Tara O'Brien's Minneapolis Real Estate Update: November 2008

Nearly one out of three homes sold in the last year was sold at a loss, and an estimated one in seven U.S. homeowners were "upside down" on their loans at the end of September, according an analysis of public records in 163 markets by Zillow.

Zillow estimates that the percentage of borrowers upside down -- owing more on their mortgage than their home was worth -- was even higher among those who bought in the last five years: 29.5 percent.

Nationwide, home prices have fallen 9.7 percent in the last year and 12.8 percent since the market peak in 2006, Zillow said.

Homeowners were considered to have negative equity if Zillow's estimate of their home's current value was less than the original mortgage, the company said in releasing its third-quarter market report.

Many real estate professionals question the accuracy of Zillow's home valuations, however, and the company said it also excluded principal payments and equity withdrawals since loan origination in its calculations.

Foreclosures made up close to one in five transactions in the last year, Zillow said, and more than half of sales in some distressed markets like Merced and Stockton, Calif.

While many reports focus on year-over-year price changes, Zillow -- which claims its quarterly market reports are the most comprehensive of their kind -- also looks at long-term trends.

Looking back five years, Zilllow reported flat or negative long-term price appreciation in about one quarter of the markets it analyzed.

That's an indication "of the enormous amount of value that has been taken out of the real estate market" in the past few years, which includes seven consecutive quarters of decline, said Zillow's vice president of data and analytics, Stan Humphries.

Of the 27 metropolitan statistical areas (MSAs) showing long-term depreciation, prices were down most in Stockton (-3.8 percent five-year annualized change), but also in areas like Boston (-1 percent) and Cleveland (-0.8 percent). Another 12 markets saw flat five-year annualized returns.

Looking back 10 years, Detroit was the worst-performing market, with a five-year annualized change of -3.1 percent and a 10-year annualized change of 0.9 percent. That compares with a 3.4 percent five-year annualized change for the nation as a whole and a 6.1 percent 10-year annualized change.

The percentage of homes sold at a loss in the past 12 months shot up from 23.7 percent at the end of the second quarter to 30.2 percent in the latest report, which includes data through the end of September. More than half of homes were sold at a loss in 17 markets, all but three of which were in California.

Zillow calculates whether a home was sold for a loss by comparing public records of sales during a quarter with the last recorded sale of a home. The calculation does not take into account closing costs or commissions.

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A new study suggests buyer psychology and tighter credit aren't the only factors keeping would-be home buyers on the fence -- homeowners with negative equity are often "locked in" to their existing homes and are nearly 50 percent less likely to move in order to take a new job, cut their commute time or move to a neighborhood with better schools.

The study, Housing Busts and Household Mobility, found that while becoming "upside down" forces many homeowners to move from their homes because of foreclosure, an even greater number have historically ended up stuck in their homes.

That's because until housing prices rebound, a sale of their existing home won't pay off their existing mortgage -- let alone generate the proceeds needed for a down payment on their next home.

The study's authors -- housing experts at the University of Pennsylvania Wharton School of Business and the Federal Reserve Bank of New York -- warned that the repercussions of "lock in" include less efficient job markets and reduced incentives for homeowners to keep up and make improvements to their homes.

Some families will not be able to move to access better jobs in alternative labor markets, the study concluded, while others who would like to move to access better schools or a different-size home will be unable to do so, the study said.

The study looked at two decades of housing data, covering the period from 1985 to 2005, and found that negative equity reduces homeowner mobility more than previously believed. All in all, having negative equity reduced the percentage of homeowners moving within a two-year period by 5.6 percentage points, a reduction of 47 percent from the baseline mobility rate of 12 percent.

"That the net impact of negative equity ... has been to reduce, not raise, mobility may surprise some given the high number of defaults and foreclosures in the current environment," the study noted.

The study looked at a period when subprime lending was not nearly as prevalent, and included only owner-occupied homes -- not those purchased as investments or second homes. Only time will tell whether the number of people locked into their homes during the current downturn outnumbers those forced to move because of foreclosure, the authors concede.

Even if the study's analysis of the past can't simply be extrapolated into the future, "policymakers should begin to consider the consequences of lock-in and reduced household mobility because they are quite different from those associated with default and higher mobility," the authors said.

