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Moody’s Foresees 10% Drop in US Housing Prices

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Recall when yours truly attended Americatalyst, a real housing/mortgage nerd conference last November, and the panel that was asked to forecast housing had no one predicting more than a 2-3% decline? I was gobsmacked because no one seemed to be acknowledging the huge number of foreclosures in process plus those likely to happen (“shadow inventory”).

Moody’s has focused on one aspect of the issue and does not like what it sees. Recall this Moody’s forecast follows one from Fitch of an 8% to 10% decline in housing prices. From Bloomberg:

Sales of repossessed properties probably will rise 25 percent this year from 1 million in 2011, according to Moody’s Analytics Inc. Prices for the homes could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc. That month, 43 percent of foreclosures were delinquent for two or more years, from a 21 percent share in 2010, according to Lender Processing Services Inc. in Jacksonville, Florida.

Prices for repossessed properties could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc.

“The longer a foreclosed home is in the mill, the bigger the losses,” said Todd Sherer, who manages distressed mortgage investments for Dalton Investments LLC, a Los Angeles-based hedge fund that oversees $1.5 billion. “We have a bulge of these properties coming through the system.”

Homes stockpiled less than a year sell for about 35 percent below the value set by lenders, according to a March 15 report by the Federal Reserve Bank of Cleveland. At two years, the loss is close to 60 percent. A surge of cheap foreclosures may erode prices in the broader real estate market, even as the economy expands and residential building increases, said Karl Case, one of the creators of the S&P/Case-Shiller home-price index.

Yves here. Note this view is based simply on the notion that foreclosures were attenuated on 1.25 million houses, allegedly due to banks keeping them off the market due to the robosiging crisis. By contrast, top housing analyst Laurie Goodman estimates the amount of shadow inventory at between 8 and 10 million homes, and our Michael Olenick, using a different methodology, comes in at just under 9 million homes.

Moreover, evidence on the ground suggests that the banks had reasons other than the robosigning scandal for drawing out foreclosures. While NEW foreclosure actions slowed down markedly, and have ramped up again in the wake of the settlement, it looked far more likely that banks were attenuating foreclosures to maximize income . The longer a house in delinquent and then in the foreclosure process, the more the bank can collect in late fees and servicing fees. And there is considerable evidence that banks pile junk fees on top of that, for instance, double charging the borrower and the trust for fees like broker price opinions.

In Florida and other states, there are numerous cases where the bank has completed all the steps in the foreclosure but has not take possession of the house to sell it. That sort of behavior has nothing to do with robosigning and presumably has to do with bank economics (as in it has a second lien it would have to write off when the home is liquidated).

In other words, there is good reason to believe the Moody’s estimate of homes that will hit the market over time is considerably understated, unless the banks plan to keep a lot of houses zombified. Stay tuned.

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74 comments

  1. jake chase

    I believe housing prices are at least 50% too high based upon income levels of the generation now in their late twenties and early thirties, the time individuals typically purchase their first house. All across the country, those occupying a house free and clear are simply stuck there. Banks are not issuing uninsured mortgages. Residential real estate now simply represents dead money. I expect those speculators buying foreclosed properties in order to collect rents will be lucky to avoid losing their shirts. But of course I could be wrong and Moody’s could be right. My guess is they are doing public relations, not economic forecasting.

    1. Fat Whalen

      Excellent, this really is a terrible time to buy a house.
      I thought Moody’s was part of the criminal rentier infrastucture – people who lied and cheated about ratings?

      1. SBC

        Moody’s Analytics which is the shop that Mark Zandi is a part of is a separate entity from the Rating Agency side of Moody’s. They make their money by being good at forecasting and so the incentive is there for them to make a good faith projection. The ususal disclaimer before any Moody’s Analytics talk is that they do not in any way reflect the opinions of Moody’s the Rating Agency.

    2. Will Nadauld

      Not to be a cheer leader for housing, but my observations are far from yours. In fly over country, those wishing to buy can do so quite cheaply both in new construction and in existing homes. I have a 1600sf rambler I will sell you for 145,000. You could do much better than that buying out of foreclosure, say 125,000. With a decent credit score you can own said liability for around 800 per month pmi included. You can rent said house for about 1000 bucks.

