Um, if the house has lost 400K, I would walk away, and rent, until my credit cleared. Why sell it? Give it back to the bank. If it is upside down 10, 20, 30K, fine, I will eat it,.. but 400k? time to walk. The bank has a loan with an asset to back it. Give them back the asset they they AGREED was worth the loan. You don’t agree the house is worth the loan? Fine, the bank can have it back. Totally moral.. businesses would do the same thing.. If the banks were ambitious and didn’t require 20% down, have a cushion.. well, maybe the head of that bank should not have gotten a million dollar bonus.

I can understand the logic, but what about everything that comes with a foreclosure? I’m not talking about ruined credit alone, but all the pressure, the shame, the notices being put on your door, the harrassing phone calls from the bank, mortgage negotiators, attorneys, and other people “who can help”?

Can people handle all that?

Indeed, we’ve been working with a very patient real estate agent.

I don’t think Steve was trying to quote a statistic regarding length of home ownership. It was a prediction based on an assumption it will be a poor sellers market for a while.

“the majority of people who bought their homes during the credit boom will probably keep their homes for 10 years or more — partly becuase they would have to take a loss if they sold.”

I looked on my block and the mean and median were both over the reported stat, but we have two that have been here over 20 years.

http://mortgage.freedomblogging.com/2009/06/05/do-these-homeowners-deserve-help/11597/

Guess what, the housing ATM might be more responsible for the massive wave of foreclosures than market dynamics! Yep, some really sympathetic victims out there.

Yes you can invest in foriegn countries, and yes there is profit.

When Americans talk about a global economy they assume we will be importing goods as we always have. Today is the first time any one has mentioned exporting American goods. A lot of talk about Japan centers on stagflation and deflation, but Japan needs to import. They are a rock surrounded by water.

The United States is self contained. We can afford a weaker dollar. We can export.

The way it gets inflationary is by having a dollar that is worthless.

A dollar that’s worth less: Exports become cheaper, while imports become more expensive. All else being equal, gasoline prices go up. So do other commodities — meaning that we’d likely resume the upward pay-more-for-food and pay-more-at-the-pump trend that was evident about a year ago.

A stock market and bond market crash: If investors start to view inflation and a devalued dollar as inevitable, it could result in a broad sell-off of stocks and bonds, and a flight of capital to other assets and currencies. (Swiss francs might become more attractive.) Inflation expectations are important.

U.S. banks have an enormous amount of excess reserves, according to Federal Reserve data, that would rapidly expand the money supply once lent out. “The enormous increase in reserves is potentially inflationary,” Stanford economics professor John Taylor told the U.S. Congress in February. “With the economy in a weak state and commodity and many other prices falling, inflation is not now a problem, but at some time the Federal Reserve will have to remove these reserves or we will have a large increase in inflation.”

Think of paying your debt with worthless dollars. It’s not that wages will increase it’s that the dollars you get will be worth less.

Thank you for sharing that, Ross.

Did you use a real estate agent to help you through the process?

That is a statement about the period of time of each ownership. The statement “most people own their homes for more than 10 years” is a statement about people. I don’t have information to verify that, so I simply assume that sampled a group of people and measured the length of time they owned their previous home. That is going to be a differently weighted sample than if they measured based on a sample of sales. Flippers will be weighted more heavily in a sample of sales than they will be in a sample of all people. That’s how flippers will bring down the average length of ownership relative to the amount of time of all people on average.

You are right, the average does not supply sufficient information. but the Median = 8.2 years

half own longer, half own less than this. definitionally

so the statement that “most people keep their homes more than 10 years ” is definitely incorrect

To me, buying a house on credit is similar to asking the govt. to borrow money for jobs and services it can’t afford to pay for. Eventually, you become a debt slave, and wind up paying a very large portion of your income to finance the debt. But remember, this kind of emotional credit-based borrowing actually works during times of inflation.

