday, September 18, 2009 | Ethan RobertsRating:
Tycoon readers,As promised last month, I will be updating you on the national real estate market on each third Friday of the month.
In last month's outlook, we looked at several positive and negative factors, including:
- The $8,000 buyer's tax credit
- Falling median home prices
- Rising foreclosures
- Increases in negative equity among mortgage-holders
This month, we have seen another increase in the number of closed sales, yet further declines in home values, more foreclosures on the way, and a frightening rise in the number of homeowners becoming "upside-down" (i.e., the value of their home is less than what they owe to the bank) on their mortgages.
As each homeowner becomes upside-down on their mortgage, the chances of them selling in the near future become slimmer, as most people lack the cash needed to pay the difference between the net from the sale versus the mortgage amount owed.
Another 25% Drop in Store?
We have also seen a noted analyst make another shocking prediction on the housing market.
Meredith Whitney, noted bank analyst with her own firm, Meredith Whitney Advisory Group, was recently interviewed on CNBC.com as saying that, due to the high unemployment rate, the housing market could fall another 25%!
Said Ms. Whitney, "No bank underwrote a loan with 10% unemployment on the horizon."
She also predicted another leg down for stocks for the same reason.
Meredith Whitney makes a stunning, negative prediction...
So, according to Ms. Whitney, if your home is worth $200,000 right now, it could be worth as little as $150,000 before the real estate slide is all said and done!
Since most people move an average of every five to seven years, this probably means that the majority of homeowners reading these words right now are either already upside-down on their mortgage, or will be soon.
Are you ready for that possibility?
For those who will need to sell their home, this raises an interesting, yet thorny, issue for the future.
When people have to sell, but can't because they are upside-down on the mortgage, will they simply begin to walk away from their homes in droves?
Upside-Down ... Then Out Altogether
After all, let's consider the present-day economic consequences of simply allowing one's home to go into foreclosure. Basically, they are minimal. Sure, you will see your credit score fall as much as a few hundred points lower, but if you already own a decent car, have a job and plan on renting for the next three or four years, losing points on a credit score may not be the worst thing in the world.
Over the next three or four years, if one pays their bills on time, they may well be able to re-establish a decent credit score. And at some point, they will be able to buy a home again -- and probably one that is far cheaper than the one from which they walked away!
Now look, I am NOT advocating for people to do walk away from their homes! So, please do not become irate and throw stones at me!
I am merely saying that, in America, there are minimal pragmatic consequences for people who turn the keys over to the bank. It may be emotionally draining and life-disrupting for families, but that's about the extent of it.
In years past, if one foreclosed on their home, they would also owe back taxes on the difference between what was owed and what the home eventually sold for at foreclosure.
However, the do-gooders in Washington decided that this was too harsh and modified that rule in "The Mortgage Forgiveness Debt Relief Act of 2007."
Since most people move an average of every five to seven years, this probably means that the majority of homeowners reading these words right now are either already upside-down on their mortgage, or will be soon.
Are you ready for that possibility?
For those who will need to sell their home, this raises an interesting, yet thorny, issue for the future.
When people have to sell, but can't because they are upside-down on the mortgage, will they simply begin to walk away from their homes in droves?
Upside-Down ... Then Out Altogether
After all, let's consider the present-day economic consequences of simply allowing one's home to go into foreclosure. Basically, they are minimal. Sure, you will see your credit score fall as much as a few hundred points lower, but if you already own a decent car, have a job and plan on renting for the next three or four years, losing points on a credit score may not be the worst thing in the world.
Over the next three or four years, if one pays their bills on time, they may well be able to re-establish a decent credit score. And at some point, they will be able to buy a home again -- and probably one that is far cheaper than the one from which they walked away!
Now look, I am NOT advocating for people to do walk away from their homes! So, please do not become irate and throw stones at me!
I am merely saying that, in America, there are minimal pragmatic consequences for people who turn the keys over to the bank. It may be emotionally draining and life-disrupting for families, but that's about the extent of it.
In years past, if one foreclosed on their home, they would also owe back taxes on the difference between what was owed and what the home eventually sold for at foreclosure.
However, the do-gooders in Washington decided that this was too harsh and modified that rule in "The Mortgage Forgiveness Debt Relief Act of 2007."
Irate reader misunderstands Ethan's intent...
So Does it Pay to Rent or to Buy?
Recently we have begun to see a change in the ratio of home prices to rentals on a national level. In diverse cities across the country -- such as Chicago, Detroit, Cleveland, Atlanta, Phoenix, Tampa, Las Vegas and Miami -- the cost of owning a home has now been reduced to equal to or below that of the cost of renting.
Just three years ago, the ratios were tremendously skewed toward renting being less expensive.
Just three years ago, the ratios were tremendously skewed toward renting being less expensive.
