Apr242012
Foreclosures are NOT hurting America’s children
As the crash in house prices continues the number of families displaced from their homes increases due to foreclosure, short sales, and strategic default. Since the foreclosures generally lead to an involuntary property eviction, many former loan owners are upset by the consequences for defaulting on their mortgage. Rather than accept the consequences for their mistakes, many who involuntarily vacated their houses portray themselves as victims deserving of special dispensation. Pandering politicians, mostly from the political left, have lobbied for increased loan modifications, foreclosure remediation, principal reduction, and other misguided policies to prevent those who defaulted on their mortgages from enduring the consequences for their actions.
The latest attempt to generate sympathy for loan owners comes from the Brookings Institute. Their recent paper titled, The Ongoing Impact of Foreclosures on Children, diverts us from the connection between mortgage default and the inevitable consequence of foreclosure with statistics ostensibly demonstrating the horrible impact foreclosures have on the lives of children.
I know how to save their house. Foreclosure is the answer…
The Ongoing Impact of Foreclosures on Children
March 2012 — Julia B. Isaacs, Child and Family Policy Fellow, Economic Studies
Five years into the foreclosure crisis, many American families with children continue to lose their homes through foreclosure.
First, we do not have a foreclosure crisis. We have a debt crisis for which foreclosure is the cure.
Second, families find those houses lost in foreclosures. For each child displaced by an involuntary eviction due to foreclosure, another child’s family gets a new family home. Everyone overlooks the positive aspects of foreclosure. In fact, the new family is likely much happier and more stable because they are not as financially indebted as the people who moved out. Society greatly benefits from the housing bust.
An estimated 2.3 million children in single-family homes have already lost their homes to foreclosure, and even more – 3.0 million children – are at serious risk of losing their homes in the future. Another three million or so children may face eviction from rental properties that undergo foreclosure, suggesting that more than 8 million children are directly affected by the ongoing foreclosure crisis (see Figure 1).
Notice all the emotionally laden language about loss. Children “lose” their homes all the time. Parents take jobs and move the family across the country frequently. 
One of the strengths of the US economy historically has been the mobility of its workers (at least until about half of them got trapped underwater in their homes). Nobody is writing scholarly papers on the negative impact societal mobility has on children. The basic premise of this paper is deeply flawed.
As single-family and rental properties continue to enter foreclosure, children face not just the loss of their homes, but also the risk of losing friends and falling behind academically if they are forced to switch neighborhoods and schools.
And how do the children facing all this loss from foreclosure differ in any way from children whose parents took a new job in search of a better life? Do you see the silliness of this paper?
Children Affected by Foreclosures
Children are the often invisible victims of the foreclosure crisis.
Invisible victims? Utter bullshit.
Mortgage records do not tell how many children are in owner-occupied homes, and it is even harder to estimate the number of children in rental properties. Yet foreclosure affects not just the homeowner or landlord, but also the children living in the foreclosed properties.
The paper goes on to promote the previously failed policies of both the Bush and Obama administrations including loan modifications and principal reduction. The paper breaks no new ground and proposes no new ideas for solving this non-problem.
It’s not the children, it’s the parents
If children are negatively impacted by a foreclosure, it isn’t due to the foreclosure or even the eviction, its due to the parent’s reaction to their circumstances. Children are resilient, and if the parent’s deal with the change positively, the children will not be hurt. In the long run, since more families that go through foreclosure end up much more financially stable after they adjust to their new circumstances, the parents feel better, and the mood of the household improves. In that respect, a foreclosure brings closure to a bad situation and improves everyone’s lives, especially the children.
Boy, new home sales in March did awful. Down 7.1%
The West was monkey-hammered MoM; ie., despite overall favorable landscape (descent supply, weather and sub-4 to 4% rates) sales volume down -26.97
Survey: High Share of Distressed Properties Keeps Prices Down
Inventory is shrinking and traffic for homebuyers seems to be increasing, but according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, home prices were down in March. One reason for this, according to the survey, which includes about 2,500 real estate agents, is the high number of distressed properties on the market.
