Bipartisan Support for "Housing Relief"

Housing Relief is pronounced quite differently than it sounds: "your taxes pay for other people's mistakes." Or, depending on your dialect, it might sound something like this: "your taxes pay for big mortgage lenders' failed subprime bet." And, last but not least, if you live in Illinois, you probably pronounce it this way: "you give your tax money to the state government to hand out to its friends who want to buy properties with state funds."

Any which way you wish to pronounce it, you're right, and it looks like it might just become law. As Investor's Business Daily puts it, the bill that passed the senate in an 83-9 vote, is a pure promotion of dependence for the fiscally irresponsible upon the backs of the fiscally responsible. The bill would flood states with funds to purchase distressed properties, creating a dreadfully hazardous situation wherein states such as Illinois would be ripe for corrupt actions (maybe an opportunity for a fresh start for Tony Rezko, once he emerges from prison).

Finally, this is a bill that has been heavily lobbied for by Political Action Committee's from Home Builders, Lenders, and Realtors (yes, us too), in an effort to bring back the realty market at a dire time. What it fails to do, however, is settle the U.S. housing market into its level of equilibrium. We've come so far, albeit painfully, to cutting back inventories, bringing prices back to reality, and weeding out the lecherous practitioners in our business (lenders, too).

It has been interesting to see this bill develop over the past month, from when it was first introduced by Rep. Barney Frank. Would I like to see the marketplace flooded with buyers, and return to listing homes at prices reminiscent of spring, 2006? Of course. But sometimes you should be careful what you wish for.

CNN says housing at or near bottom?

I don't put much faith in any of the real estate "outlooks" put out by the main stream media, or highly accredited economists, press releases, or, my favorite, real estate talk radio hosts. It is only after prefacing, therefore, that I want to point out an interesting article from CNNMoney.com, entitled "On the Path to a Housing Rebound."

I don't know whether this article is a good or bad signal as to the health of the industry. With the relentless onslaught real estate has endured from the press, I think it can only be a good thing. The data they point out in the article is precisely the type of data that guides a cyclical market from highs to lows, to highs again. I only hope that this is not some cruel counter psychology from the MSM to throw us off their track of doom-and-gloom.

To let you know where I'm coming from, anyone who noticed this intellectual heavy-weight piece from the AP will know where I'm coming from: "EVERYTHING SEEMINGLY IS SPINNING OUT OF CONTROL." That's some hard hitting journalism, with the last paragraphs including a shameless promise that voting democrat will undo all of our problems, and return life to its harmony with nature. If that will magically improve real estate, then I'm OK with it.

Interest Rate Hikes, Local Inventory Levels, and Subprime Fraud Lip Service

Yes, the picture to the left is as accurate a depiction of how us real estate folks feel after the week we just endured.

Let's see what I can isolate as the 3 biggest issues that have come onto my radar screen for this second week of June...

Mortgage interest rates. UP, UP, and AWAY!!!

UP to 6.5 percent for conforming mortgages this week, even as high as 6.75% at one point. Good luck getting that quote to stick for more than a couple of hours.

UP again, for Jumbo Mortgages (over $417,000 of loan amount), reaching as high as 8.675 or higher. Jumbo's affect the luxury housing market in Chicago's far western suburbs, the Tri-Cities of St. Charles, Geneva and Batavia, certainly. They also affect modest dwellings in the nearer suburbs, like Oak Park or Arlington Heights (to stab blindly), where prices are substantially higher. The crowd of buyers that can afford a half-million dollar mortgage at close to 9% interest is an understandably small one, and they expect a lot more for their money nowadays.

Rates have been attributed to tough talk about inflation from the U.S. Federal Reserve. As I look at overall economic news, I start to wonder if housing isn't a small problem in the macro-picture. It seems that Ben and friends thought the same thing, and it caused a small ripple in the mortgage bond market, as concerns that bond values would drop in the face of higher rates (impacted by rate hikes at the Fed) over the next few months.

