Many foreclosure notices don’t result in actual foreclosures. Here are a few tips on what home owners facing foreclosure on Maui in Hawaii should do immediately:

1. Work with the time you have. Foreclosure can be a long slog here on Maui, which gives you time to come up with an alternative.

• If your goal is to salvage your home, strive to get a Loan Modification with your lender…this alone may delay the foreclosure sale date.
• Keep up with payments for homeowners insurance and property taxes. Otherwise, you could get hit with an uncovered casualty loss or liability suit, or tax liens.

2. Determine the foreclosure laws here on Maui in Hawaii.

• What’s the timeline?
• Do you have “right of redemption,” essentially a grace period in which you can reverse a foreclosure?
• Are deficiency judgments that hold you responsible for the difference between what your home sells for and your loan’s outstanding balance allowed?

I can help you answer these questions and explain a variety of options that may be available to you…no charge…no obligation.

Oh, and watch out for online foreclosure scams.  Do your research to make sure they are a legitimate company.  Of course, you can also contact me here in Kihei-Wailea on Maui in Hawaii.

Investors…
You can play a role in providing a solution to homeowners in distress.  If you are interested in owning property on Maui – more specifically, Kihe or Wailea (areas I focus on) please contact me for a list of Maui’s Best Buys!

Aloha,

Jeff

Jeff Graves I Realtor®(S) I Coldwell Banker Island Properties
(808.633.1292  (Cell)
JeffGraves@ClearWire.net

Coldwell Banker Island Properties

34 Wailea Gateway Place, A-207

Wailea, Maui, Hawaii  96753

Source: NAR

Before the economy can actually organically improve, businesses and consumers need to believe that things are about to improve. This confidence leads to increased business investment, job creation, and consumer spending – with each action confirming and reinforcing the others. Confidence becomes a self-fulfilling prophecy.

The problem here is simple: homebuyer tax credits, low interest rates, limited foreclosure activity, extended jobless benefits – these things may help today, as in right now. But people and businesses don’t spend based on the cash they have, they spend based on what the expect the coming months will bring. A company’s sales may rise today as consumers spend stimulus money, but that company isn’t going to expand or hire anyone new because they are not confident the spending will continue.

Real economic recovery is not possible without this confidence. And we will not be confident again until housing has bottomed and our balance sheets are cleaned up. Meaning, a lot of our debts, via bankruptcies or foreclosures, still need to be destroyed.

Ponzi Recovery

The Fed, The Treasury, and The White House have spent the last 5+ years telling us that things are about to get better, that home prices are stabilizing, that foreclosures are slowing, that unemployment has peaked and that we should be confident in their ability to “fix” the economy.

Their scheme depended on consumers and businesses genuinely-believing that government intervention would work. That genuine belief – that confidence – would result in stimulus money being reinvested and jobs created. Their scheme depended on us believing that this positive economic momentum would continue to spiral upwards with tomorrow’s earnings more than covering today’s debt burdens.

This Ponzi Scheme depended on us believing that belief alone was enough, without any real underlying fundamentals.

We, en masse, haven’t bought a word of it.

We see through it. We’ve had enough.

The Jig is Up

More and more, we, the public, want the housing games to end. Let price fall. Let the market clear. Let the manipulation end. Let us all move on with our lives.

The Government may not yet have gotten the message, but the messengers are getting louder and more prominent. Recently, op-ed pieces in the LA Times and The New York Times suggested that it was time to let home price fall.

From The New York Times Housing Woes Bring a New Cry: Let The Market Fall

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

…

The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.

“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.

Tom Petruno at the LA Times takes it a step further by pointing out the elephant-in-the-room: too much debt. Time to let home prices fall?

The risk is that another downward spiral in home prices would feed a deflationary mind-set, meaning the sense that prices for all sorts of goods, services and assets can only go lower. That could cause many consumers to severely rein in spending, leading to another recession, or worse.

But a new decline in home values also could force the banking system, and the government, to finally deal realistically with a root cause of the economy’s woes: the gigantic debt load consumers took on over the last two decades.

A Vote of No-Confidence

Our government lacks the courage to enforce the will of the people. Rather than act with us to clean up our balance sheets and begin anew, they have been working against us, propping up home prices and trying to trick us into borrowing more money. They work for the banks, not the people.