      Now consider non fly over market. Old decrepit houses outside of boston selling very quickly for 700,000ish and that is with the added bonus of 10,000 dollar per year property tax. No shortage of thirty somethings vying for these houses. Finance in Boston doing well for those in the loop.
      Is any of it based in reality? what is reality? I say no. not realistic, but it is what I see. Plenty of people willing to take a chance on the american dream in both fly over and non fly over world. The crows come home to roost ten years from now when said murder trys to sell and realizes that four different “trusts” “own” their property.; god bless the mortgage insurers, and god bless america

    3. Kmurp

      I hope that houses are not 50% overvalued as stated in the first comment. If so, I would be way underwater in nominal terms ( and not including home improvements). And that would be after 22 years..

  2. John L

    Here in the west (it may be a Wells Fargo thing), banks are not only negotiating short sales, they’re giving sellers cash back at closing in the order of 10% of the sale price, ostensibly to help with moving expenses but doubtless also to pay unpaid utility bills, RE commission, closing costs, etc. Paying them to go away, in other words. This is clearing inventory, avoiding foreclosure, laundering the title chain, and cleaning up the banks’ balance sheets, and is certainly helping out those underwater, but it is killing prices for other sellers. Properties are short selling for 2/3 of the asking price a year ago. So an overall price reduction of 10% sounds entirely reasonable.

    1. Not A Bank Shill

      I read some legal opinion a while back that if an owner in danger of foreclosure does do a short sale in a non-recourse state, the bank does have recourse because no foreclosure occured.In other words after some legal proceedings the bank could come after you for the loan loss.

      A real estate agent mentioned that to me recently too, and said after years of almost ignoring short sales, they are actually now encouraging them.

      Does anyone here know if that’s true and if any such cases hit the news?

      1. Cugel

        That makes sense — IF the Seller is NOT represented by an attorney. I would NEVER let my client do a short-sale without receiving a release not only of the deed of trust, but also the note.

        Lots of banks & Credit unions try and screw the borrower by agreeing to the short-sale. . . . and then sue the borrower on the deficiency (in a recourse state).

        In a non-recourse state they can’t do that if they foreclose. But, on a short-sale the borrower is still obligated to pay the full amount of the note, unless it’s released. Borrowers who don’t have attorneys often don’t understand that just because the bank releases the deed of trust, does NOT mean they are relieving the debtor of all personal liability!

        In the cases you mention however, the obvious solution is either offer the bank a couple of thousand dollars to go away, or else Chapter 7 bankruptcy. Either way the borrower needs a lawyer.

        1. Not A Bank Shill

          OK, makes sense.

          I’ve been half seriously keeping an eye on the market as a buyer. RE agents used to say it was a waste of time to chase short sales.

          I’ll continue to assume it’s a waste of time to chase short sales, unless I hear the seller was released from the note.

          I hope the selling RE agents are nice enough to inform their clients of that little gotcha.

        2. jake chase

          I’m not an expert but I don’t believe employees are eligible for chapter 7 any more. Aren’t they all pushed into 13 and forced to scheduled payments of existing liabilities, or is that limited to credit card debt?

  3. Susan the other

    It the stupid banks can ever figure out how to get clear title, which is doubtful, they should sell this backlog of foreclosures at pennies on the dollar, or just pennies if that works faster. And they should give the former owners first right of refusal on all transactions to private homeownership. Basically just give them back their houses. Unless they have gone on.

    1. John L

      STO, see my comment above. They’re effectively doing it with short sales, but the current owner doesn’t get a chance to buy. That would be a principal writedown, and I guess they just can’t bring themselves to do that. Happy to give money away, but only to a third party.

      1. MyLessThanPrimeBeef

        Happy to give money away, but only to a third party

        —-

        Sounds like a divorce between two ex-lovers.