And AWAY! Away with mortgage perps'. Good to see that they've nabbed every last mortgage fraud'ster. 400 of our "finest" real estate practitioners were hauled off to jail for inflating stated incomes, misleading values or uses for properties, and other fraudulent tactics used to secure for loans. As the AP line depicts, the real victims in the subprime mess is "consumers" and "lenders." Consumers are the everyday folks who never fibbed on their stated incomes, source of funds (gifts depicted as savings, etc.), or never really heard or understood that their loans were adjustible. Lenders, we are told, were blissfully unaware of the sources of their record crushing revenues. The next step is arresting oil company executives, and then our ever-benevolent government will likely give us free gasoline out of the goodness of their hearts.

Looking at the data for housing inventory levels, locally, I am not yet inspired to announce the end of the housing downturn. Taking a closer look at our months' supply of inventory in the Tri-City area, you'll note that we are well above last year's inventory level, caused by fewer sales and more homes listed for sale. Foreclosures, of limited importance last spring and summer, are taking a heavier toll on the local market, along with short sales. Failed rehabs and new construction gluts, however, are far less prevalent this time around.

80% Down on Condo's May Spell B-A-R-G-A-I-N for Buyers

Looking for a steal on a condo or townhome in Chicagoland? You might find that the prices are good, but not nearly as exciting as the slashed values asked for detached homes. In fact, many areas in Chicagoland have relatively "normal" inventory levels for condo's and townhouses. Surprising, I know. And by "normal," I mean that 6 months or less of available inventory is on the market - 6 months or more typically indicating a buyers market, and common levels for detached homes hovering between 10 and 18 months.

The arrival of new lending rules may begin to change that trend, and bring similar woes that have struck the detached home market to the attached segment. Because of the effect foreclosures have had on associations (in states like Florida or California), Condominium values are particularly subject to volatility in value. When a buyer's cost for a property includes a downpayment, mortgage payment, property tax (or monthly escrow), and monthly association dues, that lattermost aspect is integral to deciding how much one can afford. If an owner in foreclosure is skipping out on association dues, the difference needs to be ether a.) picked up by other dues payers (that cost is distributed amongst the others), or b.) ammentities need to be eliminated, and the overall "attractiveness" of that condo declines. Knowing this, and wanting to avoid the mistakes made in places like Miami, lenders see 80% loan-to-value ratios (20% downpayments) as the solution.

I know, I know, this is BAD news for sellers. But FHA mortgages are an exception. If your condo can be approved as an FHA property, and pass FHA inspection, then buyers can mortgage up to 97% of the value (ok, someone might be able to do 100% for you, you never know). This does not change the effect that the new rules have on values. The less buyers can afford, the less you can sell for.

For buyers, however, they will soon be seeing this "play out" in the form of falling condo prices. While we're all brainwashed into believing that prices are lower across the board, condos have not made the same kind of adjustment in the Chicagoland area as have detached homes, and that may be changing shortly...

Seller Negotiating in Today's Marketplace

The typical seller of yesterday (prior to mid-2006) had the ability to haggle on virtually every aspect of the real estate transaction - from numerous price counteroffers, personal property inclusions and exclusions (does the 'fridge stay?), home inspection repair items, to closing date, time and location changes (to make moving o-so-convenient). Today, the sellers who are lucky enough to entertain rude offers, after countless fruitless showings, have the very same opportunity. There is one major difference:

BUYERS DON'T CARE. If you want to haggle on price - rebuffing their lowball offer with a stubborn, "I'm not desperate" counteroffer - Then buyers will move on to someone who negotiates clearly and decisively. You don't have to give your absolute lowest price, but think long and hard about just how low you'll go. They don't want to anguish over 20 counteroffers - they want 1 or 2 at most. That is, of course, unless you want to give them their offering price after you pout for a couple of weeks. This is the relationship version of calling an ex-girlfriend and begging for forgiveness. NOT A GOOD POSITION TO BE IN. If you think their home inspector is a goofball, and you don't think you need to install GFCI outlets, you may want to compare the cost of GFCI outlets with your mortgage payment (or your tax bill). Closing date, time and location? It needs to work for the people who are paying you hundreds of thousands of dollars - not the other way around.

Some might think that this short-list is a bit tough on sellers - this might seem like the "lay-down and walk all over me" approach to selling real estate. Think so? Think about how easy it really is to back out of a residential real estate sales contract in 2008, and think about how lucky you are that someone might choose your unique house out of all the others. The task is no longer trying to win at every juncture, but keeping buyers buying your house. That's the real win in an absolute buyer's market.