I believe most people would rather inflate our way out in order to get around the burden of sacrificing most of our future wealth to pay for the party we already had. Many older people I’ve talked to want me to have a lot of babies (and embrace immigration) so someone will be around to pay for their retirements. I got to thinking about this the other day and realized it’s a complete ponzi scheme. Our entire country’s economic strategy is a gigantic ponzi scheme! What keeps it alive is politicians’ need to satisfy voters in the short-term. Nobody wants to pay the necessary price to correct this mess, so every decision that comes down the line is directed toward the best short-term outcome as opposed to looking at the big picture and embracing the long-term health of America. In short, we are like a bunch of spoiled little children who want, want, want, and the govt. is our parent and does it’s best to satisfy our desires one day at a time. In a way, it’s like driving with a blindfold on.

I believe most of my future investments, other than a place to live, will be made in other countries that are up and coming as opposed to wealthy and entitled–especially when that wealth and entitlement is dependent upon borrowing money from countries who are up and coming. IOW, it’s not anit-American to dump U.S. stocks and buy into companies overseas. You either buy their stocks and make money, or you borrow money from them you don’t have. I suspect many other Americans will adopt a similar strategy.

The green shoots we keep hearing about are laughable to me. We are experiencing the effects of borrowing money, but where are the jobs going to come from when we attempt to balance the budget in the last half of Obama’s term? The U.S. attempted to bring down the debt after the economy begin to heal during the Great Depression, and it sent the economy back to Hades. No wonder the Chinese laughed at Giethner when he pledged to bring down the debt and protect the dollar. Unlike the American’s, the Chinese have read up on American history; thus, they know exactly what’s going to happen when we try to bring down the debt. The reality of the real underlying economy is going to set in. What will the U.S. govt. do when faced with that reality? Borrow more money.

I have owned and lived in my current house X years, but the total amount of time that I will keep my house is some unknown number that is longer than that. I won’t know until I move out. So when you ask people how long they have lived in their house, it will be a smaller number on average than the average number of years that people live in the same house.

Also, it is kind of like marriage where flippers go around owning houses for a year or so. They bring the average length of occupancy down, while most people stay in their houses for a long time.

I’m not speaking to the statements of the NAR, just the statistical problems.

RE: deejayoh @ 13

Again, this does not make sense. The NAR says the average length of home ownership is 6 years. So how can MOST people keep their homes more than 10 years?

Maybe there are a few people who hold properties for a few months and that brings the average down.

Alan – yeah – but only slightly. I found the median for home ownership, which is 8.2 years. See #37.

Based on my understanding of math, I am 100% positive that “most people” do not keep their homes for more than 10 years.

Of course, other people’s “truthiness” may be different.

It won’t be your father’s stagflation. Instead of a wage-price spiral, it will be a falling productivity spiral. The government faces enormous voter demands for preserving jobs and entitlements. To fund those, it will continue to create money and credit. As larger sections of the economy are in protected industries and living on government pensions, they produce less and so the available supply of things to buy fall. The falling dollar makes it more attractive for companies to export than sell domestically, so there is less to buy here, at the same time that imports are more expensive. So the people that do work will have no trouble finding a job, but their products are exported so find it difficult to maintain their standard of living. Mostly we will be working to pay the interest on the federal debt.

RE: Kary L. Krismer @ 91 –

That sentence was actually to make that distinction between short sale closings and regular closed sales. However short sales in my opinion have been closing at what I think is fair market value, by the time they close in a declining home price market.

I guess that might depend in part on when the offer was made and when it actually closes. For example, if the offer was made 8 months ago and closed last week . . . ..

RE: Jonness @ 89 -

I think we can all agree that in the next ten years there will be a period of inflation. That’s what mekes a difference in locking in price. yes your dollar is worth something today, but in the future it will be worth less.

There is a saying in Real Estate that you will be paying today’s price with future dollars. Does any one actually see a time in the future when the dollar will be worth more than it is today?

Please explain the mechanism by which wages increase rapidly so that people can afford ever more expensive homes? In the 1970’s a sizable fraction of the labor force had inflation-indexed salaries, often via union contracts. Those are almost non-existent today. Unemployment is going exponential. Globalization has been dragging down wages for over a decade even before this collapse. So just how do we get a wage-price spiral?