        No rage like love to hatred turned…

          1. ambrit

            Don’t forget that a lot of the ‘newer’ houses on the market were built with the structural integrity of a Tupperware container.
            The elephant in the room is; “Who can afford these prices anyway?” Most if not all of the twentysomethings I know, a fairly representative slice of the Southern Demographic, are bogged down in ‘nowhere’ jobs and high debt loads.
            I suspect that, if you remove the extremes of the income scale, America is looking pretty closely like, say, 1950′s income levels. Any good numbers floating around out there?

  4. Mark P.

    We’re in unexplored territory here. Has anybody knowledgeable developed any scenarios on what things might look like in, 2016 and 2020 if things continue as they’re going?

    I don’t mean simply that the RE market as we knew it is dead. That’s trivially obvious. Also, Laurie Goodman, Michael Olenick and Yves are obviously nearer the truth than Moody’s.

    Nevertheless, there’s still — amazingly stupid as it seems — a large segment of mainstream “thought” promising that things are about to return to normal and that house prices will soon start “recovering” i.e. return the march upwards into being beyond the wages of normal Americans. See forex -
    http://www.cnbc.com/id/45416286/Housing_Prices_Won_t_Recover_Until_2013_Economists

    Simultaneously, as Yves notes, alongside this semi-psychotic denial of reality, there’s the financial industry’s practical desire for selective zombification in areas of the market: resisting take hits on HELOCs and big-ticket foreclosures, extracting fees from servicers via extended foreclosures, etc.

    Moreover, Washington has shown that it’s willing to do anything to feed the banks’ balance sheets. Even when we get beyond the statute of limitations for purposes of prosecuting financial industry figures — and that time is coming up — the pols will have sunk too much into this program of “save the banks first and we save the American system” to step away.

    Point is: many of us thought that RE prices would have fallen further and faster by now. They haven’t because the system has been propped up. Presumably, the long-term hope of Bernanke et al is to inflate the dollar till its diminished value and the slow-motion fall of asset prices meet at a point where taking the losses is systemically bearable. If TPTB can extend and pretend this far, let’s suppose they can keep this up into the 2016-2020 time-frame. After all, when one can create the world’s reserve currency at will, why shouldn’t they be able to keep that up?

    I’m not looking for simple doomster comments, but wondering if anybody has any more detailed scenarios. What could the US in general and the US real estate market in particular look like four to six years out if all this continues?

    1. ECON

      Mark P. excellent observations. Canadian friend purchased three year old home in Fort Myers area at less than $54k. His travels through Florida and Arkansas suggest that there are years to go before housing hits bottom! Comment is awareness of on-the-ground observation.

      1. ambrit

        Dear ECON;
        Second your friends observation. The same holds true here in Mississippi and Louisianna. Prices have a long way to fall yet.

    2. rjlaures

      The BRICS countries aren’t very happy with the reserve currency status of the dollar. I’m wondering what would happen if they are able to break that hold.

      1. Because

        lol, who cares about BRIC. “world reserve currency” is irrevelant to americans and only revelant to globalism. That is only for international capitalism. The US doesn’t need BRIC at all. The US needs very little from the globe.

    3. Fred

      Bubble still deflating – whole lot of wealth will be obliterated. At that point traditionally, a war of some kind is started.

    4. Anonymous Jones

      This is precious. I’ve been around a lot prognosticators for a long, long time. I’ve seen many a “sane” prediction fail and many an “insane” prediction come to fruition.

      But now, based on your comment, I gather that someone like me who accepts the uncertainty of the future must have a “semi-psychotic denial of reality.”

      I acknowledge that there are real risks to the downside in the housing market. But I don’t know where prices are going to be next year, 10 years from now or 100 years from now. I have to be honest, I’m pretty sure no one does. We can makes guesses, of course. Oh wait, I guess we can’t make certain guesses, because that would expose our “semi-psychotic denial of reality.”

      At the height of the Roman empire, land in the middle of Rome was extremely expensive buoyed by the wealth of the empire and a population over a million people. I doubt any of those Romans could ever have imagined that only a few hundred years later the population of Rome would dip below 20,000 people and you would have open grazing by domesticated animals in and around the ruins of the Forum.

      I also doubt those intrepid Californios, whose ancestors had spent generation upon generation in a sleepy little worthless cow town now called Los Angeles, ever thought that within about one century that city would become one the richest cities in the world, with real estate that was then just westside marshes now some of the most expensive real estate anywhere.

