Mortgage and Real Estate Blog

Home values have been a topic of discussion in the news the last couple of days in a way that is far from comforting for a lot of homeowners. One of the big stories yesterday was that, thanks primarily to the high number of incidences in six states, one in five home owners is “under water” on their mortgage. There was another bit of news relating to home values that went along with that - and it wasn’t much better. In a poll, over half of the respondents said that they believed that their home had the same value as it did a year ago.

With all the talk about the mortgage and foreclosure crisis, it’s a bit disturbing that there are folks out there who don’t see that it’s likely that the value of their home would be affected in the chaos. It’s unsettling to think that there are individuals out there who are likely to fall into the “underwater on their mortgage” category who are not even aware of it. Add to the mix the flip side of the coin - the fact that there are folks worries about those who don’t need a loan modification applying for one and all you can see is chaos.

You used to hear about knowledge being power. Perhaps, this is just willful ignorance for those who feel powerless.

One of the things that scares many people right now when it comes to buying a home is that “the market is volatile.” In other words, there are folks out there who are focused on their want to buy a home of their own, but then they are also listening to all of the real estate talk on the news and started to worry about home values.

If you’re doubting yourself, finding yourself increasingly concerned about home alues and whether or not to buy, there’s something that you are going to want to keep in mind: the housing market always fluctuates, and along with it, there are changes in home values. Most of the time, home values are going to go up - especially if you give them enough time.

In other words, if you’re looking to make a quick flip of a property then, sure, you are going to want to wait before you head out and try to buy a house. However, if you are looking for the opportunity to get into a home of your own and you intend to live in that home for years to come, you just might find that it’s a great idea to buy now while costs are low.

(Source) According to Zillow Q2 Homeowner Confidence Survey 62% of homeowners believe their home’s value has increased or stayed the same in the past year yet 77% of U.S. homes actually declined in value

Short-Term Outlook: More optimism for own home vs. neighbors’ homes in next six months although 70% say they are concerned foreclosures will decrease home values in their market within next year; 56% planning home improvements

Isn’t it human nature to be overconfident? If this data is true then most homeowners believe the value of their own home is safe while the value of their neighbor’s home is not. Uh, sorry, but that’s almost impossible.

While it is technically possible for real estate values in the same neighborhood to go up and down simultaneously, that phenomenon has more to do with the uniqueness of the two properties in the same neighborhood. One property owner could make improvements that increase the value of their home while another homeowner may let their home atrophy and lose value. But if real estate values decrease overall then all the homes in a neighborhood will decrease at nearly the same rate. The same is true of home value appreciation.

If you have not done so, you might consider having your home appraised to assess its value and pay closer attention to real estate prices in your neighborhood before you decide to sell. If you must sell, better do it sooner than later because prices will likely continue to decline for some time. If you don’t need to sell, then you might be better off holding on to your depreciating property until prices bounce back.

Some homeowners are learning a new way to get the same house for $200,000 less than their current home values. It’s called “buy and bail.”

The way it works is you look for a house just like yours in the same neighborhood that is up for sale. Even if you step up a little bit you can get a bigger house for less than your current payments. Go through the home buying process just as you normally would, but don’t put your current house up for sale. When you are approved for your new mortgage, move into your new home and let the old home go to the bank. Sure, you’ll have a foreclosure on your credit report for 7 years, but you’ll have your mortgage payment, in some cases, cut in half.

This news story from the Wall Street Journal will fill in more details, but know that this track is fraught with difficulties. For starters, if you land in more financial trouble any time soon you will have a difficult time explaining to potential creditors why you bailed on your mortgage. And if you end up with two foreclosed properties on your credit report within 7 years then it will really hurt.

But you could also be sued in some states. The laws in every state are different and some states allow mortgage lenders to sue home owners for their assets if they bail out on a mortgage. If you are sued, you could lose your new house.

Another risk you take is being slapped with criminal charges of mortgage fraud, which is what some lenders are calling it. This is obviously a new phenomenon, but if the laws allow lenders to pursue criminal charges for fraud in your state and you are convicted on that count then you will have more problems than a mortgage on your hands. Is that likely? Not really, but it could happen and the laws are subject to change. There may not be anything on the books today that would allow that criminal charge to stick, but what about tomorrow or next week?

Homeowners who want out of their current mortgage because of the downturn in the market should wait it out if possible. Markets that go down go back up. It’s just a matter of time. But if you have a high tolerance for risk, well, it’s your decision.

Falling prices and slowing sales may be leading to a more difficult appraisal climate in local real estate markets all across the country. Since real estate agents base current prices on comparable homes sold in the last 6-9 months, slowing sales and falling prices make that more difficult to judge. Or does it?

Should agents start using a 5% or 10% fudge factor the way investors do when figuring future home values for resale purposes? When a real estate investor buys a home that he hopes to sell in two or three years, he typically looks at today’s values and adds 5% per year for resell value. That’s a good measure. But now that home values are declining, or correcting if you prefer, then a 5% measurement in the other direction may be in good order to determine resale values. Agents can use that as an incentive to sell your home now before you end up losing more money. If you know that you’re going to sell anyway, sooner rather than later could be the new catchphrase.

Until the market changes, appraisals for real estate will be more difficult to judge. But not impossible. The bright side is that oil prices are going up, which tends to increase the value of everything else. Otherwise, what would real estate prices be doing?