Home prices for non-distressed properties in March dropped 5.7 percent from a year ago in March 2011. Prices for damaged REO properties also saw a 5.7 percent decline in prices, while move-in ready REO prices fell 2.5 percent during the same period. Short sales declined significantly, with prices falling 14.3 percent during the one-year period.
According to a recent RealtyTrac report, the average price of a home sold via short sale in January 2012 was $174,120, down 10 percent from January 2011. This, RealtyTrac stated, shows that lenders are more willing to approve more aggressively priced short sales.
Driven by an increase in short sales, the total share of distressed properties in the housing market in March was 47.7 percent when using a three-month moving average, according to the HousingPulse Distressed Property Index (DPI). This marks the 25th consecutive month the index has hovered over the 40 percent mark.
“With nearly half of the market being distressed, we’re a long way from a return to a normal market,” said Thomas Popik, research director at Campbell Surveys. “Agents responding to our survey say that homeowners with well-maintained properties in good locations are very reluctant to list at today’s prices. That’s why inventory is low-and also why forced REO and short sales are such a big proportion of the remaining market.”
Over the past six months, the proportion of short sale transactions in the housing market increased from 17.8 percent to 19.9 percent.
The survey also found that traffic indexes for first-time homebuyers, current homeowners, and investors all showed substantial increases in March compared to the year before, with indexes showing current homeowners and investors were higher than those recorded when the federal homebuyer’s tax credit was offered in 2009 and 2010.
Meanwhile, HousingPulse found that real estate agents reported housing inventories well below levels seen a year ago, especially for attractive properties in desirable locations.
What Agents Said in the Survey
“[Purchase] Activity has increased while prices continue to fall. There is a significant increase in the number of short sales and foreclosures on the market in our area.” – Agent in Delaware.
“Sales are up 29 percent year-to-date through the end [of] March. Pendings are up 55 percent. Prices just are beginning to rise.” – Agent from California.
“Volume is increasing, but prices are not. Only very nice homes are selling faster.” – Agent in Pennsylvania.
Could one even question if (non-damaged) REOs should be labeled as “distressed”? Sure if you need to show up at a trustee sale with a pile of cash that will limit the buyer pool quite a bit, but if the bank is listing a well kept property on MLS what is distressed about that?
“but if the bank is listing a well kept property on MLS what is distressed about that?”
Exactly. That’s why I wrote last week about the fallacy of excluding distressed sales from the reporting. It matters not why the seller was motivated. The quality of the property that sold and the resale price are what sets the comps.
Even at current low, mid and lower-upper tier SFR price levels, what’s hurting OC children most is the fact that dual income household status is required to service mortgage debt.
That’s an angle I didn’t explore, but there is truth in that. My wife does not work so she can take care of our son. We sacrifice entitlements for this, but it’s worth it to us. Most people take both incomes and max out their DTI to get the biggest house they can get. They pay the price in stress and time away from home, both of which can negatively impact their children.
Agreed with that statement. My wife and I are sacrificing greatly in order for her to be able to be with our 18-month old son full time, and avoid having him in daycare, preschool, etc. every Monday-Friday just for us to “have to” earn enough to service mortgage debt. It’s hard enough to pay for the exorbitant rent in OC, and servicing even higher mortgage/PITI loan ownership debt with only one income would be even more diffcult IMO. At least if we ever decide to give up on the OC, we can do it with a 30-day notice to the IAC.
You “can” survive in OC with one income, but you have to make some difficult choices about your lifestyle entitlements in order to do it in a financially sustainable way. Lack of opportunity and many other difficulties stem for it, and that’s truly going to hurt my child and other children living in OC for future years.
Not to be rude, but it’s very easy to have the wife stay at home with the kids, when the wife’s earning potential is not very high. That’s an easy decision. Now if your wife is a doctor, lawyer, engineer, pharmacist… that’s a whole ‘nother ball game.