The Fed provides easy money for lenders, but who will be qualified to borrow it? And if consumers don’t have the money to spend (statistically they are tapped out), why would companies borrow money to expand operations? That is the key issue going forward. Until increases in productivity can be translated into wage gains, we will see little traction in the Fed’s deflation fighting efforts. Credit=money. And if credit continues to contract, as many argue it must, then how can we have inflation?

I have a substantial amount of my retirement money in TIPS, just to hedge my bets. But it is very hard to see how inflation (other than asset inflation) actually happens.

Funny how now they’ve become a stopped clock, saying “we’re at bottom” nonstop :).

True, though, that at some point one of them will turn out to be right.

We won’t be at the bottom until all of the pundits think that the long trend down means we will keep going down. They will say the bottom isn’t in sight and then we will hit bottom.

I think we can all agree that in the next ten years there will be a period of inflation. That’s what mekes a difference in locking in price. yes your dollar is worth something today, but in the future it will be worth less.

There is a saying in Real Estate that you will be paying today’s price with future dollars. Does any one actually see a time in the future when the dollar will be worth more than it is today?

That sentence was actually to make that distinction between short sale closings and regular closed sales. However short sales in my opinion have been closing at what I think is fair market value, by the time they close in a declining home price market.

Again, this does not make sense. The NAR says the average length of home ownership is 6 years. So how can MOST people keep their homes more than 10 years?

Maybe there are a few people who hold properties for a few months and that brings the average down.

Earlier generations typically worked for one company their entire lives before retiring, so there was less need to move.

“Just how do you think you’re going to accomplish that? Even assuming you could time a purchase followed by a foreclosure, most people don’t want a foreclosure on their record.”

The hypothetical $400K in Steve’s post actually costs $800K if borrowed. By the time the market bottoms, the loss will most likely be well over a million. That’s powerful incentive to walk away.

Instead of paying $5K/mo to keep the underwater house, rent a place for $1K/mo for 7 years while saving the additional $4K/mo. In 7 years, the bankruptcy goes off your record, and you have saved $400K for a downpayment (4K/mo + taxes and insurance). By then, house prices should still be scaping along the bottom (see house prices 1990 to 1997 as an example). Buy the house back cash for $400K and live happily ever after.

Either that or be a stressed out debt slave for the next 30 years.

Great job, but I don’t think I’d have the patience for all the back and forth nonsense.

Just a quick observation, that with every closing a new set of statistics are being generated. When homes take price reductions and sell for less than asking price that also lowers the Comparative Market Analysis.

Short sales closing lower prices, but so do all sales that are less than asking price or reduced.

So sales rather then indicating a bottom are creating another stair step down in pricing.

After the market cools in August, September, October, and December the new set of statistics will be another step lower.

Next year the Fed will be talking about inflation and another step down in pricing will be needed to compensate for the higher mortgage interest rates.

It’s 2011 that will be scary. The low end job market will be falling off and rental property will be harder to fill. Commercial Real Estate will be taking the lumps residential properties took in 2007.

I’d like to see what the commercial loan resets are going to look like and speculate on how many people will be renewing five year leases from the 2006, 2007 years.

2012 will be the first hint of recovery for housing and at that time many of the projects completed in the past ten years will be looking pretty worn.

It’s going to be a long decline in pricing that should have been immediate if some bad business models were simply allowed to collapse.

Thanks very much; again, there is nothing wrong with bidding on a home
People should just undercut by 50% or more..lol
My wife and I will probably pay this off in 5 years…
30 year mortgages should be outlawed…

Yeah, I agree with this. How many people bought townhouses or condos (or "chocolate"boxes with 5′ basement ceilings) in 2004-2008 because they were priced out of reasonable SFH during those years? Many people were convinced to buy any piece of "chocolate" they could find to get in on the gravy train and if they just held on for a few years in suboptimal housing their equity would magically become their dream mansion.

I
For MOST people (i.e. people who don’t read this blog) buying a home is at least as much an emotional decision as a financial decision. They buy a home because they want a nice place to live. They are NOT watching the housing stats and trying to time the market so that they get in and out at a maximum profit.
.

