BREAKING NEWS: Done!! President signed bill!
June 30th is a good time to take a pause an assessment of where we are…call it a reflection:
The Tax Credit is gone.
Although we are likely to see an extension of the closing portion of the credit, there looks to be no new beneficiaries of this program. Years from now, we will look back and see if it truly had its intended impact. But, for now, as I see the last of our June 30th closings convene, I can’t help but believe the incentive DID help. It may not have “created transactions” or it may have merely “shifted the normal flow of transactions to happen sooner than they might otherwise have occurred”, but I believe the $6500-$8000 that most people received will have a big impact on the economy. Our new homeowners are likely to spend the money on furniture, plasma televisions, home improvements, etc……and that impact alone makes the program worthwhile. (Without the tax credit in place the government would not likely have spent the money so effectively in helping the economy.)
The fall of home prices has slowed.
I personally believe that this pause in declining home prices has given too many a false sense of security that the worst is over. I can easily see another 10% drop in prices for two reasons….higher interest rates and increased supply (that Shadow Inventory wave is still coming and there are more Short Sales being approved everyday).
Rates are still low….historically low.
The fall of the Greek and European economies has kept foreign investors in the US bond buying mood. It will be interesting to see what happens in 60-90 days when all these loans we just closed (pre-June 30th) come to the market. I am not sure how big the appetite will be for all those 30 year loans under 5%. If the demand isn’t there for all of it at once, bond traders are likely to offer higher yields in the future (that means higher rates on loans closing at the end of the summer and fall). Meanwhile, loan officers can rejoice in another mini-refi boom and agents can show buyers why it still is a great time to buy a home.
Investment Property purchases are poised to increase.
As prices have come down and rates have co-operated, there is opportunity for those who believe in real estate as a long term investment strategy because you can cash flow many properties now (that’s where the rental income at least will cover the mortgage payment). I look forward to seeing the savvy real estate agent and loan officer building the educational tools and property management support systems to make it happen.
A continued thinning of the herd.
We have been addressing some of the more questionable reasons people give for not buying a house each Wednesday. Two weeks ago, we covered Dumb Reason #1: Real Estate is no longer a good investment. Last week, we covered Dumb Reason #2: Renters are happier than homeowners.
We will cover the third reason today: Dumb Reason #3: Limited mobility is harmful to the country.
This is an interesting concept brought up often today because of the unemployment numbers. It seems some believe that a major reason people cannot find a job is because they are locked into living in a home they cannot sell.
Richard Florida is director of the Martin Prosperity Institute at the University of Toronto. In his essay for the Journal, Homeownership Is Overrated, he says:
Homeownership certainly contributed significantly to the golden era of American prosperity that began after World War II and continued into the 1990s, fueling demand for the cars and appliances that were rolling off assembly lines. But the foundation of our economy no longer lies in manufacturing, which created stable populations of workers committed to their jobs and communities for life. Today’s idea-driven economy requires a more mobile work force that can seize opportunities wherever and whenever they arise.
Owning a home may actually be a drawback given the economic flexibility required to power long-lasting recovery.
Though there is truth to Mr. Florida’s statement, we must never allow homeownership to be looked at only through the prism of an economy. It means so much more than that.
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There is a growing trend in this country of people walking away from their mortgage obligations. The definition of a ‘walk away’ borrower is one who has the financial means to continue to make their mortgage payment but decides not to. This situation is also called strategic default.
The incidence of people taking this path is growing dramatically. A study done by The Chicago Booth/Kellogg School Financial Trust Index reported:
The number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009.
In a news release announcing the report Paola Sapienza, professor of finance at the Kellogg School of Management at Northwestern University and co-author of the report said:
“With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments.”
Strategically defaulting on your mortgage has been supported by many main stream players such as a law professor at the University of Arizona, the New York Times and the Wall Street Journal which said in a blog post that:
Whether we like it or not, walking away from debts is as American as apple pie.