More research is "urgently needed" on issues surrounding the "financial frictions" associated with potential mortgage lock-in, the study said.

According to Worldwide ERC -- formerly the Employee Relocation Council -- about 794,000 households relocate a year because they are transferred to a new job within the U.S. About 54 percent are homeowners, while the rest are renters.

Worldwide ERC reports that most companies offer to purchase at least some employees' homes if they can't sell, while 20 percent reimburse employees' selling expenses. The group, which represents organizations that manage relocation programs, estimates $32 billion a year is spent on U.S. corporate relocations.

The new study provided an overview of past research demonstrating that falling home prices or rising interest rates can lock borrowers into their homes. Households without access to enough cash or credit may find their options constrained even if home equity does not turn negative.

Another factor that can trigger the "lock-in effect" is the original loan-to-value (LTV) ratio. The smaller the down payment provided by the home purchaser, the more quickly they end up "upside down" in the event of price declines.

The study noted that in the San Francisco Bay Area, LTV ratios were typically around 80 percent until the end of 2002, and then increased sharply to 90 percent in 2004.

"Essentially, the typical new home buyer in the Bay Area bought a house for $800,000 in 2006 using a $720,000 mortgage," the study concluded. "If prices really do decline by 25 percent from their peak, the underlying house value will be around $600,000, which is much lower than the typical mortgage balance taken out that year."

In the late 1990s, barely 10 percent of Bay Area borrowers had LTVs above 95 percent. By 2006, about 35 percent of buyers had LTVs exceeding 95 percent, and more than half exceeded 85 percent.

The study's authors -- Fernando Ferreira, Joseph Gyourko and Joseph Tracy -- also shed light on how demographics affect mobility. While being married does not affect mobility, divorce does make homeowners more likely to move.

So does race, sex and education. Households headed by a person with some college have two-year mobility rates that are 4.2 percentage points higher than those without a high school degree. Whites are more likely to move than non-whites, and female-headed households are more likely to move than those headed by males, the study found.

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Part One

Are you selling a home? Did you know that even though home buyers are all looking for something different, the majority of them will turn around and walk back out of your door if they notice one or more of these Top 10 problems.

1. Odors
House odors are number one on the home selling uh-oh list. And narrowing it down, odors from cigarette smoke and pets take top billing, with mildew not far behind.

If you smoke indoors--the house smells like cigarettes. If you have pets, the house might smell bad--even if you don't notice it. Ask someone who doesn't live there to take a sniff, and don't get angry when they tell you the truth.

Eradicate the odors so that you can present potential buyers with a clean, fresh atmosphere--not a house that's full of perfumes to cover up the odors.


2. Dogs that Meet You at the Door or in the Driveway
Dogs frighten some people and irritate others. You'll have a much better response from showings if you control your pets--dogs, cats, whatever.

You say you plan to put them in a bedroom or garage and then ask people not to open the door to that area? Bad idea. Would you buy a house you can't inspect? Of course not.

Remove pets during showings if possible. If you can't, contain them in crates for their own safety and to show respect for the feelings of potential buyers.


3. Dirty Bathrooms
Grimy bathrooms are an instant turnoff. Scrub them, paint them, buy a new shower curtain, rugs and towels--do what it takes to make them shine. If you're serious about selling the home, the extra work is a must.


4. Dimly Lit Rooms
Dark homes are a turnoff to most home buyers, so try to brighten them up:


Replace dim light fixtures
Install additional light fixtures
Install (quality) sun tunnels or skylights
Remove heavy drapes to let the light stream through windows
Repaint some rooms with colors that reflect light
Trim tree limbs that shadow the house
Dirty and fogged windows are another buyer turnoff. Clean them inside and out to bring in more light. If possible, replace any double-pane windows with broken seals. You can find them by looking for a foggy residue that cannot be removed.


5. A House Full of Busy Wallpaper
Busy wallpaper in every room turns off most buyers, and even people who love wallpaper rarely like what you've chosen. It's a personal decorative touch that they want to select themselves.

It's the masses you must appeal to when you're selling a home, so take a hard look at your wallpaper and decide if it should be removed and replaced with paint. Don't paint over it, because it will be obvious that you did--and buyers know that makes removing it even more difficult.