      I don’t know. This is a big country, with a lot of people. I guess if you knew all the variables and had the perfect model, you could exactly predict where the price of each home would be tomorrow, in 2013 and in 2023.

      But I guess, despite that, I’m going to keep thinking that I’m not sure which way prices are going to go, no matter how many people tell me I’m semi-psychotic for denying reality.

      1. Mark P.

        Sorry my phrasing offends you. Two factors appear inescapable, however:

        [1] House prices have to be within some sane multiple of folks’ salaries — those folks having jobs, anyway — and the historical standard has been three times a potential buyer’s annual salary is what they can afford.

        In large areas of the country we’re nowhere remotely near there yet.

        [2] The demographics are such that for a long time to come we’re going to have far more boomers trying to sell houses than young people in their 20s-30s who can afford to buy them and form households.

        Furthermore, if the younger generation even have decently paying jobs, they’ve been loaded down with student debt. Even more than the crimes committed in the morgage-securitization realm with MERS et al, the financialization of education has been a monstrous crime against our young people and, honestly, our society’s future. It gives one those “tumbril moments” –

        http://ununoriginal.dreamwidth.org/74595.html

    5. Art Vandeley

      Mark P – I think the 2016-2020 housing market will look similar to today’s market. Politicians have shown no interest in dealing with the mortgage bubble and its fallout, or doing anything about the GSEs. The Fed will probably have rates at 0% so there will be very little private mortgage market. One thing I know, housing industry hacks will be talking about hitting bottom and how it’s a great time to buy a house, record high affordability levels, record low mortgage rates! Some things will never change.

      1. Mark P.

        I think most of us agree on those probabilities, with the exception of a few folks like Anonymous Jones above — bless him.

        What I’m trying to visualize is, with those factors considered: what are the social ramifications of this kind of RE market after another decade? What could the trends be and what will it feel like when everybody accepts this is the new normal because it’s continued for a generation? Is it sometime like Japan is today, but on a continental scale? Like that.

  5. abelenkpe

    In 2000 the 3 bedroom 1 bath 1930s era homes in my neighborhood went for around 300,000. Bubble highs reached 1.3 million for those same homes. There are two that have been obviously empty since 2007, and probably several others that are not so obvious. Prices have not come down very much. According to doctorhousingbubble.com the average annual salary for my zip code is 70,000. So a ten percent drop in prices seems like a safe bet unless of course we are suddenly hit with massive wage inflation…..lol…like that would ever happen.

    1. duffolonious

      $70K avg. household income? And houses still well above $300K? Hmmm… and I thought I had it bad, geeze.

      I’d like to see housing values if there was no bubble (or little bubble), I bet they’d still be down from 2000 (or flat) because in the long run housing prices track income.

      1. liberal

        I bet they’d still be down from 2000 (or flat) because in the long run housing prices track income…

        I would assume so, though Shiller et al. seem to believe they track inflation.

        1. DP

          Housing prices are already below 2000 levels in Atlanta, along with some long-term disaster markets like Detroit and Cleveland.

  6. Rehabber

    When a home sits unoccupied for awhile, bad things tend to happen to it. I’m seeing more product thats been hit by copper theives, weather damage that would have been minor had someone lived there to fix it, animals, ect. Most non-investor buyers are not interested in remediating that damage.

    1. Leona Hemley

      Oh bullshit, smart campers squat and keep the joint clean. Raw materials are actually quite cheap compared to the insane prices for housing. Something the two by four kickers know quite well.

      1. ambrit

        Mz Leona;
        Ever hear of property taxes? They are indexed to ‘property values’ right? Do the math yourself, and the reasoning for ‘official’ recalcitrance to lower housing values shines through. Lots of people back away from housing ‘deals’ when they see their future tax burdens.
        As for squatting, the real thing, not just the smug self serving illusiory kind, ever notice how forcefully the local police evict said urban and suburban ‘Pioneers’ even when they are making good faith efforts to maintain and even improve the properties they are #Occupying?

        1. bob

          Bingo. The local muni’s haven’t even begun to lower their assments. If they did, they would be lowering their tax base.