The Federal Reserve Bank of New York offers us a handy tool with which to view the state of the nation in terms of mortgage delinquencies, and precursors thereof. Check it out. You can ZOOM IN ON YOUR ZIP CODE, and compare the foreclosure rates, loan to value ratios, number of ARMs adjusting, percent of no-doc loans, and so forth.

The BIG Picture

National Home Values

Over this past week I've read two outstanding articles about the depths of housing woes. Two economists arguing fervently, and with impressive supporting evidence, to two completely different ends: On the one hand, we are at the absolute bottom in housing, but prices will not rebound for another 15 years (The Housing Crisis is Over, WSJ.com). And on the other hand, another 10-15% decline in values can be expected to come over the next year and a half, with a recovery to follow (Map of Misery, TheEconomist.com).

That's quite a difference in opinions! I believe I also recall reading something from the National Association of Realtors that said we already hit the bottom in the market. And that was in the spring of 2007, so I don't know what everyone is still whining about.

The problem with telling the future of the real estate cycle is not a failure in interpretting the implications of data, nor a matter of data quality, but a matter of accepting that building theory around such data is subject to your lense: optimistic, pessimistic, or just apathetic. Any economic market has data sets that support those holding half full and half empty glasses to their respective outlooks.

The Map of Misery identifies the data each group is utilizing to support gloomy or rosey outlooks for housing. One method, which utilizes the balance between housing prices and rental prices, purports that the crisis is nearing correction, with rents reaching their trough during the boom, and requiring another 10-15% of home price declines for them to reach equillibrium. This however, assumes that it is home prices that must decline, and that rents will remain stable in what has been a "landlord's market" (read: opposite of a renter's market).

The National Association of Realtors utilizes the most optimistic measure, not surprisingly, which indicates that housing costs (mortgage payments, not home prices) have returned to historic balance with household incomes. These neglect to mention the tightening of lending standards, which are preventing countless buyers from entering the market. Other measures compare home prices to incomes, which have not yet been reigned in (another 10-20% decline needed...).

Taking a look at these two graphs, you can tell the story of the market's coming doom, or its overdue recovery. Perhaps you'll better understand my viewpoint today:

Vehiament cases exist for both arguments, and with legislation being pushed forth by politicians for a fresh new band-aid (thank you P.A.C.'s and polls), all bets are about to be affected greatly as our tax dollars are put to the task. A little bit of helpful Q & A might guide someone who is a layman at the subject, or perhaps just someone as confused as the rest of us.

Do you think the market is due for a recovery this year, next year, or in 2020? Think that Chicago is subject to a different timeline altogether? I'm interested to hear your opinions!

Showing Activity as Leading Indicator for Sales?

Before a home sells, it must be shown. I dare you to try and dispute that fact.

As real estate brokerages arrange appointments for buyers agents to show listed homes to their clients, they create data. ShowingTime.com, known to agents as "ShowingDesk," is the premier online service provider for setting appointments. It is used by my broker, Baird & Warner, along with 40 other brokerages - from the big national brokerages to the independent regional ones. The data recorded for each appointment is logically one of the best indicators of market sales activity, as the more a property is shown, the more likely a buyer will write an offer, and the more likely that agreeable terms can be found, leading to a visit to a closing table.

I track my office's showing activity (above), in addition to online views of each individual property's webpage. In comparing this with a given property's number of showings, I can gauge how well a property is doing, relative to other indicators. ShowingTime.com offers us a snapshot of the nation-wide sales picture, by comparing the percent increase or decrease of showings, and the published record of closed sales. Or, at least, in theory.

If we are to believe the suggestion of ShowingTime.com's graph, then the upsurge of showing activity in March should have yielded a very positive April for home sales. While there was a definite increase (see graphs below), there is another trend represented in ShowingTime's graph: More showings per buyer. This is a definite trend in the marketplace, as buyers take more time to decide the right home for themselves. A buyer can see more houses, and have less worry over their "favorite" getting sold out from under their noses.

