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Why real-estate quagmire stays, and stays, and stays ...
Posted By Dan Mangru On 11/09/2010 @ 5:37 pm In Commentary,Money | Comments Disabled
We live in an instant society.
Want to watch your favorite movies any time of the day? We have Instant on Demand.
Didn’t think that Terrell Owens got both feet in for his touchdown on Monday Night Football? No worries, we have instant replay.
We have instant popcorn, instant pudding, and pretty much instant everything.
So with all the advances of modern technology, what is taking so long to clean up the real estate market?
We have all of the tools to fix the market.
Want to start selling foreclosures? We can use the power of the Internet to do massive online foreclosure auctions as opposed to gathering on the old courthouse steps.
Want to gather investors? Start an investment group on Facebook. It’s really that simple.
Yet despite all of the tools available to us, the real estate markets remain a disaster.
National home prices have changed -5.0 percent quarter-over-quarter. In fact, looking at national home prices since their mid-August peak, price declines are even more dramatic, changing -6.8 percent.
Roughly 1 out of every 4 homeowners has negative equity in a home (meaning that their home is worth less than their mortgage).
And just last month, all of the major banks halted the sale of foreclosed properties.
So what has been the government’s response to all of these problems?
In February 2009, President Obama announced “unprecedented action to solve the mortgage/housing crisis in America” (if you watch him he tends to say unprecedented a lot). He announced the $75 billion Making Homes Affordable plan to keep four million Americans in their home and fend off foreclosure.
Also at Obama’s urging, the Federal Reserve purchased $1.25 trillion worth of mortgage-backed securities and the U.S. Treasury made plans to spend an additional $220 billion to buy even more mortgage-backed securities.
So how has that worked out for us so far?
Well, buying all of those mortgage-backed securities did help, it’s just that buying them helped the banks and not the American people.
The banks with government favor (Bank of America, Goldman Sachs, Citigroup, Wells Fargo, Chase) all received government bailout cash and not one of the big boys went under.
Hooray for Obama!!!
He saved the big banks!!!
Three cheers for Obama now that wealthy bank executives don’t have to face the music for their poor judgment and risky investments.
Instead of having to deal with the massive losses that they should have incurred and face the wrath of shareholders, bank executives had their mess covered up by trillions in bailout money that subsequently led to record bank profits in 2009-2010.
Just think about that for a moment. Banks made more money after the bailouts than what they did during the height of the real estate boom.
When you think of it that way, how is that not outrageous?
Now for the rest of the little people, things haven’t worked out so well under Obama.
Of those 4 million people that Obama was supposed to save, only 495,898 have received permanent loan modifications since the program was launched in 2009. Of those modifications, 11 percent redefaulted on their new lower-cost loans after nine months. After six months, a little less than 10 percent of modified loans were delinquent.
Yet according to the administration, the program is going great.
Raphael Bostic, assistant secretary of the U.S. Department of Housing and Urban Development, said the Obama administration’s efforts have helped “millions of families” stay in their homes, although no one in the world of news, media, academia, business, or real estate can find anything to support that claim.
By no means is the picture rosy for real estate.
“There’s still blood in the streets,” said David Dweck, founder of the Boca Real Estate Investment Club and organizer of the Foreclosure Convention of South Florida. “A lot of people are suffering. But as long as you buy right, you’ll be in good shape.”
But because the banks used shoddy paperwork to do all of their foreclosures, there might be litigation as to whether some foreclosures were legal, meaning that investors who are picking up foreclosed properties now have to worry about whether the bank will take back the home that they just bought because a processor in the back office didn’t dot their I’s and cross their T’s.
This brings us back to our original question: why real estate won’t bottom?
One word: litigation.
In states that have numerous laws regarding foreclosures and that require judges to oversee the foreclosure process, the housing market is a disaster.
For instance, look at Florida. Florida’s median price of a single-family home was $133,400 in September, a 48 percent drop from the highs of June 2006, according to the Florida Association of Realtors. Even worse, condos have dropped some 61 percent since that time.
In comparison, states that do not require a judge’s ruling to foreclose such as California have rebounded quite nicely and have been able to get the foreclosure process down to around 19 months.
That number could be even smaller if the government hadn’t implemented loan modification programs and moratoriums on foreclosure.
In states like Florida that require judicial hearings to hear foreclosure cases, state governments have learned that they don’t have enough judges to handle the massive flood of foreclosures. This year Florida had to spend an additional $9.6 million to hire new judges, magistrates, case managers and clerks to hand the foreclosure caseload.
So while prices in Florida are on the decline, prices in California are on the rise. California has seen the median price for town homes, condos, and single-family homes rise to $265,000, a 20 percent increase from the April 2009 bottom.
Many experts suggest that there could be as much as 30 months of shadow inventory in the real estate markets (homes that are vacant waiting to be foreclosed but are not up for sale). With that type of black cloud looming over the economy, the best thing to do is foreclose.
I understand that there may be families out there who are struggling to make ends meet and who can’t make mortgage payments. After all, unemployment is at 9.6 percent and broad unemployment (which includes people who’ve given up looking for a job or who have been unemployed for over a year) is around 17 percent.
Yet sadly, the reality is that people who couldn’t afford the homes they bought shouldn’t live in them. If you haven’t paid your mortgage in over 2 years, you probably shouldn’t be able to live in your home for free while the courts are backed up. We don’t need judges and multiple expensive hearings to tell us that.
There must be a reasonable 12-18 month timeframe for foreclosures that protects the rights of the homeowners but also allows for expediency in the system.
Just from people that I’ve met, I’ve heard that some people haven’t paid their mortgage in over 3 years and are still living in their homes.
This has to stop.
The quicker that we can get all of these homes foreclosed the quicker we can get real estate going again.
While putting all of these homes on the market will have the effect of raising inventories and lowering prices, it will provide stability in the long term. Investors will know that the bulk of the foreclosures are behind them and can feel safe investing in market that is ready for rebound as opposed to avoiding disaster.
Combine that with rising asset prices and real estate could be in line for a very sharp rebound, but only if governments and courts get out of the way and allow the markets process the foreclosures.
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