If too much debt is the problem, then more debt cannot be the answer.

We understand this. We aren’t taking out more loans. Home sales have collapsed. Auto sales have collapsed. Consumer spending has collapsed. Business spending has collapsed. Municipal spending has collapsed.

By shunning debt, each of us is participating in our own private economic recovery.

The Disease and The Cure

The day will come when home prices are at bottom and balance sheets are healthy, but getting there will be tough.

Bankruptcies and foreclosures are painful, but also cathartic. Beyond the initial shame, they represent a new beginning and present a more stable foundation for future growth. And, with so many people in trouble, the initial shame is now less-so.

Don’t get me wrong, I’m not rooting for anyone to lose money or lose their home. Rather, I’m rooting for the day when all of this is behind us.

As Todd Harrison would say: We have to go through it to get through it. (and so far we’ve been putting it off.)

Falling home prices aren’t the disease, they are the cure.

The shadow inventory looms large over all of us. Home prices have already started to slide back down. If and when foreclosures begin to flood the market again, we would be in for a violent few years…but we would come out stronger on the other side.

A Confident Recovery

If confidence is based not on where we are, but where we are headed, then it stands to reason we’ll be most confident when there is nowhere to go but up. Organically, without artificial stimulus with borrowed money.

At that time, asset prices will be at their lowest. Businesses will expand and hire, consumers will begin to spend, and a real recovery will begin.

Most importantly, our foundation for growth will be strong, with little debt.

This day will come. And the sooner politicians get out of the way, the sooner home prices fall, the sooner we work through our shadow inventory, the sooner this day will arrive.

I am working with a few investors that are actually finding it more difficult to find properties in the areas where they have been buying. Despite what you read or may believe about the real estate market here in Orlando, it is not a bottomless well of foreclosures and short sales. There are a lot of each, but some areas seem to be running a little lower on available inventory. This made me wonder how many properties have turned over in these particular areas. In the ones I have looked at, around a third of all the properties have turned over in the last two years. These were some of the areas hardest hit by foreclosures and there will be more, but maybe not like we have seen over the last two years.

I took a look at what has been happening in our market overall in the last two years and found that 28,960 properties identified as bank owned or short sales have closed in the past 24 months as of today. There have been some changes in how properties are identified in our MLS, so that number may actually be higher. The total number of homes that have turned over in the last two years is 48,722. I believe the homes most at risk of negative equity are those purchased between 2000 and 2006. During that time there were 156,145 existing home sales posted. At the peak between 2004 and 2006 homes were sold over and over again by speculators and there were also at least 40,000 new homes built to throw into the mix. To be conservative, I am estimating with cash out refinancing and such there could be about 250,000 homes at risk of negative equity less the 84,805 that have sold in the last four years. That leaves about 121,000 properties, but many of those people are in it for the long haul and will stay in their homes.

The worst case scenario is that we will be dealing with these distressed properties for the next four to five years. I think the best case is that the job market gets back on track and we could see many of the short sales go away as equity begins to return. In another two years things could be very different. Considering how much stronger sales have been recently, I am optimistic.

David Welch Real Estate Optimist, Orlando Real Estate

Lenders should be building bridges between themselves and homeowners instead of burning them.  Today’s defaulters are tomorrows new home purchasers.  Even if it takes 5-7 years for a strategic defaulter to buy again, you better believe, many of them will buy again.  Many will remember how Chase or B of A etc. didn’t give a $#!t about them.  That will last a lifetime.

According to a recent study by Harvard Economists:

“Foreclosure reduces the eventual sale price of a home by an average 27 percent, compared to the prices paid for similar properties nearby. Those nearby homes, in turn, could see their own prices depressed by 1 percent, if they happen to be within 250 feet of the foreclosed property.”

Those statistics were published in a report on physorg.com, and these acclaimed Harvard economists closed their report by stating:

“Public policy should discourage reliance on foreclosure as a means of protecting lenders. While foreclosure may rescue lenders, it damages the rest of society.”