          Less tax dollars from property taxes, and less assistance from the state and federal governments.

          The risk to buying a house now is that you will not be able to afford the taxes, let alone the mortgage.

  7. ECON

    To someone like me watching from the sidelines outside USA, the housing tragedy beginning in 2007 with all the financial and economic costs incurred over the intervening years must be in far greater excess than any of the benefits derived from the federal governments management of the situation. Despite the widespread TBTF banks being subsidized in the billions on this file alone by the taxpayers, it would have been much less costly for feds to squeeze the TBTF banksters and save the economy. The US economy will only come back, and not to the normal expected, when the albatross of housing is vanquished.

  8. Hugh

    Student loans keep the next generation from buying homes. High unemployment and stagnant wages serve as a dampener on home buying generally. So it’s not just an oversupply of houses, or their deteriorating condition, but a dearth of buyers.

    Current housing prices remain twice what they were in 1997. In short, they have much further to fall and, in the absence of any countervailing trends, could do so for years.

    1. Doug Terpstra

      Right, that’s on the demand side. And as Yves notes on the supply side, “there is good reason to believe the Moody’s estimate of homes that will hit the market over time is considerably understated…”

      So, another ‘perfect’ storm looms. Where dramatic oversupply and plummeting demand intersect, Moody’s 10% drop is almost certainly wildly optimistic by orders of magnitude.

  9. ToivoS

    There is another component to the shadow inventory that I have not seen mentioned. This is just based on my observations of a few upper-middle class neighborhoods in a generally prosperous California city. I have been following sales in a neighborhood whose house prices reached 850K to 1.1M in 2006. Today prices are listed in the low 700s. However, there are no sales at this level. Out of 7 on the market last spring one went for 625K. The other 6 just withdrew. None of these people are underwater, they are all empty nesters with mostly retired mortgages. These are couples living in 3500 sq ft homes with 8 rooms and 3 bathrooms. They all seem to be waiting for the market to improve. It is really crazy. If at some point they come to a collective realization that even that one house that went for 625K was too expensive I could easily see a quick 25% drop in prices in that neighborhood.

    1. Mark P.

      “…there are no sales at this level … if at some point they come to a collective realization that even that one house that went for 625K was too expensive I could easily see a quick 25% drop in prices in that neighborhood.’

      Yup, it’s perfectly possible.

    2. Rcoutme

      That is the 800lb gorilla in the room that Moody’s, Bernanke and all the others seem to be ignoring. Many, many, many Baby-boomers expected to sell their current homes (at huge profit, some or all of it tax-free) to use for their retirement. Then, just before they hit that magic age, the GFC hit. As we sit here reading an typing, thousands of people from the BB generation are hitting retirement age. They expect to 1) sell their homes, 2) collect on their ira/401k, 3) stop working. The problem, as I see it, is that we, as a society, did not plan correctly for this.

      The BB generation has a history of not being planned for. Now we have come to the point where they need to retire and we have not developed the technology and financial/economic policies that will permit them to retire while maintaining their standard of living (or at least one they would consider tolerable).

      As a consequence, the 1% may be able to retire in luxury, the 5-10% may be able to retire in dignity. The 90% will likely retire in what they consider to be poverty (although it may not actually qualify in the defined legal sense). I always wondered what would happen when the BB’s all tried to retire and sell their 401k’s, now I think I am seeing it occur.

    3. ohmyheck

      Question: Did the retirees buy the house to retire in, say at $700,000, or did they buy it 30+ years ago, at $70,000?

      In other words, if their house is paid off, and they actually invested, with 30 years worth of interest, say $150,000, then isn’t anything over $150,000 considered a profit?

      If the latter is the scenario, the $500,000 profit is a big chunk of change. I can see why GenX-ers would be a bit miffed…..

  10. PQS

    Further to ToivoS above, I would bet many people are sitting on their homes because that was their retirement nest egg – they bought 30 plus years ago and saved little else, thinking that their home would provide.

    1. KnotRP

      Rent and ownership are both sitting on the same crumbling foundation: income.

      Don’t confuse system feedback latency with arrival of a signal.

