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Monday, September 10, 2007

Using the "R"-word in real estate

This week’s Business Week magazine is one of the first times that I have seem where the “R”-word was used in conjunction with the housing market. Admittedly, I have been reporting a fairly gloomy landscape for some time, but even I did not call it a housing recession; although that is probably a fair word to use, especially in Michigan.

According to Wikipedia; a recession is traditionally defined in macroeconomics as a decline in a country's real Gross Domestic Product (GDP) for two or more successive quarters of a year (equivalently, two consecutive quarters of negative real economic growth). However this definition is not universally accepted. The National Bureau of Economic Research defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months." A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. The term recession is often used in conjunction with a specific sector of the economy, in this case the housing sector.

So, I guess that the definition and what we can see happening are a good match in the housing sector in Michigan. We are experiencing the deflationary effects of our recession now and it will likely get worse. We are just at the begging of the round of big ARM resets. The majority of the ARMs that will adjust this year will do so between now and the end of the year; and then, WHOA, Nelly, watch the foreclosure rates spike. We are currently only at the 3-5% level of foreclosures as a percentage of the total active real estate market. That figure could go as high as 8-10% by early next year, maybe higher. Now those are figures that virtually scream the “R”-word.

What can you do, if you have a ticking ARM about to reset on your home and you know that you can’t afford the reset? You could try to refinance the whole thing – the first and second mortgages. But, many homeowners are already upside-down – they owe more than the home is currently worth. Most of these owners also can’t afford to bring money to the table if they sell their homes. First, call your lender and trying to work out a refinance with them or explain that you do not want to go into foreclosure and see if they have the latitude to work with you. Most lenders really don’t want you to default and many will try to come up with a workout plan.

If your lender isn’t receptive to helping you work things out and you can’t get the place refinanced for enough to cover the current debt; then, call a Realtor and get his/her advice, now! Don’t just ignore things until you are in foreclosure and headed for the sheriff’s sale. Your Realtor will ask you to cooperate with him/her to get the authority to negotiate with the bank on your behalf and they will start a process called a “Short Sale” – a sale in which the sale price will be less than what is owed on the house. Your realtor can explain the process and the consequences and hopefully get the place sold without having the foreclosure process pro ceding all the way to eviction. This is a painful process to go through, but the alternative – going all the way through foreclosure – is even more painful. You dona’t have time to wallow in self-pity if this happens to you. It’s time to take action and move on with your life. Call today!

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