And while I do disagree somewhat because I believe a reduction in housing prices is ultimately what will lead us to a real recovery, I do agree with the fact that foreclosure is used as a means of protecting lenders, something I have seen many times first hand. Lenders, and government agencies, will give all sorts of lip service talking about how they are doing whatever they can to prevent foreclosure and keep people in their homes, at the end of the day if the numbers work out in the bank’s favor to foreclosure, sorry Joe Homeowner, but you gotta hit the road.

Continue Reading…

No one who buys a home intends to miss any mortgage payments. But unexpected life circumstances can quickly stymie the best of intentions, and homeowners can’t always prevent defaulting on their payments.

If you’re one of these homeowners, it’s important that you take steps to prevent the situation from getting worse. Many homeowners fall into the traps of procrastination or overreaction, neither of which is helpful. Instead, you should adopt a measured response in which you take into consideration all the options available and act decisively before you lose your home. Below are some suggestions.

Contact your lender

Once the due date for your mortgage payment has come and gone, it’s only a matter of time before your lender knows you’re in default. But don’t wait for them to contact you; act preemptively and call them right away. If you leave it up to them, they may contact you for several months – when it will be much harder to resolve the situation.

Lenders deal with defaulted customers every day, so they often can provide advice. And most lenders aren’t eager to expend the money and time it takes to foreclose on your home, so they’re open to other alternatives.

Consider your alternatives

Homeowners in default have several viable options to stop the foreclosure process. Not all of these options will work for every homeowner, but you should consider the advantages and disadvantages of each option and determine which is best for you if you are in default.

                           OPTION 1: Pay down/Sell

This is an option if you have money to spare. We can sell your home and you pay the difference between what your house sells for and what you owe your lender. The positive to this is you can keep your credit intact. The negative is that you need disposable dollars to do this.

                           OPTION 2: Short Sale

A short sale is where we will sell your home for less than what you owe. We need to negotiate with your lender(s) to accept less than what you owe. It will make a difference if your loan is a purchase money (non-recourse) or non-purchase money (recourse). Note: There can be tax ramifications depending on if you have a recourse or non-recourse loan. We can explain the difference if you give us a call. The positive is that you can pay off your loan(s) without any money out of your pocket. The negative depends on how many payments you missed. It can reduce your credit score 50-150 points. *

                            OPTION 3: Walk-away/Foreclosure

This is a situation where you just walk away from your house. You can still have negative tax consequences and it can affect your credit by approximately 250 points. In most cases, a short sale is a better option. *

                             OPTION 4: Bankruptcy

Sometimes you will be advised to file bankruptcy. In a lot of cases, people will suggest this because they do not know about other options as mentioned above. This should be a last resort. It can affect your credit by approximately 400 points and your credit for the long-term. *

                             OPTION 5: Deed in Lieu of

This is a situation where you basically hand the keys over to your lender. In most cases, the last thing your lender wants is the property back, and if they do, it is normally prior to foreclosure. At this point, your credit is probably already negatively affected. If you were current with your payments, why would your lender take the property back?

                             OPTION 6:  Loan Modification with your Lender

This is a situation where you want to stay in your property, but can’t afford your current payment(s). The lender might renegotiate interest rates or reduce your payment and add it on to the backend of your loan.

                            OPTION 7: Rent

You can rent your property out until the market turns upwards. In most cases, there will be a negative between the rent and your loan payment(s). Most of the experts feel this market will take 2-4 years to turn-around. You should be prepared to rent out your property a couple of years.

*(Reductions to credit scores are estimates only. Individual situations will produce varying results).

Take Action:

In almost any circumstance you are going to want to consult a knowledgeable and experienced Realtor in your area.  It is especially important to ask a Realtor with Short Sale experience and know how for guidance.  Short Sales are the most typical option homeowners take when they fall behind on their payments.  The important thing is to act quickly.  Lenders are becoming better and better at approving short sales and also expediting the process.  Short Sales are going to be a major factor in the Sacramento market for years to come.  It is much better to give a short sale a try then just do nothing and wait to be foreclosed on.  Take action today and call a local Realtor that is qualified to help.

clear skies,

doug reynolds

www.SellWithDoug.com

Short Sale Certified

Every bailout shares one central trait: it’s always really a bailout of banks advertised as “saving Mom, apple pie and the American Way” or its equivalent. Here is the only guide you need to understanding any and all bailouts:

Bailout of X (housing, Iceland, Greece, AIG, Harry Potter Theme Park, the ibogaine industry, etc.) is always a bailout of banks. The bailout of X is simply shorthand for the taxpayer bailing out the banks which are insolvent due to their overleveraged, risky lending. The bailout of X (let’s say housing) is simply the PR facade, the socially appealing and politically correct pretense to shovel billions of dollars into the banking cartel to save it from the consequences of its faulty risk models, fraud, collusion, embezzlement, misrepresentation and influence-peddling.

