San Diego Homes – WHEN IT PAYS TO LET THEM FORECLOSE!
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A recent research report from the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management reports that of the large number of mortgage defaults across the country, 26% were what they call strategic. This report defines strategic as one in which the mortgage default was a calculated, done by homeowners who have the money to make the payments. The owners decided that the homes negative equity position indicates to them it would be economically wiser to let the property go back to the lender.
According to another nationwide study, 22% of all homeowners had negative equity positions during the first quarter of 2009. This means the homeowners owed more on their mortgage, than the current resale value of their homes. In some parts of Southern California, Nevada and Florida, it’s speculated that more than half of all homeowners now have negative equity.
Currently, we are just beginning of prime adjustable-rate loan activity called mortgage resets. The number of these mortgage resets far exceeds the number of subprime loans. The findings from Northwestern University’s study seem to indicate that the U.S. housing market is on the brink of another substantial rise in home foreclosures.
Keep in mind, that these are prime loans made to the middle and upper end of the housing market. The people can afford to make the reset payments on their mortgages. A main reason that these people can afford the new reset payments is because of today’s low interest rates hovering at around just 5%. In a post, dated 1-20-09, titled ‘San Diego Negative Home Equity’ on my San Diego real estate market blog, I speculated about this exact situation. The post was well in advance of this study’s findings and all the more prophetic today.
I believe the importance of the mortgage reset will wake up homeowners to the harsh reality, and extent, of their negative equity position. Will they want to keep making mortgage payments? Would you, if the current value of your home was $50,000 less than the balance of your mortgage? What if your home value was $100,00, $200,000 or even $300,000 less than the balance on your mortgage? Would you continue to make payments or let the bank take it over?
I recently sold only in La Jolla. That was purchased new in 2005 for approximately $1.6 million. My buyer, was able to buy this home for just $1.1 million. So, in just about three years, from the time this home was purchased, the original seller’s home value had declined by $500,000, or just over 31%. Now just imagine if this home was originally purchased with a 10% down payment. The original owner would have had $160,000 invested in the property at the start. Plus would have made three years of substantial monthly mortgage payments, plus upgrades and then found out that his original $160,000 equity position had deteriorated into a -500,000 position. Now, should the original purchaser, with the loan balance of $1,440,000 continue to make mortgage payments or let the bank take the property back?
In the Northwestern University study, among those without moral reservations, 63% of those homeowners with a negative equity of $300,000 or more would let the property go into foreclosure. For the other group in the study who had moral issues with letting their home go into foreclosure, if they could make the payments, 38% would let their properties foreclose if their negative equity position reached $300,000.
Another finding in the study showed that the higher number of foreclosures in the zip code, the higher the homeowners’ willingness to walk away from their properties. Plus, 82% of homeowners in the study were likely to have a strategic default when they were aware of others who had defaulted.
The bottom line from this study seems to show that the traditional assumptions that homeowners default on their mortgages because they can’t afford their monthly payments, needs to be re-examined. Even with the new Fannie Mae and Freddie Mac 125% refinance mortgages, will these deep in negative equity homeowners really be enticed to refinance their homes, when financially, it looks like a foolish decision?
San Diego Home Foreclosures Up 66%
San Diego home foreclosures
Dataquick of La Jolla, reported that San Diego County June notices of default were up 66% over May. But, the number of default notices were down 11% from June 2008.
John Walsh, President of DataQuick said: “There is a perception that the housing market is dragging along bottom, that it probably won’t get much worse, and that the lenders need to get serious about processing the backlog of delinquencies, either with work-outs or foreclosure. We’re hearing that some lenders and servicers are doing just that, hiring more people to do the necessary paperwork. That means the foreclosure numbers will probably shoot back up during the third quarter.”
San Diego Home Foreclosure Ploy
San Diego housing market
In the San Diego housing market the undisputed hottest selling properties are bank-owned, foreclosed homes and condos.
Many San Diego home buyers are exhibiting characteristics of the famous Alan Greenspan term, “irrational exuberance.” Use of the terms, “bank owned,” “bank foreclosure,” “lender reposition,” “foreclosure sale,” etc., are sure to draw a crowd to view the property. If the property shows half-way decently, there will be offers, and sometimes multiple offers.
Adding my observation to the above facts, a number of lenders have hit on a marketing ploy to create a buying frenzy which guarantees an almost instant sale. In the majority of cases the offer(s) exceed what may have been realistically expected if the property was marketed the traditional way.
Here are some actual examples of this technique for San Diego home sales.
- On 4-8-09, a bank owned home in east Carlsbad was listed at $499,900. Based on the location, age and size of the home, I estimated the current value at $575,000 to just over $600,000. Within one day of the listing, the listing agent had multiple offers. According to the agent, the lender required it to be on the market one week before they would look at any offers. The agent speculated that based on the number of inquires, she would have 40 to 50 offers in the one week period. This home sold for $597,000. The sales price was almost 20% over the listed price. Doesn’t a sale of $97,100 over the listed price suggest that it was listed way under the market?
