Home prices to drop another 20%?

 

There is a consensus forming that the U.S. housing market may finally be on the rebound. Home prices are up 4-straight months, according to the latest S&P Case-Shiller index and Zillow's U.S. home value index increased for the first time since 2007 in the second quarter.

But Gary Shilling of A. Gary Shilling is not convinced home prices have turned to the upside for good.

"The fundamental reason is there is a huge excess of inventory out there," he tells The Daily Ticker's Henry Blodget. "Some of it is listed but a lot of it is a so-called shadow inventory."

Shadow inventory refers to homes in foreclosure and waiting to be sold or properties that homeowners have delayed selling, likely to get a better price.

In his latest Insights investment note, Shilling writes "excess housing inventories, the mortal enemy of prices, measure about 2 million over and above normal working levels. That's huge considering that housing completions averaged about 1.5 million in earlier balmy years."

He also cites the backlog of delinquencies and foreclosures that were put on hold during the robo-signing investigation and settlement process.

A CoreLogic report in June showed shadow inventory fell almost 15 percent from 2011 levels to 1.5 million properties. More than half of those 2.8 million homes were "seriously delinquent, in foreclosure or REO."

"Since peaking at 2.1 million units in January 2010, the shadow inventory has fallen by 28 percent. The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices," said CoreLogic chief economist Mark Fleming. "This is one of the reasons why some markets that were formerly identified as deeply distressed, like Arizona, California and Nevada, are now experiencing price increases."

As Shilling sees it, the banks have three options to get the bad mortgages off their books:

1. Flood them onto the market
2. Institute a mortgage modification plan
3. Try to convert the properties into rentals

He says the second and third options are a lot less likely because mortgage modifications rarely work and rental properties are very difficult to maintain on a large scale, which may detract institutional inventors.

As a result, he believes the more likely scenario could very well end up being option number one, which would have a negative impact on home prices. The latest National Association of Realtors survey shows foreclosed properties tend to sell at a 19 percent discount to the market.

Too many foreclosures flooding the market at the same time could drive down prices of the surrounding homes.

"It would take a 22% house price drop to return to the long-run trend going back to 1890," he writes in his research note. "Since corrections of bubbles often overshoot on the downside, our forecast of a further 20% decline may be conservative."

Thanks for reading…Steve Jackson

Call me on my direct line at: 561.602.1258

Loan modification? Short Sale? Deed-in-lieu?

Underwater? Thinking you should pursue a loan modification?

You may know of someone who tried to modify their mortgage only to end up frustrated because your bank gave you a modification that made sense for them,NOT you. You've even probably heard where the bank actually offered someone a loan modification that actually increased their monthly payment. This typically happens because they add the missed mortgage payments to the backend of the loan, then they try and recast the loan over many more years to try and keep the payment down. But the end result is a mortgage with a higher balance on a home that's probably worth much less then what is owed.

Now, not every loan modification is done this way. In fact, certain mortgage servicers have recently come out with very aggressive loan modification programs that will reduce the principal of the mortgage balance. One of the reasons behind this is the changing of servicing rights; most mortgage holders have probably received a letter at some point telling them that their mortgage was transferred to a new company. Essentially this means that your current mortgage company sold the servicing rights to another company.

Why is the advantageous to you? Because delinquent underwater mortgages have a lesser value than performing mortgages at market value. This means that if the servicer modified your mortgage and you become a paying customer again, you just helped them increase the value of their asset (your mortgage), amazing how that works.

Start by calling your mortgage company and asking them if they have any new mortgage modification programs. And don't be fooled by a company that may want to charge you for this service. They will make the same phone call as you. It all starts with a phone call that you are perfectly capable of making.

So what are the alternatives?

Foreclosure, Deed in lieu, and Short sale.

At the end of the day it seems as if everyone would love to avoid foreclosure. And if you haven't qualified for a loan modification you're only left with a couple of choices. "Deed in Lieu" or "short sale".

Deed in Lieu is where you cooperate with the bank to essentially hand back the keys, transfer title back to the bank. Sounds easy enough but some banks may require you to attempt a short sale first...At this point, the banks don’t want any more homes in their inventory. A deed-in-lieu is basically is a foreclosure that you agree to with the bank, relieving them of the trouble and expense of going through the actual foreclosure

What is a short sale? A short sale is a property that sells for less than the balance owed on the mortgage. The lender accepts a discount on the mortgage to avoid a possible foreclosure auction or bankruptcy. The property would be purchased from a seller with the banks permission.

As you are probably aware short sales have become very common over the past few years and have played a major role in our housing recovery. The main reason is it offers many benefits to both the homeowner and the bank. Foreclosing on a home is timely and costly, so no bank prefers to foreclose, most times, they would much rather use an alternative measure like a short sale. In fact some banks are offering big short sale cash incentives to entice homeowner to list and short sale their property.

Even our Government has stepped in and created a short sale program that if you qualify, it waives any deficiency and also pays relocation assistance money to you at closing to help you get started at a new property. They have also created temporary tax policy until the end of 2012 (which we hope they extend) that again if you qualify, you will not owe any tax on the forgiven mortgage balance.

Given the great current short sale programs that are in place, If have you think that you may be a candidate for a short sale, now may be the time.