The crash of the housing market is now more than three years passed; yet, the repercussions of the subprime lending fiasco remain, with no near end in sight. Housing prices nationwide continue to fall, according to the November 2011 Home Price Index, released earlier this month by Core Logic, a real estate data analytics firm. Housing prices in the U.S. decreased 1.4% month-over-month, the report states, marking the fourth consecutive monthly decline.
Unfortunately, we still have not hit bottom in the housing market, as several factors continue to drive the downward trend. First, lending practices remain tight. Banks that are carrying foreclosed properties are limited in the amount of money they can lend, while other lenders have implemented more stringent standards for homeowners, reducing the number of people who can qualify for a mortgage. The lack of available financing reduces demand, and basic economics dictates that when supply outweighs demand, prices fall.
In addition, cash buyers represent an increasing percentage of people purchasing a home, putting downward pressure on home prices. A recent report from Campbell Surveys and Inside Mortgage Finance, part of the Housing Pulse Tracking Survey, shows that cash buyers accounted for 22.8% of all housing purchases in December 2011, which was up from 22.2% in November.
Cash buyers tend to offer 10-20% below list price. Sellers prefer to take the lower cash offers because financed offers have a higher chance of falling through, in light of tighter lending practices. Since lower offers are being accepted more frequently, average home prices are declining, meaning new sellers have to lower their asking price to stay competitive.
The continued downward trend in housing prices also is pushing more houses underwater, meaning many homeowners owe more on their mortgage than the current value of the property. This trend ultimately will result in more short sales as homeowners try to cut their losses and extricate themselves from their mortgages.
In addition, the rate of short sales is expected to increase because loan modifications by the major lenders are on the decline, according to a 3Q2011 report from Moody’s Investor Services. We believe lenders have recognized that a loan modification is not the solution for most homeowners. Bank of America has a 50.5% re-default rate on mortgage modifications for subprime loans, notes the Moody’s report. In other words, half of the people to whom they gave a loan modification re-defaulted on their loan. The majority of our clients who decided to short sell their property tell us that their lender first pushed them into a loan modification, which was unsuccessful. When they defaulted on their mortgage again, a short sale was the best option to avoid foreclosure.
Banks are now experiencing the negative repercussions of granting subprime loans in the first place, and of attempting to modify loans for customers who never should have qualified for a mortgage. Bigger banks are now looking more toward short sales rather than loan modifications as the solution to underwater defaulted loans. If you are in arrears on your mortgage, or if you have already received a notice of foreclosure from your lender, please call our office so we can help you negotiate a short sale and get back on track with your finances.