Every homeowner loves their property. As the foreclosures pile up and homeowners are forced into a life of rentership, many will come to question their love affair with homeownership. Was it really about owning the home, or was it about having their own private ATM machine? Whatever the reason, these properties are a source of pain, and may just want the pain to end.
by CHRISTINE RICCIARDI -- Friday, August 6th, 2010
The National Multi Housing Council (NMHC) reported results of its latest Quarterly Survey of Apartment Market Conditions Friday, stating the industry is on the rise, improving in all four indices surveyed and setting an index average record for the second quarter in a row. The results show a shift in consumer mentality toward short-term rental agreements and away from long-term mortgage debt.
Currently one-third of Americans rent their housing, and over 14% live in a rental apartment. The NMHC represents the interests of rental property investors, such as Fannie Mae, Freddie Mac, Stewart Title and Starwood, to name a few.
NMHC chief economist Mark Obrinsky suggested other economic factors boosted the market for apartments.
“Demand for apartment residences has substantially increased thanks to modest improvements in the jobs market and the continuing decline in homeownership rates," he said.
It shouldn't be surprising that apartment rental rates are up as homeownership rates decline.
Millions of houses on the verge of foreclosure threaten to send homeownership to its lowest level in 50 years, according to new industry estimates.
Fresh projections say the rate could plummet to about 62% as early as 2012 and almost certainly by the end of the decade. Homeownership rates haven't been that low since they hit 61.9% in 1960.
The share of households that own their homes has been sliding since the housing bubble burst in 2006. The rate fell again in the second quarter of this year to 66.9% — the lowest since 1999 — from a peak of 69.4% in 2004, the Census Bureau says.
"Anybody who knows anything about housing thought it would be flat in the second quarter," says John Burns, CEO of John Burns Real Estate Consulting, a national housing market analyst based in Irvine, Calif. "Homeownership fell during the quarter when government was offering a tax credit (to first-time homebuyers). What do you think is going to happen now that there's no tax credit?"
The continued decline — 0.5 points lower than the same time a year ago — points to a fast plunge, he says.
Burns estimates that 6 million of the 8 million homeowners who are behind on their mortgages will lose their homes to lenders in the next two years. This "shadow inventory" could push ownership rates down to 61.7% within two years, he says.
If John Burns is right -- and I have the utmost respect for his forecasts -- the conversion of such a large percentage of housing from ownership to rental property is going to crush prices.
It may seem like a small point, but if home ownership didn't rise in the second quarter with tax credit in place, and if it dropped so quickly thereafter, the trend is unmistakable. And since most of these foreclosed owners will not be buying a house any time soon, it is very likely that Mr. Burns's forecasts will prove true. Even though Fannie Mae has reduced its waiting time to only two years, these borrowers still have to come up with 20% down, and with our still bloated house prices, that is a difficult task that few will accomplish.
Arthur C. Nelson, director of the University of Utah's Metropolitan Research Center, says the rate may not plunge that quickly because many foreclosed homes will be purchased by others.
Others who? The others are mostly investors who are renting these properties to former owners. Investors pay less than owner-occupants -- considerably less. That is why a conversion from owner occupancy to investor ownership lowers prices. There simply are not enough first-time buyers and others with good credit to clean up this mess.
Homeownership has been a cornerstone of the American dream because it has generally built personal assets and stable neighborhoods.
That is until we allowed every homeowner to raid the equity piggy bank with cash-out refinancing and HELOCs.
Federal policy has long encouraged homeownership through the mortgage tax deduction and government-backed mortgages.
The push to own rather than rent now is being questioned. "A large percentage of households are not responsible enough to handle a mortgage payment," Burns says. "Growing homeownership is a great goal but you have to grow the percentage of households that are responsible."
John Burns is right, although nobody wants to hear the truth. We pushed home ownership rates up to 70% by giving loans to people who were not up to the task.
More stringent financing requirements may prevent some from buying.
"We've seen low-income homeowner rates declining by twice as much as higher-income groups," says Daniel McCue, senior research analyst at Harvard University's Joint Center for Housing Studies.
The decline in home ownership at the low end is because lenders foreclosed on subprime borrowers while their alt-A and prime brethren have been allowed to squat. The higher income groups will also see a decline in home ownership rates as lenders finally get around to foreclosing on these people.
"Everyone is looking harder at the benefits and potential risks of homeownership. Is it the right option for you?"
Demographics also affect home buying. The children of Baby Boomers are coming of age but young adults typically rent and financial pressures are further delaying home buying decisions. More 20-somethings have returned home to live with their parents. The 2010 Fannie Mae National Housing Survey shows that two-thirds of Americans still prefer owning a home because it's a good investment in the long run.
The housing bust is providing bargains for home buyers willing to take the plunge.
"Affordability is very much in favor of homeownership right now," Burns says. "If the economy turns around quickly, you would hope that responsible renters would become homeowners."
