Price of Impatience

Price of Impatience

With Values Steadily Plunging, Anxious Homeowners’ Hopes Sink


It’s hard to imagine now, but there was a time — not long ago — when the local housing market was appreciating so rapidly that many, many homebuyers feared that if they didn’t snatch up a property, they’d be priced right out of the market.

Of course, all good things come to an end. The causes behind that hyped-up housing surge are now widely known: an oversupply of new home construction, loose lending terms, down payments for first-time buyers dropping to historic lows and “teaser rates” that kept initial mortgage payments down, delaying the inevitable pain. Buyers, believing homes would continue to soar in endless appreciation and would be easy to sell for a profit or at least refinance, didn’t worry too much about what might happen when those rates readjusted. And the notion of prices dropping was unfathomable to many in the industry.

Then all at once, or so it seemed, that sense of security came tumbling down. The unfathomable become a very real recession, and inflated home values started to plummet hard and fast. And they haven’t stopped.

Photo: Tyler Olson / Bigstock

One of the many unfortunate side effects is a large number of homeowners who, thinking they had to move quickly on first-time purchases or upgrades, made decisions they now regret. Homes they once saw as promising long-term investments began to eat away at bank accounts, and hopes of recouping money spent and debt borrowed continued to fade and prices continued to drop.

Even as parts of the economy recover, two segments have stubbornly bucked the positive trend: employment and home sales. It’s been a vicious cycle, with home prices depressed by the record number of foreclosures tied to record-high joblessness, two factors that are stymieing the housing rebound.

And forecasts of when home prices might finally swing back up keep getting pushed back — some economists now say we’re headed for a double dip in the housing market in 2011, the year the industry was supposed to start recovering. Instead, analysts now predict further price slumps of anywhere between 5 percent to 20 percent this year, warning that it may take years for prices to return to normal levels. Moreover, despite the already-low prices, many potential homebuyers are still hesitant to purchase a home, sensing the market hasn’t yet bottomed out — further dashing the hopes of impatient homeowners trying to see any kind of return on their investment.

Steve Slifer, a veteran economist who spent more than 30 years at the Federal Reserve and now-defunct Lehman Brothers, had this to say about the current market:

“Home prices have fallen by 25 to 30 percent in the past couple of years. We haven’t seen price declines of that magnitude since the Great Depression. New home sales have tumbled from 1.4 million or so prior to the recession to 300,000.”

Overall home sales, he added, are the slowest Americans have seen in more than five decades.

“Any way you slice it, the housing market is the worst it’s been since the recession hit,” he said.

So, what’s a homeowner to do?

Research Bank Options

While the idea of homeownership as an easy way to boost personal profits may be gone, not all the news is gloom and doom.

“Housing is still a great long-term investment and all studies I have read, from some very objective sources, support that,” said John L. Heithaus, chief marketing officer at MRIS (Metropolitan Regional Information Systems), the nation’s largest multiple listing service.

His opinion is echoed by other real estate professionals and economists in the D.C. area, although most of them agree it will be years before prices start to ratchet up significantly. For those homeowners who bought when prices were at their highest, the years can be daunting — especially when critics say it’s more lucrative for banks to foreclose than to find ways to help struggling borrowers stay in their homes.

But other options do exist.

Matt Fein, a Keller Williams realtor in Maryland, says there are three primary bank options for people having problems making mortgage payments: loan modifications, short sales and deeds-in-lieu.

Both Fein and Heithaus noted, however, that making any of these options work requires a lot of research and preparation on the part of the homeowner.

“If a property is in decent condition, in a good area and is priced right, it makes sense to look at these options,” Heithaus said. “But this is not a market where properties can sell for 20 percent of the asking price. Banks are smart about how they manage their assets and they have hired some really strong asset management firms to dispose of them. Home buyers should look at these deals very carefully and read all of the fine print.”

For Todd Dunning, a homeowner who’s lost $60,000 in equity since purchasing a house in 2003, modifying his loan turned out to be a real money-saver, but only after getting help from an outside professional.

Hearing that banks themselves aren’t motivated to approve loan modifications, the marketing consultant paid $1,000 to have a third party prequalify a Home Affordable Modification Program, or HAMP, that he could then take to the bank.

“We got a case file in 72 hours showing we met all the Treasury guidelines for approval,” Dunning said. “It even showed the lowest payment we qualified for. I took this to the Wells Fargo office and was told they could now approve based on that.”

The loan adjustments brought his monthly mortgage payments down by more than 40 percent, from $2,700 to $1,550.

But for most homeowners, such success stories are rare.

“Of the options for people having problems making mortgage payments, loan modifications are the most difficult,” said Fein. “There are some good attorneys out there who can help get them done, but from what I hear most people that try to do loan modifications are unsuccessful.”

In Dunning’s case, it was in fact an attorney who kept him from being denied. On the same day he was approved based on a case file prepared by ModiLoan, a letter arrived in the mail saying he’d been declined by the same bank. (The letter was later voided.)

“Interesting because they used the exact same guidelines and criteria [when the letter was sent],” Dunning said, adding that being armed with the case file made all the difference.

Fein noted that banks are a little better about completing short sales, when a lender decides selling the property at a moderate loss is better than pressing a borrower unable to make payments. But, he added, there are “plenty of horror stories about banks taking months or years to approve” or, in some cases, deny these kinds of sales. Deeds in lieu, Fein said, are typically an option only after the owner has attempted, and failed at, a short sale. In a deed in lieu of foreclosure, the borrower deeds the collateral property (the home) back to the lender in exchange for the release of all obligations under the mortgage. Both sides though must come to an agreement on the terms of the defaulted loan.

