Where is the Real Estate Market Headed? Short Sale or Loan Mod?

10 Mar

Where is the market headed?

Which often leads to: Are we at the bottom?  Will homevalues start increasing?

These are not just common questions I hear everyday, they are VERY important questions to anyone who owns or is planning on owning real estate in the next decade.

While many folks out there keep guessing, I’ve found it much more productive to actually look at the facts and take educated action.

Key indicators help us identify when the market ‘might’ begin to recover:  Consumer spending, consumer debt levels, Government intervention (which has ‘propped up’ our falling Real EstateMarket), standard Real Estate Cycles and Stock Market trends all play a major role in our current economic woes and the length of this real estate down turn.

Historically, when home values decline, they go downsteadily for about 5 years.  This down turn, on a national level, started about mid 2006 which, based on this trend, would put us at the ‘bottom’ around 2011 or 2012.

 

 

A History of Home Values
A History of Home Values

 

Take a look at Chart 1 above, which was created byRobert Shiller, the #1 source on US real estate cycles, to see why this down turn might last a little longer:  To add fuel to the fire, take into account the charts below which show that consumers typically spend more or less money based upon their age.  These charts show a typical ‘spending pattern’ based on the age of the ‘head of household’.  When a family has teenagers and kids in college, that is usually their ‘peak’ in terms of contribution to economic spending.

 

 

Spending Patterns at Different Stages of Life

Spending Patterns at Different Stages of Life

 

As you are also aware, relating to baby boomers and their spending patterns, they have ‘peaked’ and are on the decline. They have had a tremendous impact on our economy in the last 10- 15 years during our economic boom in the late 90’s and through 2007 which helped to fuel the real estate boom that we just experienced.  It is our estimate that due to high unemployment (hovering around 9% nationally) and based on the current and upcoming economic policies which limit business growth, the ‘recession’ we are in, as it relates to employment and real estate will last through 2012.  Then, starting in 2012 and 2013 we can expect 2-3 years of a ‘flat’ real estate market with possible nominal increases in real estate prices in select parts of the U.S.before we see another increase in home prices nationallybeginning in 2014 or 2015 and going upward (not as dramatic as the last boom) through 2022-2025 before we hit another major ‘peak’.

Now we come to the moment where you should ask yourself, “Would I be better off taking advantage of current tax benefits for doing a short sale or should I try and stay in my home by way of a loan modification, even though my home is well over $XO,OOO negative in equity?  “What if your neighbor and you purchased your homes at the same time back in 2005 and for the same price ($400K with 100% financing).  Let’s say you both were facing financial problems this year and your neighbor decided to make an emotional decision and stay in his home by getting the bank to ‘modify’ his loan. You on the other hand decide to make this a financial decision and realize you can rent another home that you will love just as much as your current home for less money.  You decide to use your current difficulties as a way to get out from under this mountain of debt by doing a short sale.

Now let’s fast-forward three years down the road.  Home prices have finally hit bottom and stabilized and you are now again ready to buy a home.  It just so happens that a home in your old neighborhood is for sale at the low price of $200K, half the price you had paid for your old home on the same street.  You buy the home with a very affordable payment.

Let’s jump ahead 5 more years. At this point, the market has appreciated about 40% since you bought your new home and it is now worth about $280K. Your old neighbor that modified his loan has been doing well the last fewyears and decides to move to his ideal home across town.  The tax laws that you took advantage of for doing a short sale no longer exist and your neighbor has $150K cash in the bank… so he can’t really prove a hardship and get the bank to accept a short sale.  He still owes about $370K on his home and he has to pull $105K out of his pocket to sell his home and pay the mortgage off, the closing costs and commissions.

You decide to sell at the same time and for the same price and you put $65K in your pocket at closing after paying commissions and closing costs.

Now take a minute to ask yourself these two questions:  1) Why do banks love loan modifications?  2)  Does it make MORE sense for YOU to modify or to short sale your home? In our sample scenario, the neighbor that did a loan modification made a $170K  mistake ($105K in out of pocket expense and $65K in lost opportunity income) by making the decision emotional vs. making it a logical and financial decision.

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