Normally when this re-balancing occurs, people are more likely to take the plunge and buy a home. But will fears of further declines in home values keep first-time homeowners from kissing their landlords goodbye?
Are buyers willing to forgo the $8,000 tax credit on the chance that they can purchase a home for 25% less a year from now? What if Ms. Whitney is wrong?
Are buyers willing to forgo the $8,000 tax credit on the chance that they can purchase a home for 25% less a year from now? What if Ms. Whitney is wrong?
Who could resist...?
Meanwhile, as reported here a few months ago, the well-intentioned "road to hell" continues. Reports from the Obama administration state they are on track to meet their goal of modifying more than 500,000 delinquent mortgages by Nov. 1.
But the reality is that, for many people, the loan modification offers being made do little to nothing to stop their slide into foreclosure. The national unemployment level reached 9.7% in August.
Homeowners without jobs cannot pay their mortgages, whether it's the original $2,000 per month, or the well-intentioned, modified new loan at $1,700 or $1,800.
The 'Best' May No Longer Be Good Enough
According to the Treasury Department, the banks that are participating in the loan-modification programs have only made offers to 12% of eligible borrowers. So there is still a long, long way to go before anyone can claim success from these programs.
Foreclosures continue to build up in the pipelines, as the number of foreclosures in-progress are now 88% higher than a year ago, and the defaults are being led by the prime mortgages -- that means the best loans made!
Meanwhile, Federal Housing Administration Commissioner Dave Stevens is warning of increasing evidence of "material and growing" challenges in the multifamily mortgage sector, which could have negative consequences for tenants.
Translation: Apartment owners are not paying their mortgages, and increasing loan defaults could mean tens of thousands of tenants will lose their homes.
The irony, however, is that this may have a stabilizing influence upon home rental prices, and/or lead to more home sales!
'Frankly' My Dear, I Don't Give a Darn!
And speaking of "do-gooders," here comes the lovable Barney Frank (D-Mass.) again, trying to revive the mortgage "cram-down" bill, that will allow bankruptcy court judges to "cram down" (i.e., lower) the principal amount of mortgages on primary residences.
Barney says he is disappointed by the lack of success with foreclosure mitigation efforts, and if things don't improve soon, he will again push for the cram-down bill -- a bill that was already defeated earlier this year in a Democratic-controlled Senate.
Critics of this bill say it will lead to more people filing for bankruptcy as an alternative to foreclosure, a notion that Barney Frank disputes.
But the real problem with the cram-down law is that it will likely increase mortgage costs and interest rates going forward, and at a time of crisis in the real estate industry.
The reason? Because the lenders fear that, under this law, judges will be able to reduce principal from thousands of their loans that are now in circulation.
So, to make up for that possibility, they will push interest rates higher.
Barney's new threat -- real, or just his usual tough-guy bluff?
Some Good News
But, as is becoming the norm, despite the struggles of the real estate market, not all the news this month is bad. Mortgage applications have surged recently, with the numbers rising to their highest levels since late May.
Consumers are taking advantage of ongoing lower interest rates, not just in re-finances, but also in applications for purchases.
In fact, applications to buy a home this month were at their highest level since January 2009.
However, I had to laugh at a headline on CNBC.com yesterday that said, "Mortgage Demand Drops as Fixed Rates Rise." Sounds ominous!
But when you read the article, you discover that the drop took place during the Labor Day four-day workweek, and the interest rate rise was only from 5.02 to 5.06%.
The headline makes it appear as if the interest rate rise is responsible for a decline in mortgage applications. Just one more ludicrous example of how the popular media will say anything to make events that are simply correlations appear to be causal.
Homebuyers are not delaying their purchases because the 30-year mortgage interest rate was up 0.06 last week!
Overnight Mortgage Averages:
| Product | Rate | Last week | ||
| 30-yr fixed | 5.27% | 5.21% | ||
| 15-yr fixed | 4.67% | 4.68% | ||
| 5/1 ARM | 4.34% | 4.37% | ||
data courtesy of Bankrate.com
As for the question of whether or not the $8,000 tax credit for homebuyers will be extended, or even increased, for another year, there has been little word from Washington.
There was no extension granted by the time that Congress left Washington for the August recess.
The tax credit, as it stands now, is due to expire on Dec. 1, 2009. So far, efforts by various lobbying groups such as the National Association of Realtors (NAR) have not influenced anyone in Washington to extend the tax credit. However, as reported here before, various senators have already co-sponsored legislation to do so.
So, once again we are looking at a real estate market that is a mixed bag of good and bad, folks.
As usual, I value your opinions, so feel free to toot your horn in the comments section below!
The September 2009 real estate market....
See you next week!
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Ethan Roberts
Contributing Editor
The Tycoon Report