The data above, taken from Kane County, IL, includes April's sales number for Under Contract and Closed properties (both detached and attached residential housing). It does reflect an increase in the number of properties sold, but those numbers reflect a decrease as compared with last year's seasonal figures. April 2007 sales in Kane County amounted to 552 Closed properties, while April 2008 yielded 339. The number of properties that have gone under contract in April (606 in '07, 506 in '08), will inevitably revise downwards as transactions under contract fail to result in a closing (due to home inspection, mortgage financing, or other problems encountered).

It seems as though ShowingTime's March report reflects the dispositions of buyers towards a more thorough and deliberative home search, and not a surge indicating housing's recovery by summer time. An uptick, yes, but comparing year-over-year data gives us the whole story. There may not be any dispute to this post's leading statement, but plenty is left to argue for ShowingIndex's direct correlation to sales activity.

Are 1st Floor Master Bedrooms Any HOTTER than the Rest of the Market?

The real estate market has benefitted from the Baby Boomer generation since their births caused the great housing boom after World War Two. As they've grown up and had families, they've been the largest economic catalyst in the modern era, with their luxury home, vacation home, and investment property purchases spurring the most recent boom. Experts have been predicting since well before the boom that the housing market would begin to pick up a trend of ranch homes, and first floor master bedroom homes, townhomes, and condos. With the first "official" baby boomers reaching the "senior" age range (62) this year, the purchase preferences of these buyers is more forward looking than ever. Empty nesters are often looking to move on from their 2 story home to downsize into something that gives them everything they want in terms of upgrades and ammentities, but with more lifestyle flexibility.

Now that the boom of housing has moved to what everyone hopes is the trench of it's decline, let's take a look at what many expect will be the economic engine of real estate's recovery: The 1st Floor Master Bedroom Home and Townhome [FFMH & FFMT]. By comparing the inventory level of these properties, with those of non-1st floor master properties [NFFH & NFFT], we'll be able to see if the trend is emerging, or if the experts' predictions are wrong. For the purpose of this analysis, we'll be examining the Tri-City area: St. Charles, Geneva, and Batavia, Illinois.

Looking at Figure 1, below, inventory levels and sale levels for NFFT's, with FFMT's below them. We can clearly see that at the present moment, the experts' predictions are not yet materialized. Townhomes are seen as more a promising housing sector for baby boomers, with the appeal of reduced maintenance, and lower expense during retirement years. Here, however, the number of homes on the market exceeds the prior six months of sales and contract activity by almost 5 to 1 for 1st Floor Master Bedroom Townhouses. Meanwhile, the general marketplace for townhomes over $300,000 is only a 4 to 1 balance between supply and demand. 1st Floor Master Bedroom Townhomes are presently demanded less than conventional townhomes that have 2 stories, with a master bedroom up at least 1 flight of stairs. We have seen townhomes inventory overall in check, but the over-$300,000 price range is clearly still in a strong buyers market.

Figure 1

On the other side of the coin, in Detached Homes, the entire market has been far from in-check during the market's decline. As seen below, in Figure 2, the FFMH and NFFH markets are at 4 to 1 and 3 to 1 ratios of inventory to demand. With a gross 798 actively for-sale homes of the NFFH variety, and 166 with first floor masters, buyers are in the drivers seat of the entire detached home marketplace.

Figure 2

Why is this the case? Are the experts wrong? I believe it is less to do with the preferences of baby boomers, as it is the effect that the housing market has had on their ability to execute purchases of homes that meet their evolving needs. Given the challenge they face in selling their existing homes, this trend is going to continue to lay in waiting for the boomer buying boom to come.

Innovation Amidst Housing Recession - Change Your Mortgage!

Everyone is talking about the housing market downturn, and the impending doom for all of the world's people. Foreclosures will surely swallow us all, regardless of how responsible your own financial picture may be. There is one thing that economists rarely remember to take into account - The resilience and creativity of individuals in the marketplace. Case and point, the present real estate downturn:

Investors -- including big fish like former Countrywide Financial Corp.
President Stanford Kurland as well as smaller fry like Gentry -- are buying
loans on the cheap from lenders who want them off their books. By paying
less than face value for the mortgages, the new holders can modify loan
terms, including shrinking the amount owed, and still make money.