Let’s take a few examples:

1. Bailout of Greece = bailout of French and German banks which foolishly lent gargantuan sums to Greece.

2. Bailout of AIG (“to save the global financial system we all love and need”) = bailout of AIG’s counterparties: Goldman Sachs, various European banks (yet again), etc.

3. Bailout of housing (a.k.a. “America’s sacred right to home ownership”) = bailout of mortgage lenders, institutional owners of defunct mortgage backed securities, Countrywide/Bank of America, etc.

Let’s look a little deeper into the ongoing bailout of housing.

Naturally, the bailout is being sold as “helping Americans keep their homes.”

Does anyone seriously believe the financial and political Power Elites give a rat’s rear-end about the 24% of American homeowners who owe more on their mortgage than their house is worth, i.e. underwater “owners”? Of course they don’t. Their only concern is that banks might have to suck up trillions of dollars in losses, and thus eventually be recognized as functionally insolvent.

Knowing as we do that any “aid to housing” is aimed at saving banks from housing-related insolvency, we might ask: just how much pain is potentially out there for banks and institutions holding mortgages and mortgage-backed securities?

Calculated Risk recently published an interesting analysis of negative equity:

As of Q1 2010:

There is almost $2.4 trillion mortgage debt for homes in negative equity.

The total negative equity is $771 billion.

There are 4.1 million homeowners with more than 50% negative equity (they owe 50%+ more than their homes are worth).

Other sources estimate that 24% of mortgage “owners” are underwater.

For context: according to the U.S. Census Bureau, as of 2008, 51 million households have a mortgage and 24 million own homes free and clear (no mortgage), and about 37 million households rent.

Since several million homes have either been foreclosed or are in the foreclosure pipeline (delinquent, defaulted, etc.), the actual number of current mortgages is undoubtedly less than 50 million.

What we do know is that lenders are fearful that many of the 11-12 million homeowners who owe more than their house is worth will walk away from them, especially as the real estate market begins to weaken again. According to this New York Times article, “The so-called strategic defaults have become a matter of intense debate in recent months.”

When did “Holy Moly, we’re bagholders!” qualify as a debate?

We know that strategic default is the preferred option for the upper class when it finds itself on the wrong side of a speculative investment; the delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. One in seven homes over $1 million are in default.

Lenders have good cause to worry about underwater “owners” walking away. The correlation between being underwater and defaulting is very high, as this chart illustrates.

According to the Fed Flow of Funds, total mortgages total $10.24 trillion and total equity is $16.5 trillion. As I showed in Housing and the Collapse of Upward Mobility (April 16, 2010), since free-and-clear owners hold at least 32% of all $16.5 trillion in home equity ($5.3 trillion), that leaves at best about $1.2 trillion in equity spread amongst the 50 million homes with mortgages.

So roughly 12 million homeowners have negative equity, and about 9 million are underwater by 20% to 50%. While the report published in Calculated Risk pegs negative equity at $771 billion and total mortgage debt on underwater homes at $2.4 trillion–roughly 25% of all outstanding mortgages–the recent decline in sales (post-housing credit) raises the question: how many of the other 37 million mortgages will slip underwater if house prices decline?

One way to estimate how many homeowners are close to being underwater is to look at how many homes have a traditional, conventional 30-year mortgage. As I showed back in 2007, the number of homes with conventional mortgages was modest compared to those encumbered with adjustable-rate mortgages, second mortgages, home equity lines of credit, and so on–in other words, those with low down payments and multiple mortgages on their home.

The large number of low-down FHA loans which have soured suggests that many homeowners have little to no equity, even if they are not yet officially underwater.