- A bank-owned Little Italy one bedroom condominium was listed in March for $234,900. The estimated fair current value for this condo was approximately $275,000 to $280,000. The listing agent stated that within 3 hours of the MLS listing being submitted, he had an offer. Again, the lender would not look at any offer until the condo was on the market one week. This San Diego property generated 21 offers within the 1st. week, of these, 11 were at or above the $234,900, listed price. This Little Italy condo sold at $295,600, or $60,700, approximately 26% above the listed price! I was told the accepted price was $15,000 above the next highest offer.
- A San Carlos planned-unit-development, bank-owned 4 bedroom was listed at $344,900. The estimated fair value for this condo was approximately $410,000 to $425,000. Inside of one week, this San Carlos property had an accepted offer at $410,000. This was approximately 19%, or $65,100, above the listed price!
Banks are purposely under listing property with the strategy of creating a buying frenzy to result not only in a very quick sale, but, a sale at or above the fair market value. Is this practice fair or even legal? It is on both counts. If the bank does not list it properly, they could end up with a sale way below the current fair market value. On the other hand, it isn’t fair to neophyte buyers/agents. Buyers and/or their agent who do not recognize the ploy, may be wasting quite a bit of time writing offers that in some cases, will not even be considered or countered. Also, what about shattered expectations? A number of buyers/agents may honestly believe that their full price offer has a chance of being accepted. In reality, they not only have zero chance of getting their offer accepted, but in the majority of cases, they will not even get a counter-offer.
So what is a potential buyer looking for a bank owned property bargain to do? If they are smart, the best advice would be to seek out an experienced agent and implicitly follow that agent’s advice.
California Foreclosure Sales Jump 80% in March
On March 12, 2009, I wrote a post entitled New Law Extendeds California Home Foreclosures (again). This prior post talked about California's latest 90 day foreclosure moratorium law. These mis-guided laws will result on a wave of California foreclosures rather than the past trickle we would have seen. If nothing else, this will just extend the bottoming of the San Diego/California real estate market.
The existing California foreclosure process has been tested and is a known, proven method of moving real estate property from non-payers into strong new purchasers. Currently with the California law enacted last year and the latest 90 day extension, the California foreclosure process now takes a minimum of 231 days. To bring this back to the real world, the 231 days is from the start of the process. This California foreclosure does NOT start until the homeowner has been behind a number of months on their payments. So, with all the programs to try to work out some type of loan modification, many times the actual foreclosure process does not start for many months past the first missed payment.
The initiation of the foreclosure process is further delayed by Government backed (FHA/VA) loans and Government controlled (IndyMac) lenders. In California, it is now quite common for the time a homeowner can stay in their home without making any mortgage payment to exceed 12 months!
These facts are never mentioned in most TV/newspaper stories that run stories on the plight of the troubled homeowner who is being foreclosed. To top things off, just yesterday, a Los Angeles Acorn spokesperson was saying that they were considering non-violence protests to block the on-going foreclosure evictions. San Diego real estate blog
San Diego Home Foreclosure … Is It Really So Bad?
In a Wall Street Journal article published on 1-31-09, Ramsel Su (a real-estate consultant and a former REO broker) made some interesting and controversial observations on the current housing market bust.The intent of modification programs to date is to create a generation of mortgage slaves. Fortunately, mortgage slaves can free themselves via foreclosure, and the masses are choosing to do so."
Personally, here in San Diego, I've seen a number of media outlets review the typical hard working family forced to move because of their home being foreclosed. These situations are indeed sad and make for interesting human interest stories.
San Diego Home Sales Up … Prices Drop 30%
A total of 19,926 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 19.2 percent from 16,720 for November, and up 50.5 percent from 13,240 for December 2007, according to MDA DataQuick.
Regionwide, foreclosure resales accounted for 55.7 percent of December's resales activity, up from 54.7 percent in November, and up from 24.3 percent in December 2007.
| Sales Volume | Median Price | |||||
| All homes | Dec-07 | Dec-08 | %Chng | Dec-07 | Dec-08 | %Chng |
| Los Angeles | 4,430 | 5,848 | 32.0% | $470,000 | $320,000 | -31.90% |
| Orange | 1,731 | 2,580 | 49.0% | $565,000 | $397,000 | -29.70% |
| Riverside | 2,503 | 4,435 | 77.2% | $355,000 | $209,000 | -41.10% |
| San Bernardino | 1,518 | 2,862 | 88.5% | $315,000 | $180,000 | -42.90% |
| San Diego | 2,468 | 3,325 | 34.7% | $430,000 | $300,000 | -30.20% |
| Ventura | 590 | 876 | 48.5% | $525,250 | $338,000 | -35.60% |
| SoCal | 13,240 | 19,926 | 50.5% | $425,000 | $278,000 | -34.60% |