As numerous homeowners struggle to make higher adjusted mortgage payments, or face personal circumstances (divorce, health problems,job loss) that prevent them from keeping up with their obligations, there seemed to be no other way out. Many cannot get out of their loans by selling their homes, since they purchased properties utilizing 100% mortages, or refinanced at a similar loan-to-value ratio. Further, banks across the nation have been facing a struggle of defaulting subprime mortgage portfolios - bets that made sense two and three years ago. With everything stacked against these parties, and the fallout of their misfortunes seeming quite vast, the prospect of savvy investors saving the day sounds like an enormous blessing - and a profitable one for them. Read on:

With some economists projecting 2 million foreclosures this year, legislators
and regulators are hoping to encourage wide use of this model. They want lenders
and investors in mortgage bonds to mark down what borrowers owe and then provide
them with lower-cost loans. It's a tricky business: No one wants to be seen as
bailing out speculative buyers or imprudent lenders, but they also don't want
mass foreclosures to devastate neighborhoods and the economy.

The greatest enemy of this program, however, appears to be the victims, themselves. Fewer than 50% of homeowners who are delinquent on their subprime mortgages are willing to return phone calls regarding lender work-out plans (mortgage lenders attempting to renogotiate loan terms in order to keep a homeowner in their home, and paying agreeable loan terms). Many homeowners worry that lies told regarding stated income, or other fraudulent information given to lenders, will come back to haunt them. Given the widespread existance of such fraud, on behalf of homeowners and lenders, investors buying subprime mortgage notes are not making fact-verification of old mortgage applications a matter of importance.

The headline here reads of an innovation that may save the real estate market, and the broader economy. It may as well read:

Homeowners Facing Foreclosure: Call Back Your Lender!

Source:
Investors move in to save broken mortgages
Los Angeles Times, E. Scott Reckard
http://www.latimes.com/business/la-fi-loanbuyer-2008may01,0,3521729.story

Condo's/Townhomes Vs. Detached Homes

As some readers may have noted, a trend has been playing out through this real estate cycle that deserves mention: Townhouses & condominiums are not in the same trough of this cycle as detached single family homes are.

St. Charles Detached Homes

St. Charles Attached Homes

In fact, attached houses are actually in territory that indicates they are neutral as to being a buyers/sellers market. This sample was taken of strictly St. Charles, Illinois, but I am seeing this play out through much of the suburban area. Looking at the market time statistics, below, one can see that attached properties are selling in less than 180 days, on average.

St. Charles Attached Market Times

Why is this happening? Three factors are at play- lower prices for attached properties put them within the reach of cautious first time homebuyers; todays buyer is looking for a more "move-in ready" home - less tolerance for major renovations that often come with older single family detached homes; and buyers often do not have time to do the yardwork and maintenance that goes along with a detached home. Today's buyer is changing, which has affected families and individuals selling their homes. With the challenges of being a "move-up" buyer in this market, first time buyers are a major driving force, despite the drastic reduction in their ranks due to the extinction of many high risk loan instruments that brought more first timers into the buying process than ever before.

[note: Market time statistics are problematic because of real estate agents cancelling or expiring property listings, and then re-listing them the same day. This is done in order to reintroduce a property to the "hotsheet." This is part of the reason that I utilize absorption statistics to indicate realistic expected market times.]

In Defense of: The Home Ownership Ideology

Dean Baker, author of "The Conservative Nanny States," has written an article featured on RealClearMarkets.com entitled "The Homeownership Ideology." Baker's article, after blowing past the alleged causes of the housing bubble and subsequent deflation, proceeds to level blame against the belief in home ownership as a "virtue" - in and of itself. He points out that during the height of the market's fervor, it was not good policy by economic and political talking heads to promote buying a home. Especially, Dean articulates, when it comes to lower income households. These families and individuals opted, quite tragically, to buy properties at prices 20 to 30 times the annual rental cost in their given communities.