I agree that it’s an emotional decision for many, but I also think MOST people do not get their dream house. People make tradeoffs. Most people get the home they can afford that’s good enough. But when prices fall 20%, 30%, 50%… you start to see a lot of homes you like a lot more. So are you going to bust your butt for the next 30 years to pay off the house you happened to pay too much for, or are you going to try to jump over to a better house for less money. For a lot of people, it might just be worth the risk to their credit rating.

Rent’s not changing. He just needs a current document for the lenders. Sorry. And if anything, rent-o-meter.com shows my rent has gone from being slightly below market to slightly over market in the last year and a half. so they have been falling, not rising.

I know you put yourself in the “marginal buyers” group (that definitely sounds the best of your 3 categories ;-) I think you became are a big exception in my mind, when you stated matter-of-factly that you just paid of your principle. From the numbers it is obvious yours is at least a medium-priced house. You are in a different financial world, obviously, than the other people thinking about their bad decision to buy during the bubble.

How many other people do you think can pay down a few hundred thousand or more? I doubt there are many who have 10K to do this, and even then, they probably don’t want to sell one of the vehicles or one of the kids. What you did is not a possible solution for 99% or more of the people with the same housing situation as yours. More power to you, though, for not welshing on your deal.

Wether many mortgage holders will decide to just “walk away” or not is beside the point. Statistics show that there is a high correlation between the percentage of homes that are worth less than the debt owed on them and the foreclosure rates..

Um, gee, uh, did it ever occur to anyone that if you’re not underwater you have another option? Like selling. I mean really. That’s somewhat obvious, especially given the discussion we’ve been having about how hard it is to close a short sale.

I hope that my home goes up in value (some day).

I am not depending on any equity at the time I sell and would not sell if the market went down another 25%.

I searched for 2 years to find a house, neighborhood, and location that fit 95% of my functional and economic requirements through the end of my children’s college years (~14 more years). My wife would divorce me and my kids would leave me if I sold for purely financial reasons.

Should a hardship come upon me and I was forced to sell for some reason, it would suck. Knock on wood.

HANG IN THERE ROSS

They may not take the offer today, especially if they get a 30% off offer for the banks to mull over for like 5 months…LOL

I’m with Scotsman, in 2010 and 2011 your offer could sound quite sweet.

This stagflation recession depression or whatever the Hades economic mess we’re in is one thing; a quagmire with no quick way out. The deals will sweeten with time in my hunble opinion and if you get it for 50% off and your job prospects look adequate in a year or two….who cares if you bought at bottom, if its the house you want.

I’m a younger baby boomer and every night, thank God I’m not in debt. Those HELOCs even got a good portion of my generation in horrifying debt by surprise.

I agree that being underwater alone will not cause a huge number of foreclosures, it is the losing ones job while being underwater, or the job requiring someone to move or take less hours, the ARM resets on a person who was counting on refinancing, or they get a serious illness that affects their cash flow, ect. Instead of selling they will be foreclosed on because they can’t sell for the mortgage balance.

Also consider the many people the last 10 years who bought a new house to live in and rented the old one at a loss rather than selling, because they thought it was a good investment. That won’t happen now that most people are aware that prices can drop, therefore there will be more sales. Also, many of these financed their 2 houses with interest only ARMs and the like counting on rising rents or refinancing, and they may be foreclosed on. At the very least fewer people are doing that now, meaning more supply coming online.

Also consider the people that bought because they were sure they could sell at a profit when they wanted to move. Those who bought “starter homes” that they wouldn’t want to live in for the long term, once their kid gets old enough to need more space or better schools, ect. Or those who bought early in a career knowing they would likely change locations in a few years but were sure they could make up the transaction fees in appreciation. These people may or may not get foreclosed on, but there are certainly a lot fewer people who would do that now, meaning fewer buyers.

What percentage of homeowners retire in the first home they bought. I would bet it is pretty low. That means people need to be able to transfer homes a some point, which means foreclosure if they are underwater. Maybe not for Steve and Mukoh, who are apparently already comfortable in their dream homes, but certainly for enough people to keep prices lower. I would ask those who don’t care about your equity, is that your first home, or did you require equity from a previous home to buy it?