If we reckon that the most likely owners to still retain a healthy margin of equity are those 12 million owners with conventional mortgages, that suggests the following:

– 11-12 million homeowners are already seriously underwater (10%-50%).

– Of the remaining 37 million mortgages, 25 million are at-risk due to being adjustable, or encumbered with high-interest rate second mortgages or HELOCs (home equity lines of credit).

This suggests that the remaining $1.2 trillion in equity in all homes with a mortgage is concentrated in the 12 million homes which were purchased with a conventional down payment before the housing bubble expanded in earnest around 2002.

If we consider the millions of homeowners who did not re-finance or saddle their properties with additional mortgages, and those who bought in the 1980s or 1990s whose mortgages have already been substantially paid down, then it bolsters the notion that most of this $1.2 trillion in equity resides in about 25% (12 million) homes. Interestingly, $100,000 in equity multiplied by 12 million equals $1.2 trillion.

That suggests fully half (25 million) of homeowners with mortgages have little equity.

Were household income and home values to both decline, many of these 25 million homeowners with minimal equity would be at risk of either being unable to pay their multiple mortgages or of slipping underwater.

Housing: it’s worse than you think (by Scott Sambucci, Vice President, Data Analytics, Altos Research)

In other words, the 11-12 million mortgages currently underwater could well be the top of the iceberg if incomes and house values continue stagnating/declining.

No wonder the banks are demanding that housing be bailed out. They could end up holding the bag on a lot more than $770 billion in negative equity.

This article is reposted with permission from hedgeye.com.

“All truths are easy to understand once they are discovered; the point is to discover them.”
- Galileo Galilei

The penalties for non-consensus thinking were harsher 400 years ago. In 1610 Galileo published his observational studies of the moons of Jupiter as evidence in support of Copernicanism and a heliocentric model of the solar system. At the time, most astronomers still believed in a geocentric model and considered a heliocentric model outrageous. Galileo’s work was derided by many of his contemporaries and, ultimately, Galileo was brought before the Roman Inquisition for heresy, tried, found guilty and forced to spend the rest of his life under house arrest.

Fortunately in today’s world the penalties for having a non-consensus view generally aren’t as severe. That said, it can still take a long time for certain entrenched assumptions to change and evolve, which brings us to the subject of today’s Early Look. One such entrenched assumption in the investment community today is that home prices are unlikely to fall materially from here.

For those unfamiliar, our view on housing is bearish and our argument relies principally on supply and demand data, and the imbalances that exist between them. Our analysis has sought to both measure and quantify the effects of dislocations in supply and demand in housing and the lagged effects these imbalances have on home prices. Our conclusion is that based on the current supply and demand imbalance, prices will be 15-20% lower in 12-18 months on a national basis. This is an overly simplistic summary of a 100+ page presentation we’ve assembled on the subject, but below we present just a few of the facts worth considering.

Consider the following. There are currently 3.99 million homes on the market for sale as of the end of June. Existing home sales were 5.37 million (seasonally adjusted annualized rate) in June, which equates to 8.9 months of supply. This is disingenuous, however, as June existing home sales represent April contract activity. We know that post-April pending homes sales are down over 30% through May and June. As such, we would expect a comparable decline in existing home sales once the data rolls through on a lag later this month. In other words, existing home sales for July/August will be in the ~4 million range, which will be a wake-up call to the Panglossian bulls. Assuming inventory remains around 4 million this will equate to ~12 months of supply. The market is often considered in equilibrium when inventory is 5-6 months of supply. For reference, 12 months will be the highest amount of supply seen since the housing downturn began. This 12 months figure does not include shadow inventory, which likely represents an additional 4.2 to 6.0 million homes (according to estimates from the Mortgage Bankers Association, the Federal Government’s HAMP Program, and Lender Processing Services, the largest mortgage default processor in the country.)

