Distressed property is expected to keep local real estate values suppressed in 2011. New data shows Carlsbad will experience a steady flow of foreclosure activity into August. More than 330 single-family homes and condos in the later stages of default are set to enter the market over the next six months. This will add roughly 55 homes a month to the current for-sale inventory of new construction, foreclosure and traditional sale homes. Historically, an inventory increase of 10 percent should not notably affect local property values, but these homes will be short-sale homes. which have been found to be extra damaging to a neighborhood's value.
A short-sale occurs when a homeowner owes more than the property is worth. Instead of vacating the property and forcing the bank to foreclose, the owner remains in the property and negotiates with the bank to accept less than what is owed. A short-sale is beneficial to the owner, as it allows the owner to avoid a foreclosure on his credit. Some short sellers have repaired their credit in as little as 18 months. The difference that makes short-sales so dangerous to a neighborhood's value is that the owners have little incentive to sell the home at top-market value. The owner in a short-sale owes more to the lender than the property is worth. If their home sells for $500,000, not $525,000, it makes little difference to the homeowner, whose primary concern is securing an approval from the bank.
The general idea of the free market prescribes that prices will settle in at fair market value. But the current real estate market has an imperfect demand for short sales. DSNews, an industry publication for distressed property professionals, found in a recent survey of 3,000 home buyers and agents that 30 percent of owner-occupant buyers and 20 percent of investor buyers refused to view short sales when looking for a home. This means a significant number of the available buyers wont look at, and thus not offer on property that requires a short sale.
With fewer buyers and a reduced chance to sell, short-sale property is often discounted heavily (as much as 10 percent below current market value) to entice home buyers into making an offer. When more than a few short sales are present in an area, it can have a dramatic effect on the perception of value of a neighborhood. To make matters worse, the bank relies on third-party sources for value and will never physically view the property. This gives a high degree of probability to mis-price the property and approve a lower than necessary value.
Interestingly enough, over the last 12 months many of the short sales have come from owners walking away from homes in “strategic default.” This is when a homeowner has the financial capacity to continue making payments on the home, yet chooses to stop making payments and walk away from his debt. This is due primarily to the fact that the homeowner owes more than the market value of the property.
Property values declined 25 percent in Carlsbad and as much as 45 percent elsewhere in San Diego. A homeowner might grab a basic compound-interest calculator and find that a conservative 3 percent yearly appreciation rate will take 18 years for that house to get back to $500,000. For owners who put little-to-no down payment, strategic default is an easy decision. For a briefing of strategic default, watch the May 2009, 60 Minutes story: “Strategic Default: Walking Away from Mortgages.” Also, read the white paper by Brent T. White, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.” This paper challenged norms by encouraging underwater homeowners to reconsider the common thought of staying in your home even though the value has gone down.
A short-sale occurs when a homeowner owes more than the property is worth. Instead of vacating the property and forcing the bank to foreclose, the owner remains in the property and negotiates with the bank to accept less than what is owed. A short-sale is beneficial to the owner, as it allows the owner to avoid a foreclosure on his credit. Some short sellers have repaired their credit in as little as 18 months. The difference that makes short-sales so dangerous to a neighborhood's value is that the owners have little incentive to sell the home at top-market value. The owner in a short-sale owes more to the lender than the property is worth. If their home sells for $500,000, not $525,000, it makes little difference to the homeowner, whose primary concern is securing an approval from the bank.
The general idea of the free market prescribes that prices will settle in at fair market value. But the current real estate market has an imperfect demand for short sales. DSNews, an industry publication for distressed property professionals, found in a recent survey of 3,000 home buyers and agents that 30 percent of owner-occupant buyers and 20 percent of investor buyers refused to view short sales when looking for a home. This means a significant number of the available buyers wont look at, and thus not offer on property that requires a short sale.
With fewer buyers and a reduced chance to sell, short-sale property is often discounted heavily (as much as 10 percent below current market value) to entice home buyers into making an offer. When more than a few short sales are present in an area, it can have a dramatic effect on the perception of value of a neighborhood. To make matters worse, the bank relies on third-party sources for value and will never physically view the property. This gives a high degree of probability to mis-price the property and approve a lower than necessary value.
Interestingly enough, over the last 12 months many of the short sales have come from owners walking away from homes in “strategic default.” This is when a homeowner has the financial capacity to continue making payments on the home, yet chooses to stop making payments and walk away from his debt. This is due primarily to the fact that the homeowner owes more than the market value of the property.
Property values declined 25 percent in Carlsbad and as much as 45 percent elsewhere in San Diego. A homeowner might grab a basic compound-interest calculator and find that a conservative 3 percent yearly appreciation rate will take 18 years for that house to get back to $500,000. For owners who put little-to-no down payment, strategic default is an easy decision. For a briefing of strategic default, watch the May 2009, 60 Minutes story: “Strategic Default: Walking Away from Mortgages.” Also, read the white paper by Brent T. White, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.” This paper challenged norms by encouraging underwater homeowners to reconsider the common thought of staying in your home even though the value has gone down.