With all the talk off tight inventory at the low end, shouldn’t we be hearing about rising rents for houses soon?”

“20. Scotsman » Jun 5, 2009 at 11:02 am

“RE: jon @ 17 -

That’s a great theory- if only any of it was indeed happening as you suggest. But it isn’t. Please check for current facts before posting. ;-) ”

” 63. Scotsman » Jun 5, 2009 at 1:30 pm

” Oh, real life story: I just got off the phone with my landlord. … He wants to update the lease… “

Now this is the guy that I want to be my realtor :)

No one ever said the banks were rational.

On a foreclose property I was watching, here’s my experience:

- Last purchase price (2006) – $550K
- Loan amount – $495K
- Estimated peak pricing – ~600K
- Property foreclosed in August 2008 to bank.
- Local broker starts marketing the property in Sept 2008, initial price @ $550K. He specializes in BPO/REO sales.
- I noticed the property, and since I rented on the same street, knew the area. But 550K was too overpriced.
- Price drops approx ~25K-50K every month, usually around the 10th of the month.
- By December, price is 425K
- Jan 09 price is 390K, we offer 300K on Feb 2. Bank rejects the price. We counter @ 325K, bank agains rejects the price with little explanation (’too low’).
- Feb price drops to 375K, we re-offer 325K. Bank rejects
- March, price drop to 350K, we again re-offer 325K, Bank counters at 340K. We stay firm at 325K and tell them our next offer will be lower (which gets the listing agent really upset and writes a slightly nasty reply that we’re behind the curve and the price is amazing blah blah blah).
- April, price drops to 325K, we again offer 325K and think we’re a shoe-in this time. However, before accepting our offer, bank pulls the listing and sends property to be auctioned at a REDC auction (www.auction.com) taking place in early May.
- We attend auction in early May at the Meydenbauer center, and win the property for 370K + 5% premium (going to the auction house), “subject to seller confirmation”. We place 5% non refundable earnest money (cashier’s check) and wait for “confirmation”
- After approx 3 weeks, and no response, our buyer’s agent lets us know the property is back on the market at 325K, and apparently this is our auction rejection notice
- We re-offer 325K for the property and this time get acceptance in pricipal
- Now comes the one-sided buyer’s addendum with a whole bunch of gotchas: bank only need supply “insurable title”, rather than “marketable title” (not being familiar with title matters I had to consult 2 attorneys on the difference). $100-per diem fee for later closing. Contract says seller will not pay any transfer or excise taxes. and a whole bunch of other verbiages that generally protect the bank, give them the right to back out and screw over the buyer.
- I bring the addendum to my lawyer who makes several changes. Submit offer and addendum with changes. Bank will not accept any changes (actually, they’ve outsourced the sale to a 3rd party who does not have the authority, supposedly, to accept changes). I ask that the decision be escalated. Reply is that a new addendum can be added and they will consider changes on new addendum, but no changes will be accepted on their addendum.
- Listing agent keeps telling us that he has other backup offers and even rejected one at 10K above asking (yeah right, nevermind his legal fudiciary duty to the seller to take the best price) and that he is doing me favours (yeah right) and generally rushes the process. I am not easily rushed.
- Much back and fourth ensues, and we finally get the legal matters sorted out more or less to my satisfaction (I accept some compromise based on my belief that the bank actually doesn’t want to keep paying carrying costs on the property and wants it to be sold =)
- Inspection and resale cert are acceptable
- Locked in a mortgage rate of 4.25% on a 30yr fixed /w 1/2 pt & 25% down (lucky timing!)
- Closing date set in mid June and we should make it to close, I hope!