I agree with Dean's premise - pitching homeownership to the poor and those who cannot afford it doesn't make sense. In fact, I think the whole reason mortgage products like Option-ARMs, 100% Interest Only's, or 40-Year-ARM's ever saw widespread use was because individuals that did not have the discipline or wherewithal to purchase a home had been convinced they needed a home - and at any cost. Those people are now realizing the cost, as are the businesses that swarmed around them for their one-time business. Now we all feel the repercussions of those actions.

I do have some mixed feelings about a website sponsored by Illinois Governor Rod Blagojevich and The Illinois Housing Development Authority (ihda.org). While some of the money offered drastically improves one's ability to purchase a home, some of the conditions make it painfully clear that those best qualified are those with the least qualifications. Certainly we should not be encouraging EVERYONE to become a homeowner. This is somewhat akin to suggesting an alcoholic try to keep a houseplant alive before trying to date, or own a pet. Perhaps individuals should be coached along the line of financial discipline, and income stability, prior to purchasing homes on 30 year mortgages. I am sure Blago is not troubled by the website- I believe he has enough other things worrying him.


What I differ with Mr. Baker on is primarily a matter of timing. While I believe that baiting poor or lower-middle-income Americans into buying homes is not a positive thing for Americans, I do not think that de-legislating the allure of owning your home is an idea that should be batted around in our halls of government. But especially NOT NOW.


If there has ever been a time when individuals should be encouraged, or browbeaten, as to the virtues of homeownership, it is now. When rent prices are trying to skip right alongside with inflation, buying a home at a still-historically-low interest rate seems to be a sound plan. The market also provides them the time to educate themselves, and exercise patience - finding the correct property, at a price that truly suites their budget.

Imagine, however, if congressmen and women began discussing reversal of the tax deductibility of mortgage interest payments. The legislative carrots that guide individuals into homeownership ought not be scrapped just because markets are subjected to a business cycle that can be destructive at times. The ideology of homeownership's virtues should not be traded in just because of the financial downturn of the moment - perspective is needed to look into the face of the next boom, and sort out what can be done differently to ensure fewer are preyed upon, and fewer succeed in defrauding the system. Instead of railing against homeownership, articulating the true benefits of home ownership might be a more productive endeavor.

The Bubble Blame Game

I stumbled across a fascinating article this week, in which a British writer evokes the virtues of falling housing values. On the other side of the pond, however, our attitude is not so chipper, despite what Wauchovia is indicating as a drastic improvement on the housing affordability curve. I would have to admit that it is certainly one way we could avoiding blaming anyone for the present real estate funk. In fact, I might be willing to step forward to claim that it was us Realtors who were responsible for such unheralded affordability!

Allow me to take one step backwards, for the time being. Since there isn't exactly a Franz Ferdinand "moment" for the real estate boom, there is, instead, plentiful blame to spread around. It took place over period of at least 3 years, which is the time frame of appreciation gains that we are presently undoing. It's not a matter of who is at fault, but more so, what could participants have done differently: what would have made a difference?

The basic blame alleged against each profession seems to run along the lines of the following:

Realtors - Bought into the notion of invincibly appreciating home values; encouraged home buyers who were trying to buy beyond their apparent means; some acted as the "glue" in transactions that truly should not have happened.

Mortgage Brokers (the salesperson who brokers an individual loan to a home purchaser)- Many advocated for adjustable, reverse amortizing, interest only, 100%, and other higher risk mortgage products; often "filled in the blank" for Stated amounts [income, asset, job, you name it...] for subprime and Alt-A loan products; coached appraisers as to values; coached clients, and all involved parties, as to what they needed to say, or do, in order to get a deal done.

Appraisers - Valuing properties at contract prices, often well above list prices, and in spite of obvious comparables.

Mortgage Lenders (the institutions originating the mortgages sold to investors)- Often knew full well what mortgage brokers were doing to put together deals; uninterested in rehiring any appraiser who had under-appraised a property; collateralizing made sense, at the time.

The list goes on, surely, but this is only the ones responsible on the professional side of the coin. The consumers, be they real estate investors (i.e. - flippers, developers, speculators), first time buyers, million dollar buyers or even corporate relocation companies, have guilt on their hands as well. And builders is a whole other chapter...

My favorite scapegoat of all, however, is THE GOVERNMENT. Municipalities, in particular, are a fabulous party for ridicule. Did your city or county do anything particularly profitable during the boom? Perhaps something that might have backfired into the drastic drop in revenue at the local level? Or maybe we should thank everyone for such terribly affordable homes.

