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Monday, October 25, 2010

Biting the bullet…

I’ve noticed for the last couple of months that more and more home sales involve prices that are less than what it appears the homeowners owe (at least from the public records anyway) and yet are shown as not short-sales. My own experience this year representing underwater homeowners verifies this trend. Many underwater homeowners are biting the bullet and bringing money to the table to close of the sale of their homes, sometime quite a bit of money.

Most of these sales involve homeowners who wanted to (or needed to) move in order to get on with life. Perhaps the sales were caused by job changes or maybe family changes (it’s amazing how that small bungalow that felt so right for just the two of you when you were first married gets feeling cramped when the second baby comes along). For whatever reasons these homeowners decided to sell, not matter what the financial consequences. So they bit the bullet, sometimes a quite large bullet, just to get out from under that first house mortgage.

In my little market area the percentage of homes sold as distressed – foreclosed or short-sales- has fallen from an average of 50+% earlier in the year to less than 40% for the last three months. That’s the good news. It’s hard to gauge accurately the number of sales that are taking place that involve loses that the seller is absorbing; however, I look at each sale to see if the sale price is at lease at or above the last recorded mortgage level (assuming that the mortgage was taken out within the last 5 years). My gut feel is that 30-40% of the non-distressed sales were made for less than what was owed. That means that those home sellers were biting the bullet and absorbing the value loss themselves.

What is the long term impact of this? Well, for one, it also means that those same people had less money available to make a down payment on something else. Either they went into an apartment or other rental property for a while or they bought something of much less value, since they had little to put down after stripping their savings to get out from under the old house. In either case the long term impact was not good. There loss on the sale will ripple through the economy one way or the other. They won’t show up in the deadbeat statistics, but they will show up in the spending less (because they had less) categories across the board.

What does this all mean? Well me often have heard or read about the “shadow inventory” of distressed homes (foreclosures or the pre-foreclosure inventory that is yet to hit the market). We also have a huge overhang of unrealized losses in America that is just not going to go away anytime soon. We have people who are hanging on, paying their mortgages and hoping/praying/waiting for the values to come back on their homes. Folks, that ain’t gonna happen. That value is gone. At best, if we return soon to historic rates of appreciation (which is certainly not guaranteed) is will take 10 years or better to regain the lost values back to the levels of 2004 (of they ever get that high again).

So, is it time to bite the bullet? Well, I would ask, “Do you have a good reason to sell now?” If so, bite away; because, it will do you little good to try a short-term wait. It’s just not going to matter. What may matter more is that whatever loss you take on the sell side you can partially make up (more than make up if you are upgrading) on the buy side. If you are downsizing because you have retired or taken a downgrade in jobs, hold on to your old house if you can (and have a good mortgage rate) or bite the bullet now and get out from under it before it drags you under. Talk to your financial advisor to figure out the best way to access the money you need to make up the difference between what you an get for it now and what you owe.

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