With the super low interest rates, affordability is good. It is even improving in Irvine as today's featured property demonstrates. Personally, I would prefer higher interest rates and lower prices because if you buy today, you will never get the chance to refinance into a lower rate loan. However, rental parity will soon be upon us, and for those who plan to stay for the long haul, they will be able to ride out the declining prices that will occur as interest rates go up and shadow inventory comes to market. There is no urgency to buy, but when prices are below rental parity, there are fewer reasons to rent.
Peak buyer accelerates their default
I have profiled hundreds of peak buyers who have lost their properties to foreclosure. The official statistics say that only 20% of defaults are strategic. Do you believe that? Do you really believe that all the people I have profiled on this blog -- just in Irvine -- are casualties of unemployment? Couldn't these people afford to keep these homes if they obtained a loan modification? Isn't everyone in Irvine rich and should be able to afford a half a million dollar house?
Strategic default -- or accelerated default as I have more accurately described it -- is far more widespread than lenders would like to believe. The buyers of the houses I profile each day could never afford the property, and most don't see the point of continuing to fake it with a loan modification, so they simply quit paying. It's difficult to tell if a default is accelerated by choice or compelled by unemployment, but since nearly every property I profiled was also deeply underwater, what would you guess it is?
This property was purchased on 2/23/2006 for $565,000. The owners used a $452,000 first mortgage, a $56,500 HELOC, and a $56,500 down payment.
They stopped paying early last year and managed to squat for about a year.
Foreclosure Record Recording Date: 04/01/2010 Document Type: Notice of Sale
Foreclosure Record Recording Date: 08/14/2009 Document Type: Notice of Default
The bank took this property back on 5/11/2010 for $436,500.
Home Purchase Price … $436,500 Home Purchase Date .... 4/30/2010
Net Gain (Loss) .......... $(38,128) Percent Change .......... -8.7% Annual Appreciation … -8.8%
Cost of Ownership ------------------------------------------------- $423,800 .......... Asking Price $14,833 .......... 3.5% Down FHA Financing 4.57% ............... Mortgage Interest Rate $408,967 .......... 30-Year Mortgage $83,507 .......... Income Requirement
$2,089 .......... Monthly Mortgage Payment
$367 .......... Property Tax $0 .......... Special Taxes and Levies (Mello Roos) $35 .......... Homeowners Insurance $0 .......... Homeowners Association Fees ============================================ $2,492 .......... Monthly Cash Outlays
-$337 .......... Tax Savings (% of Interest and Property Tax) -$532 .......... Equity Hidden in Payment $25 .......... Lost Income to Down Payment (net of taxes) $53 .......... Maintenance and Replacement Reserves ============================================ $1,702 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $4,238 .......... Furnishing and Move In @1% $4,238 .......... Closing Costs @1% $4,090 ............ Interest Points @1% of Loan $14,833 .......... Down Payment ============================================ $27,399 .......... Total Cash Costs $26,000 ............ Emergency Cash Reserves ============================================ $53,399 .......... Total Savings Needed
Property Details for 4602 ROXBURY Dr Irvine, CA 92604 ------------------------------------------------------------------------------ Beds: 3 Baths: 2 baths Home size: 1,112 sq ft ($381 / sq ft) Lot Size: 4,992 sq ft Year Built: 1971 Days on Market: 12 Listing Updated: 40393 MLS Number: S626665 Property Type: Single Family, Residential Community: El Camino Real Tract: Wl ------------------------------------------------------------------------------ According to the listing agent, this listing is a bank owned (foreclosed) property.
BANK OWNED!!! NICE SINGLE STORY IN THE WILLOWS. NICE FLOOR PLAN COMPRISING THREE BEDROOMS, TWO BATHROOMS. LIVING ROOM WITH FIREPLACE. 2 CAR GARAGE WITH INSIDE ACCESS. KITCHEN HAS BEEN UPDATED. THE BANK HAS APPROVED REHAB AND IS IN PROCESS OF NEW FLOORING, NEW INTERIOR PAINT AND OTHER MISC REPAIRS (CALL FOR LIST). ROOM ADDITION AT REAR OF PROPERTY IS NOT PERMITTED (AS IS), NO CONTRIBUTORY VALUE ADDED TO PRICE. CONVENIENTLY CLOSE TO GREAT SCHOOLS, PARKS, SHOPPING, FREEWAY ACCESS AND MUCH MORE! A GREAT OPPORTUNITY FOR YOUR PRIMARY RESIDENCE BUYER OR INVESTOR BUYER! NO HOA FEES AND LOW TAX RATE (NO MELLO ROOS). Free appraisal and credit report if buyer finances through Bank of America Home Loans.
Payment affordability is excellent
Each week as I prepare these posts and input an even lower interest rate, I have been watching the cost of ownership drop lower and lower. The resale prices are still quite high, but the payment affordability is excellent. An FHA buyer would have a cost of ownership of only $1,700 a month for this detached 3 bedroom 2 bath home in Irvine. Yes, this property has some serious negatives, but it would likely rent for more than $1,700. You can find a few cheap condos renting for that price, but I can't find anything detached. If any of you can find a link to an detached 3/2 renting for less than $1,700 in Irvine, please post the link in the comments.
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
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