Very true. I had lunch recently with a guy married to a physician. She would like to take some time off if they have children, but giving up such a large salary is very difficult. Plus, women careers like that often find the work very satisfying, and the stress of giving up with work in addition to the stress of giving up the entitlements is too much for many to deal with. These issues are never black and white.
Actually, the dual income household problem is not just an OC problem, it’s a nation wide problem which will continue to worsen as baby boomers grow older and dependent on their children. I think as time goes on there will more and more pressure to switch to a single income family with one parent staying home to take care of the kids and grandparents. We are on the eve of a couple decades of multi-generational family living. I don’t even want to think how single parents are going to function moving forward, certainly not in OC or other costly areas for standard of living.
I’ve been renting a 2 bed/2 bath condo since 2009 and since I’ve been here almost everyone that’s moved in has been a family of four or five (a lot of single mothers lately). I’d imagine it’s stressful trying to raise a family in a space designed for singles and couples since I hear arguments at least once a week.
Apparently banks are trying to avoid REO by increasing short sales.
Short sales expected to surge this year
NEW YORK (CNNMoney) — Short sales are rising sharply, offering many struggling homeowners a better alternative to foreclosure in many of the nation’s hardest hit states.
In short sale deals, the sale price of the home is less than what the seller owes. Often, the bank that holds the mortgage takes so long to approve the sale that the deal falls through. But in recent months, the pace of short sales has increased, a trend that should gain momentum, according to RealtyTrac.
In January, short sales rose 33% compared with 12 months earlier, the company reported.
During the month, 32 states saw year-over-year percentage increases in short sales. Even more encouraging, short sale deals outnumbered foreclosures in 12 states, including some of the hardest hit like California, Arizona and Florida.
January’s numbers look to be just the beginning. “[W]e believe 2012 could be a record year for short sales,” said Daren Blomquist, vice president at RealtyTrac.
Banks are showing signs of being more open and willing to approve the deals — even if it means accepting less money. The average sales price for a short sale was $174,120 in January, down 4% from December and 10% year-over-year.
Typically, banks get about 20% less for a foreclosed home. Foreclosure can also take years to unload, during which expenses, like property taxes, insurance and other expenses, mount up.
Short sale process to speed up. One of the biggest roadblocks for short sales has been the time it takes to get deals approved. That time shrunk slightly during the first quarter — to 306 days from 308 days the previous quarter — but many deals still fall through because the buyer eventually walks away.
However, that could all change come June 1 when a set of new rules are put in place that will require lenders to make a decision about short sale requests within 60 days.
We’ve heard this before. In 2009, lenders withheld REO and attempted to switch to short sales, but they were unwilling to write off their second mortgage debt. I question whether or not it will be any different this time around.
Let’s pretend the banks actually do write off the second mortgages, and short sales do begin increasing in OC. Since the re-sale “comps” would be at the lower short sale price if this scenario begins playing out more and more, how do you think it will impact OC housing prices in the near future, IR?
If they really do start approving more short sales it would have the same effect as selling more REO. A large number of motivated sellers always drives down prices. And with so much mortgage distress, we have lots of motivated sellers. The only thing causing all the frenzy in the market right now is the REO isn’t there, and the short sales are not closing yet. There isn’t enough transactable supply to match the demand — weak though that demand may be. Sales volumes are still 20% or more below historic norms, yet demand is outstripping supply right now. It shows just how much supply the banks re withholding.
Nice post today, IR. Interesting about the featured property today in Yorba Linda, which is in the neighborhood of my old high school, where I personally graduated in 1996. This house was purchased in 1994 and per your facts listed, they began HELOC abusing in 1996. As I was graduating high school and moving into college, I always wondered how it seemed the families of my peers always had money for new cars, twice-annual vacations to Maui, second homes, exclusive summer sports camps, etc. yet mine didn’t (and my dad made a well above-average salary on his own as an engineer). Now, as the economic tide has metaphorically rolled back out to sea, and thanks in part to public info exposed in places like this blog, the facts are proving to me that it was all HELOC money after all. It’s at least satisfying to finally find answers for questions that always perplexed me. I suppose I am fortunate to have parents that didn’t put on the wealthy facade like their neighbors and at least taught and modeled for me how to be fiscally responsible.