6. Damp Basements
Dampness or damp smells in the basement throw up a red flag to buyers that the foundation leaks!

Most problems we see are not caused by faulty foundations. They occur because rainwater is being diverted towards the foundation instead of away from it.


Clogged underground drains
No rain gutters along roofline
Downspouts aimed the wrong way
Go outside the next time it rains and determine where runoff water is going.


7. Bugs
Roaches, spiders, any insect that shouldn't be in the house. Get rid of them.


8. Poor Curb Appeal
You must grab a buyer's interest from the curb if you want to sell the home for top dollar. Home buyers often refuse to go into a house with an unkempt yard, sagging doors or peeling paint. You say you can't afford to paint? Okay, but get that yard in tip-top shape and grab a screwdriver to fix those doors.


9. Gutters with Plants Growing in Them
I'm serious. Some people never clean their gutters, and it always makes buyers wonder what else hasn't been maintained.

Remember the drainage issue in #6? Cleaning packed gutters might help.


10. Sellers Who Hang Around for Showings
Yes, you... leave the house during showings. Home buyers feel awkward about opening closet doors and lingering for a really good look at the house if the seller is home.

If you're selling by owner, give them some space, don't hover.


Parting Words
Most of the Top 10 problems are home selling issues you can correct without spending a lot of money. Do it now, before you put the house on the market, because if your house develops a reputation among agents as the house that smells, the house with the huge barking dog or the house where the owner won't leave people alone, it will be too late. Your house will be last on their list to show potential buyers.

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More than 7.5 million single-family homes are worth less than what's owed on their mortgages, and another 2.1 million were very close to being upside down at the end of September, according to an analysis by First American CoreLogic.

First American CoreLogic used automated valuation models to analyze its huge database of public records and produce what it claims is the industry's first state-level assessment of households with negative equity (click to download spreadsheet).

The analyses, of 42 million properties with mortgages, found the states with the highest percentage of upside-down mortgages were Nevada (48 percent), Michigan (39 percent), Florida (29 percent), Arizona (29 percent), California (27 percent), and Georgia (23 percent).

Those six states are home to about one in three U.S. mortgages, but account for more than 58 percent of the nation's upside-down homes, First American CoreLogic estimated.

Take those six states out of the equation, and the percentage of U.S. homes with a negative-equity mortgage is 12 percent, rather than 18 percent, the analysis found.

Some homeowners own their property outright and do not have a mortgage. But add the 2.1 million mortgages that are within 5 percent of being upside down, and 23 percent of single-family homes with mortgages are upside down or near upside down, First American CoreLogic estimates.

Being upside down -- owing more on a mortgage than a home would fetch in a sale -- does not necessarily mean a homeowner will end up in foreclosure.

But for homeowners who are having trouble making their mortgage payments because of a job loss or a rate reset on an adjustable-rate mortgage, being upside down can make it difficult or impossible to pay off a loan by selling a home or refinancing it.

Analysts at Fitch Ratings this week said 1.8 million subprime ARM loans totalling $347 billion are on average six months away from their initial or next monthly payment reset.

Fitch analysts said those borrowers face an increased risk of payment shock because of the recent volatility of a benchmark interest rate used to calculate their rates.

The six-month London Interbank Offered Rate, or LIBOR, spiked between mid-September and mid-October as loans between banks became more scarce.

Although six-month LIBOR is trending down from recent highs, at its recent peak it would have caused monthly payments for many subprime borrowers to increase by 30 to 50 percent, Fitch analysts said.

Another 1.4 million subprime loans totaling $245 billion are past their initial rate reset but are also affected by changes in LIBOR, Fitch said.

An increase in workouts and loan modifications by lenders could help ease the payment shock of rate resets, Fitch analysts said. The 98,000 loan modifications granted in September by HOPE NOW loan servicers represented a 22.5 percent increase from the previous month, Fitch noted.

If the loan workouts continue at the pace seen this year, then more than 1 million of the 1.8 million subprime borrowers facing resets could be granted relief over the next six months, Fitch said.

The Bush administration is reportedly weighing a proposal that the government guarantee as many as 3 million existing loans when lenders agree to restructure them based on a borrower's ability to repay.

By Inman News, Friday, October 31, 2008.

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