Laurie Goodman, a Senior Managing Director with Amherst Securities, one of the leading providers of mortgage data analytics, recently published a paper in the Financial Analysts Journal entitled “Dimensioning the Housing Crisis” in which she submits that from the beginning of the crisis (YE06) through today there have been 1.5 million homes liquidated through foreclosure and short sale. During this timeframe, depending on which housing series you use, home prices have fallen 20-35% nationally. Using conservative assumptions, she concludes that a further 11-12 million homes will be liquidated in coming years. If 1.5 million liquidations coupled with broader supply/demand imbalances triggered 20-35% downside in home prices, consider what 11-12mn liquidations will do amid a more severe underlying supply/demand imbalance.

While the government has intervened over the past 18 months to try and arrest the rate of decline in home prices, we think their efforts have merely kicked the can down the road and have done little to alter the underlying nature of the problem. Ultimately, the pressure from foreclosures will outstrip the government’s ability to hold back the supply.

Touching briefly on the demand side of the equation, demand for mortgages as measured by the MBA Purchase Index has been steadily falling for the last five years. After averaging 471 in 2005, the Purchase Index fell to 264 in 2009 (-44%). 2010 to date is down to 209 (-55%). The month of July averaged just 170, a 64% decline from 2005. For reference, 2010 year-to-date demand is consistent with demand last seen in 1997-1998, while July demand is consistent with levels last seen in 1995.

It seems obvious to us that home prices are headed materially lower from here, yet many people – most in fact – don’t agree. There are a host of reasons we’ve had explained to us why home prices shouldn’t go down from here. The most oft-cited is the demographics argument, namely that there should be solid net new household formation over the next several years that will drive marginal demand for homes high enough to absorb existing supply, shadow inventory and whatever other pressures might come down the road.

It’s foolish to dismiss criticism out of hand without first thinking it through – especially when multiple investors are telling you the same thing. To that end, we’ve analyzed the core of the argument that household formation is set to take off, and what we’ve found is quite interesting. The chart at the end of this report shows data that we don’t think many people are aware exists. It represents real household formation rates through June 2010. We have the data monthly – not many people do. What is striking is that it shows that in the first half of 2010 the number of households in the US actually shrank. This is the first time this has happened since the data series began, and our data goes back to the 1950s. Moreover, negative growth in 1H10 follows anemic growth in 2008 and 2009.

Why is this? Normally, some 60% of net new household formation occurs in the 20-29 year old demographic. It’s typically at this age when a young person moves away from home and, in doing so, a new household is created. The catch is that unemployment is at 9.5% nationally, and the unemployment rate for this age cohort is well into the teens. Remember, household formation is a derivative of confidence, which itself is merely an extension of the employment environment. This lack of confidence must be having a profound effect across the country for the number of households to actually be shrinking.

Will this change? The relationship between the economy and household formation is reflexive, to borrow a philosophical concept from George Soros. That is to say, when times are good household formation drives the economy amid a virtuous cycle, but when times are bad the economy will suppress household formation, which, in turn, feeds back negatively into the economy in a vicious cycle. The latter is the dynamic that exists today.

Our firm is of the strong view that US economic growth is poised to decelerate meaningfully in the back half of the year and into 2011, which will keep a lid on hiring. This will in turn keep the lid on household formation, the one credible case for a pick-up in housing demand.

Josh Steiner
Managing Director

Proving again that different conclusions can be drawn from the same data, Morgan Stanley is contradicting Case-Shiller’s claim that Bay Area home prices rose by 1.7% from April to May. According to Morgan Stanley, San Francisco MSA home prices actually fell by 1.2 percent.

The Case-Shiller claim was suspect to begin with.

Flashback: Are Bay Area Home Prices Really Up 18 Percent?

For more detail, Case-Shiller also breaks down each MSA into price tiers and tracks the performance of the top, bottom, and middle thirds. One would think that these tiers would reflect the 18.3% boost, but, strangely, they don’t.

By my calculations, the lower third has appreciated by 14.9%, the middle third by 12.8% and the top third by just 8.3%.

These numbers certainly seem more believable (at the lower tier anyway).

But, if no segment of homes even appreciated by 15%, how can the index say that the MSA appreciated by 18.3%?

Morgan Stanley broke the data down a different way. They removed all of the short sales and foreclosures and looked only at regular, non-distressed sales.

BusinessWeek reports:

San Francisco prices fell 1.2 percent while New York gained 0.8 percent in May, Morgan Stanley said in a report, which looked at homes that weren’t in foreclosure or involved in a short sale, in which a buyer pays less than the amount owed on the mortgage and the bank agrees to take a loss.