But the fact remains that for banks, foreclosure is often more profitable than modifying loans or other measures to help homeowners. Recognizing this reality, the Federal Housing Finance Agency announced in January that it’s considering new approaches that would make it more advantageous for banks to help struggling owners stay in their homes. But any new model wouldn’t be in place before the middle of 2012, at the earliest.

Recouping Costs by Renting

For many, renting has proved to be a far better choice than any of the current bank options.

“If you’re $100,000 under water on a $750,000 property, then it may make sense to rent the property for 10 years if income exceeds expenses or if negative cash flow is minimal,” Fein said.

It can also be a good choice for employees with government clearances, for whom foreclosure and poor credit can damage opportunities for promotions or even jeopardize an existing job.

To improve one’s financial situation while renting out a property, Fein offers this advice: Raise rents by 3 to 5 percent each year, buy a home warranty, and have tenants pay the deductable for repairs to help minimize property expenses.

Rick Gersten, chief executive officer of Urban Igloo, a local apartment-finder service connecting renters and landlords, says it’s important for owners to review their financing options before renting to ensure they’re making the lowest possible monthly payments.

“We also recommend owners align their rental rate with the market,” Gersten said. “Often owners want to cover all [mortgage] costs but the dynamics of the market can make the expenses greater than the rental revenue and the property sits vacant.”

To further help minimize costs and make renting a financially viable option, Gersten and his team advise landlords to include strong terms and conditions regarding damages beyond normal wear and tear, and to reserve monthly inspection rights.

“We often recommend both parties take pictures and agree in advance to a punch list of the conditions to compare before and after the rental starts and ends,” he added.

And if it’s important to secure a renter for more than a year, it’s best to base any annual rent increases on a predetermined rate and include it in the lease.

“If the landlord asks for too much of an increase, the renter will move after the term of the lease,” Gersten pointed out. “A month’s vacancy is valued at approximately 8 percent, so a modest increase below that percentage keeps renters happy and in place.”

Waiting and Hoping

Despite some of the lowest fixed mortgage rates in history and already-decreased prices, the number of people who purchased previously owned homes in 2010 plunged to the lowest level in 13 years, according to the National Association of Realtors.

The good news is that in January, the Standard & Poor’s Case-Shiller Home Price Index showed that the price of homes in the District of Columbia actually rose in the past year, bucking a national trend that saw the average value of houses in 20 major metropolitan areas tumbling — in some cases, to new lows. That same month, real estate research firm Clear Capital listed Washington, D.C., as a top 10 city where property values are most likely to rise in 2011.

Heithaus attributes the projection to greater housing demand fueled by relatively low unemployment figures, and to a number of area companies that are growing and bringing in subsidized, ready-to-buy consumers. He also noted that local foreclosures have been far less prominent when compared with hard-hit areas like Miami, Las Vegas and Southern California.

“While we certainly have our challenges, the increase in supply from foreclosures and the projected shadow inventory have not been as prominent here,” he said. “Overall, we see the greater D.C. market as rebounding and stabilizing.”

Others aren’t as optimistic.

Data from the National Association of Realtors shows home prices in Washington, D.C., as well as nationwide, dropping steadily from 2007 to 2010, when they began a gradual rise in the second quarter.

“While many might think that Washington has been somewhat insulated, the data do not support that conclusion,” Slifer observed. “Whether the first quarter of 2010 will turn out to be the absolute low in home prices has yet to be determined. Thus, it does not appear to me that Washington has been insulated at all from the housing crisis. Perhaps this is because the run-up in home prices in the first six years of this decade exceeded that for the country as a whole.”

One thing experts do agree on is this: Whether or not real estate is a good idea — be it holding onto a current investment or looking to buy a new property — really depends upon each individual’s situation.

First-time buyers have the obvious bonuses of low mortgage rates and home prices that are 25 percent to 30 percent cheaper than they were a year ago, Slifer says. For homeowners who are relocating or looking to downgrade, the situation is a little different but still has benefits. While homeowners can’t expect to get offers anywhere near the prices they would have commanded several years ago, they can turn around and buy new properties at equally depressed prices.

Where it gets tricky, according to Slifer, is when a homeowner is significantly upside down on their investment.

“If you owe $500,000 but your property will only sell for $400,000, you need to come up with $100,000 out of your own pocket at closing,” he said.

Someone without that kind of cash, he added, may want to consider renting out the property while also looking to forego purchasing another home.

“That may not be the most desirable outcome, but it is better than foreclosure,” he said. “Once property values in Washington have bounced back in a few years you can sell then.”

By how much will they bounce back?

Guesses vary, but the resounding forecast is that sellers should not expect high prices any time soon.

“I don’t think we’ll start to see any significant appreciation for at least five years,” Fein predicted. “Then, hopefully it will be a slower and steadier appreciation moving forward, which is better for everyone — not the 10 to 20 percent annual increases that were happening from 2002 to 2006.”

Still, says Heithaus, things could certainly be worse. He cited the many intangible values that homeownership brings — things like peace of mind, accomplishment and a sense of community. In addition, times have been tougher before.

“To put things into perspective, I can remember buying my first house in 1981 when mortgage rates were 18 percent,” he said. “If you want to talk tough, that was a pretty dark time.”

About the Author

Heather Mueller is a contributing writer for The Washington Diplomat.