You were very fortunate. It’s the primary reason you aren’t suffering today despite the troubles in our industry and with the general economy. Think of the stress from the loss of entitlement everyone else is feeling.
I miss pre-Y2K America …
Just saying 🙁
I hadn’t stopped to think about that, but you’re right. I too miss the way things were in many ways. We had stable housing costs and a strong economy based on production rather than debt. Now we have a weak economy still propped up by both private sector and public sector debt, a housing market in shambles, and widespread despair.
Ya, pre-Y2K America seemed stable.
But in fact Chinese mfgs. and Indian outsourcers were already well into hollowing out our economy and middle class.
HELOC money post-Y2K just masked that fact.
Oracle (above) took the words right out my mouth! When will they publish a study on how overleveraging damages children. When Ma and Pa borrow too much to buy a house they can’t afford…it’s the kids that suffer. Those tense months when the family has to figure out to pay the bills are no fun for the kiddies. Of course, kiddies don’t care if the parents live in a mansion or a two-bedroom apartment, unless their parents are stressed out about it. I once received a call from a mom whose baby was a few months old. The mom told me that she was eager to get back in the workforce because she wanted to “set a good example” for her daughter!
I would guess the baby would rather have the mother around than be impressed with the “example” she sets.
If they want to criticize anyone it should the be banking cartel and the Fed. I don’t have a problem putting Alan Greenspan, Tim Geithner, or Ben Bernanke in the electric chair.
Larry, you should use this picture:
http://a6.sphotos.ak.fbcdn.net/hphotos-ak-snc4/47143_146443955388860_108982649134991_265628_1963065_n.jpg
errr… Sorry, here’s the pic:
http://a1.sphotos.ak.fbcdn.net/hphotos-ak-ash4/311833_318672188159639_100000505817244_1322880_1634486440_n.jpg
That’s a great find. Thank you.
Speaking of SL’s, HELOC’s etc.,
**These data (from the FDIC), show that borrowers are 2.75-times more likely to go delinquent on their first mortgage than on their home equity loan, as delinquencies on the first liens are 9.61% relative to 3.49% for second liens. The share of HELOCs that are nonperforming is even lower, at 1.83% of all loans, according to the FDIC.
http://economics21.org/commentary/large-banks-begin-recognize-reality-second-liens
Thanks. I may use that article. It’s very interesting that so many people default on the first but keep the second current. It doesn’t make much sense to me.
Didn’t make sense to me either. Perhaps that the data is mined “from the FDIC” put the stated results into proper perspective. just say’n 😉
Huge lot on the featured property – 1/3 acre, enough for 3 regular Irvine SFRs at 4500″.
Need a riding mower for a lawn that size.
I feel like this paper was written for an episode on the Lifetime cable network. A Lifetime original “Dream Foreclosed” episode:
You can just picture Linsday Wagner’s character inconsolably bawling at her bedside, while her young daughter walks in the room with the torn letter in her hands and tears rolling down her cheeks:
“It says “Notice of Default”, mommy. What does that mean? Are we gonna have to move, Mommy?”
Except children are usually resilient to major life changes, even more serious ones like divorce. Let’s get some perspective here. Going through foreclosure, dealing with emo parents for 6 months, moving into a smaller rental in a new community, attending a new school and making new friends might be very unpleasant for a young child, but it’s a proverbial “walk in the park” compared to childhood diseases like MS, cancer, a serious debilitating car accident, coma or the sudden death of a parent. There are families going through real hell right this minute because their child is missing due to a crime. In this light, foreclosure families and their children have actually got it made in the shade.