May292013

Negative equity keeping homes off the market

Back in March, I reported that low housing inventory is an indicator of residual mortgage distress. In that post, I noted that loanowners have less incentive to sell when prices are rising because they can be patient and sell without a loss. Plus, I focused on the work of Mark Hanson who points out that even those who are a little above water don’t have the equity necessary to sell and pay commissions and certainly don’t have enough left over to make a move up.

Building on that insight, I postulated that distressed inventory can be gauged by measuring how depleted inventories are from normal levels.

A baseline for comparison can be constructed if you project the line from 2000 through 2005. Based on that projection, we should have about 3,000,000 homes for sale nationally. Currently, there are about 1,750,000. That strongly suggests that about 40% of those who would ordinarily be selling are not because they are either squatting in their properties or hopelessly underwater. Some might argue that discretionary sellers are also withholding their properties because prices are rising, but that isn’t supported by data from the past. In 2004, prices went straight up due to the proliferation of the Option ARM. Inventory held its long-term trendline suggesting that discretionary sellers do not withhold their listings just because prices are rising rapidly.

For any of you who have read this blog for a long time, you’ve seen the issues raised on this blog finally go mainstream many months later. When I first read the story below, I wondered if the guys at Zillow weren’t inspired by the post on residual mortgage distress. Perhaps they came across the idea on Mark Hanson’s blog, or prehaps, they developed the idea on their own. Whatever the reason, the mainstream media is finally educating the rest of America on why there are so few homes for sale.

Housing Supply Limited as 22 Million Americans Lack Equity

By Prashant Gopal — May 23, 2013

About 22 million Americans may lack enough home equity to move, keeping property listings tight and limiting sales as the housing market recovers, Zillow Inc. said.

Forty-four percent of homeowners with mortgages owed more than their properties are worth or had less than 20 percent equity in the first quarter, the Seattle-based real estate data company said in a report today. Those people probably are locked in to their residences, because listing a house and purchasing a new one generally requires equity of at least 20 percent to meet costs such as a down payment and broker fees, Zillow said.

Mark Hanson has been pointing this out for years. I picked up on it from reading his work. This is the first mention of it I’ve seen in the MSM.

Perhaps the truth needs to be spoon-fed to people. If the MSM picks up on how dire the problem is with a lack of home equity but focusing on the truth Mark Hanson has pointed out for years, the general public gets even more despondent. Now that prices are rising and loanowners are less stressed, the real truth is finally exposed pushing back the light at the end of their six-year tunnel. Reality bats last, right?

The people who cannot sell are contributing to a dearth of home inventory on the market, which is restraining deals in the key U.S. spring selling season. There were 2.16 million homes available last month, the fewest for any April since 2001, the National Association of Realtors reported yesterday. While the low supply is helping to fuel price gains and lift home equity, values have to climb further to ease the shortage, Zillow said.

Looking at the effective negative-equity rate could explain why recent, healthy declines in the number of underwater borrowers haven’t yet translated into more homes for sale,” Zillow Chief Economist Stan Humphries said in the report. “Things like real estate agents’ fees and a down payment for the next home traditionally come out of the proceeds from the prior home’s sale. Without enough equity, these costs will instead have to come out of a homeowner’s pocket, leaving many still stuck.” …

As I reported, low housing inventory is an indicator of residual mortgage distress.

While some homeowners will keep properties off the market because they have low equity, it doesn’t necessarily mean they can’t sell. People may be able to use funds from friends, relatives and savings to cover the difference, said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.“People could always buy a smaller house or find a few thousand dollars here or there,” he said.

If they look in the cushions of their couch, they might find enough to make their next mortgage payment, right?

The analysts haven’t totally caught on to what’s really going on yet. Perhaps in a few months, they will realize that loanowners are in no hurry to list and sell their houses because the loan terms of their loan modifications are currently still favorable. We won’t see more inventory until the temporary terms which eased the payment burden start to reset back to the contract rate. This cost push is what will finally get people to list their homes.

Thanks for buying our home Mr. Banker

The former owners of today’s featured property were not Ponzis. They bought near the trough in 1996 and only refinanced one time through 2008. On 3/29/2008 they refinanced with a $318,000 first mortgage and essentially cashed-out at the peak. They quit paying shortly thereafter and were served notice in April of 2010. They were allowed to squat for over three years and were finally booted out in June of 2012. The bank sat on it for almost a year before finally putting it for sale.

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[idx-listing mlsnumber=”OC13096499″ showpricehistory=”true”]

1406 South MOHAWK Dr Santa Ana, CA 92704

$469,900    ……..    Asking Price
$153,000    ……….    Purchase Price
1/21/1996    ……….    Purchase Date

$316,900    ……….    Gross Gain (Loss)
($37,592)    …………    Commissions and Costs at 8%
============================================
$279,308    ……….    Net Gain (Loss)
============================================
207.1%    ……….    Gross Percent Change
182.6%    ……….    Net Percent Change
6.4%    …………    Annual Appreciation

Cost of Home Ownership
——————————————————————————
$469,900    ……..    Asking Price
$16,447    …………    3.5% Down FHA Financing
3.77%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$453,454    ……..    Mortgage
$120,791    ……….    Income Requirement

$2,105    …………    Monthly Mortgage Payment
$407    …………    Property Tax at 1.04%
$0    …………    Mello Roos & Special Taxes
$98    …………    Homeowners Insurance at 0.25%
$510    …………    Private Mortgage Insurance
$0    …………    Homeowners Association Fees
============================================
$3,120    ……….    Monthly Cash Outlays

($490)    ……….    Tax Savings
($681)    ……….    Principal Amortization
$21    …………..    Opportunity Cost of Down Payment
$137    …………..    Maintenance and Replacement Reserves
============================================
$2,108    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$6,199    …………    Furnishing and Move-In Costs at 1% + $1,500
$6,199    …………    Closing Costs at 1% + $1,500
$4,535    …………    Interest Points at 1%
$16,447    …………    Down Payment
============================================
$33,379    ……….    Total Cash Costs
$32,300    ……….    Emergency Cash Reserves
============================================
$65,679    ……….    Total Savings Needed
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