Short sales increased by 30 percent nationwide over the past year, destabilizing the housing-price indexes, said Oliver Chang, a U.S. housing strategist at Morgan Stanley who co-wrote the report. Proceeds from short sales are 15 percent to 40 percent more than foreclosed homes, driving up S&P/Case-Shiller indexes even when values of non-distressed homes are falling, Chang said.

“There’s a price premium you can get from a short sale,” Chang said in a telephone interview. “That makes it look like prices are going up when they’re not.”

…

“We expect actual home price performance to weaken further,” the Morgan Stanley report said. “Our analysis was performed on May home price data, which were affected by the strong gains in sales due to the expiration of the tax credit. With the weakness in sales that has since ensued, we expect home prices to weaken as well, further contributing to the double-dip effect we can already observe.”

When Morgan Stanley says there is a premium for short sales over foreclosures, what they are implying is that the Case-Shiller weighting formula incorrectly values short sales.

Remember:

Case-Shiller gives extra weight to sales where the exact home was sold before. They use all kinds of adjustments and tweaks to try and account for overly-improved or trashed homes.

If Case-Shiller weights short sales the same as foreclosures, this would help explain why the index shows more appreciation than we actually see in the market.

This article originally appeared on Foreclosure Radar.

Today I came across a recent study on foreclosure sales and house prices by an MIT economist and two Harvard researchers. MIT just issued a press release so the study is now making headlines.The researchers looked at 1.8 Million transactions in Massachusetts over the last 20 years and came to the conclusion that homes sold after foreclosure sell at a particularly large discount of 27% on average. Further they find that “each foreclosure that takes place 0.05 miles away lowers the price of a house by about 1%”. Wow. I sure hope there haven’t been 100 foreclosures near you.

I’ve long believed that foreclosures DO NOT cause price declines, and after reading this study my view has NOT changed. My view instead is that price declines cause foreclosures, but there’s a twist to this view, that I believe threw these researchers off track and led them to a faulty conclusion despite an otherwise interesting paper. They are not alone. I think most people actually believe foreclosure cause prices declines. The key to the author’s error, I believe, can be found in the following sentence: “To the extent that house prices drive foreclosures, low prices should precede foreclosures rather than vice versa.” Through various regression tests they found this NOT to be the case, which would seem to strongly support their conclusion over mine.

Here’s the rub – home prices are a function of income and loan terms. As such the price buyers in a given area can afford to pay often declines PRIOR to being actually reflected in market sales. Massachusetts unemployment went from 6 to 9% in 1990, hitting many households and leaving them unable to pay their mortgages, and impacting what potential buyers could afford to pay as well. In 2007 over-indebted subprime borrowers with 100% LTV, teaser rate, neg-am, loans and no skin in the game began walking away as builders started discounting the same homes those borrowers were told would only go up in value. Those subprime defaults led lenders to pull the exotic loans that previously enabled buyers to “afford” twice as much home as they could using more traditional loan products. Sales then stalled as unforced sellers were unwilling or unable to drop prices.

This leads to the part that seems to confound everyone, including this study’s authors. Banks taking back foreclosures are forced to sell at the price buyers can afford. Thus foreclosures are the first sales to begin occurring in large numbers at the price level that buyers can now afford. As they do, nearby unforced sellers come to grips with the new market reality, while others that don’t have foreclosures nearby cling to the hope that their home won’t be affected. That hope is kept alive by a trickle of sales that continue to occur at prior price levels as not all buyers are impacted by economic changes equally.

Thus even though foreclosures are the first to sell at lower prices, they are not the CAUSE behind those lower prices.

I’ll leave you with this simple example: there was little decline in California’s median price, despite mounting foreclosures and an increasing percentage of foreclosures sales, until the September 2007 credit crisis. At that point the median price began to rapidly tumble to a level the median income family could afford using the more traditional loan products that remained available in the market. Bottom line, the typical homebuyer can only afford as much home as their banker tells them they can afford. As such changes in household incomes typically due to rising unemployement and/or the tightening of loan terms used to qualify buyers are what cause price declines, not foreclosures.