Are Foreclosures in your Neighborhood Worrying you about your Home's Value?

As well they should. Foreclosures, short sales, tax sales, and generally "distressed" sales are obviously negative impacts on your neighborhood's home values. If your neighbor's foreclosure just sold for $250,000, and your home was valued at $300,000, one would worry about whether yours is now worth only what your defaulting neighbor's home sold for. There are two aspects of this concern - The difference between "today's foreclosure" and the prevailing appraisal guidelines of the present market.

Today's Foreclosure v. Yesterday's Foreclosure

In real estate's not so distant past, foreclosures were an ugly, ugly beast. Horror stories floated around that discouraging many home buyers from even considering foreclosed properties in their house-hunts. Before home buyers were evicted from their homes they often left a stinging reminder of their emotional loss. Foreclosures were renowned for being hazardous waste sites - deserving of HAZMAT teams that came in the form of eager, hard-working rehabbers. Every fixture or valuable material was extracted from properties - entire copper plumbing systems, furnaces, faucets, electrical conduit, mill work, toilets and ceiling fans. Filth of every type was left behind - pet feces, pet bodies, months of garbage, unplugged refrigerators brimming with food, walls spray-painted with expletives, the list went on. In the past, most of these properties were purchased sight unseen - perhaps an investor would be able to peek in through windows to understand the mess they might be buying into.

Today, foreclosures are a different animal, entirely. Sure, the ugly ducklings exist, and they go for a severe discount. Some properties have boarded up windows, but most do not. In fact, most foreclosures need such undaunting work as new carpeting in select rooms, some paint, and maybe a door or two that has been punched into, or drywall needing to be patched. In some occasions these properties have been very poorly maintained. In other scenarios, however, the reason home owner's are in a financial bind is because of recent renovation of their home. I recently sold one that had a newly installed furnace, central air conditioning, and a perma-sealed crawl space.

The plus side of this contrast is that neighboring homes that are in foreclosures are not stigmatizing neighborhoods in the manner they have in the past. The negative side is that foreclosures are indeed more similar to resale homes than ever before.

Appraisal Standards

Appraisers utilize comparable properties to your home when they appraise a property for a mortgage lender - be it for a purchase mortgage or a refinance. Presently, appraisers classify foreclosures, short sales, and bank owned properties differently than resale single family homes. The homeowner looking to refinance does not need to judge their property directly against the foreclosure down the street, but may still have trouble finding recent enough sold properties in the area. While foreclosures do not "count against you" directly, appraisers are now restricted more than ever before in what they can, or cannot, utilize in their "comparative analysis" approach. Some lenders require sold properties to be 3 months or more recent - almost all require comparables to be no more than 6 months old. Finding properties that weight in your favor can still be a challenge.

While foreclosures are not a good thing for anyone looking to sell their home, they are not direct comparables to your home. They will compete better than ever when it comes to the attention of home buyers, but a move-in ready home, in great condition, will command an entirely different price point.

Who's to Blame for the Real Estate Bubble?

Sorry, but I had to ask the question. It seems as though everyone I meet these days has a thing or two to say about "who-dun-it" concerning the economic 'calamity' at hand. Some are insightful, some are to the other side of crazy. Regardless, I think you could make a pretty fair case against just about any profession involved the real estate sale being "to blame": who overinflated this, who fudged numbers here and there, or who hyped up this-or-that. Likewise, an argument can be made as to exercise of naivete, beligerance, and stupidity by numerous buyers and sellers - non-real estate professionals - during the boom times between 2002 and 2006.

While there are lots of valid points to go around, none of them really do any good if they are not weighted correctly. And to "do any good," I mean, of course, how do we avoid this kind of behavior in the future. Asset bubbles, and this was one, are not an overly good thing for economies. Unless you're willing to pay me $70K for some tulip bulbs, that is.

I'd like to revisit this topic at length: What changes can be made to the real estate sale process to protect against the abuses that went on? How do we make changes without making our existing situation far worse? If everyone had a hand in it, who is at the top of the totem pole of blame?