My conclusions (as a first time home-buyer):

- Bank have very poor and slow process
- Bank actions almost make things seem like they don’t really want to sell their property
- Their basic strategy appeared to be a Dutch auction: start the price above market value and drop price monthly to find a market clearing price. The problem is that the market was largely dropping with them, and so they could have sold the property much earlier and probably at a higher price if they had simply started the price at a realistic level and had some flexibility to accept lower than asking price. The Dutch auction strategy would work very well in a appreciating market, as each month’s appreciation will probably cover at least carrying costs.
- Auction process was a waste of time, money for the seller and an annoyance to buyers (and kept the property off the market for ~1month of peak season, (i.e. May)) Side note: properties at the auction where financing was available (read: not in horrendous condition) generally sold for 40-50% off peak market pricing. I’m not sure if they were expecting a miracle, not sure why the bank sent the property to auction if they weren’t serious to sell,.
- My wife became very frustrated with this process and was pushing me to just walk away several months ago. She has utter disdain for the seller and takes things personally
- In the end, I got a property for approx 45% off peak pricing, record low interest rates and I should qualify for the federal tax rebate. I personally expect the overall market to also fall about 40% in the long run, though would not be suprised to see an overshoot in the short run
- I calculated “fair market value” by averaging out comps from the early 1990s based on county records, adding 3%/yr for inflation and determining a fair price for this property would be around $325K – $375K. So my offer was not based on bubble pricing.
- In the long run, I don’t expect this property to make money, beyond inflation.

I FOUND IT ON DR ROUBINI’S WEBSITE

It was in Stockton CA about a year ago when prices collapsed 50%. The shrewd buyer saw a home next door for half price, qualified to buy it too [probably a rarity among recent home buyers...LOL]; then handed the keys to the bank on the overpriced one. They rented the defaulted home out for year, mortgage free too…LOL.

I may add its totally unethical to me, but Hades, the unethical rich do it too. Perhaps that’s why the next horrifying bubble will be Comercial Real Estate…..noticed the For Lease signs are getting thicker and thicker every day?

When your home is under water, it means that there is no cushion left if you need to sell due to job loss, divorce, or any other life changing circumstances. Even if we don’t see masses of people just up and leaving their homes when they cease to have equity, large numbers of under-water homes are NOT good for the broader real-estate market, and lead to high rates of foreclosures.

By The Tim @ 22:

Which is exactly why so many people are walking away from homes that are worth half what they paid, despite the fact that financially they can still afford it.

Where is your evidence this is actually occurring?

There have been multiple news stories about this, which I’m too lazy to google right now, but what they’re basically saying is “Being upside down on one’s mortgage is the biggest predictor in whether a home goes into foreclosure”.

Here’s what happens:

Couple owns a home, they have a $400,000 mortgage on it. They now realize it’s only worth $250,000. They have a 6.5% mortgage, they can’t refinance to today’s 5% mortgages because they’re upside down on their loan.

They realize they could either buy a new house just as good as theirs, or rent a house, and pay half of what they’re paying today in housing costs. They realize that THEY ARE GOING INTO FORECLOSURE EVENTUALLY. They’re not going to live there for 20 years, so they will never be able to sell as housing values will never come back before they have to leave, the foreclosure is going to happen so they might as well get it over with now.

In fact, letting the house be foreclosed on now is the best financial decision they can make. This cuts their home expenses in half, and it lets them start rebuilding their credit now. Maybe they’re tricky and they buy a new house before they abandon the old one, or maybe they just stop paying on their mortgage and live mortgage free for 9 months before they finally get evicted.

HI MARY

You’re right, its all over the media today and yesterday, we’ve been totally lied to in the past, RE: the approximate half factor unemployment rate, compared to historical Great Depression (GD) norms.

Which brings up another interesting brainstorm I’ve been daydreaming about today:

If unemployment is about as bad as the GD, where’s the breadlines, masses of beggars, etc?

Answer: during the GD we also had a dust bowl, seriously mitigating food production in America, today we have Safeway, Albertsons, etc. charging like $4 for a box of cereal that probably costs 50 cents wholesale, etc….hence the past date food products [covered by the mass product markups] to be thrown out are then sent to food banks, to feed the hoards of unemployed needing food assistance.

I hear food banks have trouble getting the cash for truck shipments [especially when diesel gets expensive]; so if you want to give food banks charity, send ‘em cash.