    2. ToivoS

      PQS –. Retirement nest egg exactly correct. In my anecdote the one house that sold was a close friend who planned to retire in 2008 but put it off because he had factored in 850K for his retirement. It reached a point where he could no longer delay.

  11. Sid

    Folks, before you panic and sell your houses, you might check out the Calculated Risk blog: ‘So RealtyTrac is saying prices for some repossessed properties could fall 10 percent “because they deteriorated” while in the foreclosure process.’

    While you are on the blog, you should also check out the cost-to-buy vs the cost-to-rent graphs. House prices are not going drastically down as long as rent prices are where they are. Especially when investors are snapping up foreclosures to rent out and making 8-9% return on capital.

    1. Nancy

      I’m reading this as Moody’s saying there needs to be a 10% increase in Bank corruption to make sure the bubble doesn’t cave in so fast. This way looter/hustlers can get stolen houses cheap and rent ‘em out.

    2. GA

      I would be cautious about interpreting the ‘investor rent’ interest as putting a floor under house prices across the board. It clearly will in some segments/areas, but will not in others where prices could still fall dramatically – and how this translates into headline ‘market’ or index figures is very uncertain and depends on index methodology.

      The cases above are all underlining that shadow inventory has several sources, not just foreclosures, including deferred sale by empty nesters and others who are ‘well off’ (as in, have jobs, etc), and that much of the shadow inventory may be relatively ‘high end’ – large homes that don’t work as multi-family, and too expensive/large for many buyers.

      There are many types of housing that don’t work for rental properties, and even if this is changing, my own view is that upper-middle and high-end properties rarely work as rental properties (or conversely, low-end properties are often best for rentals). The yields just tend to suck at the high end, and the news stories about these new rental investors make it clear they’re looking mostly at low to lower middle segments.

      Even high-end prices could fall enough to make them work as rentals of course; but the math on that is stark – prices have to be cut in two to make the yield double, and rental investors care first about yield. That floor on prices could be a lot lower than where we are now.

      Although who knows? Maybe we’ll see a repeat of the phenom in some cities where grand old homes were effectively chopped up into rooming houses and rabbit warrren rental properties (often mostly illegally). This reversed in many cities during the long boom, but is one way to get the yield back up.

      The math issue on ‘housing prices’ is that how much weighting expensive homes get in the index is unclear and not easy even for the mathheads.

    3. Yves Smith Post author

      Did it occur to anyone that the more properties are converted to rentals, the more rents will fall? And the more homes are sold out of REO or in short sales at lower prices (per Moody’s and others) it will make them viable rentals at lower prices? The later investors will undercut the earlier ones with the higher cost base.

      This is a pretty naive analysis. It might hold in some markets where there isn’t much shadow inventory, but you’d have to know the local dynamics very well to be sure of that.

      1. Stan

        How about Banks and investors stay out of housing? Can’t you make money some other way?

      2. davidgmills

        Rents are up well over what a mortgage would be here because the people who got foreclosed on need a place to live.

        The number of people needing roofs over their heads hasn’t changed. The only thing that has changed is that foreclosed owners have become renters, driving rents up.

    4. roaring mouse

      Sid, I agree that 8-9% pre-tax rental yields will support some segments of US housing. However, property taxes must be considered, and across the US, these are likely to increase considerably in order to fund hungry local governments. Very quickly, a 8-9% pre-tax rental yield becomes 2-3% after-tax, and 0% inflation-adjusted.

  12. BondsOfSteel

    Houses are purchased on leverage. What happens to prices when interest rates go up?

    The cost to rent graphs are based on the current rates. ZRIP could last for a long while, but it’ can’t last forever.(See Stein’s Law.)

    1. Because

      Your forgetting that “ZIRP” is a market creation as well under FOMC operations. They take the consensus through the 13 year treasury rather than have a couple of rogue freaks jack up rates like they did in 1893 and 1931.

      If rates are going up, the economy is getting better, if rates are really going up, the economy is getting alot better making RE a lot better.

      Leverage becomes easy to handle.

  13. Tyzão

    I wonder how many of those 10 million+ the banks will get and how many the homeowners will retain? At some point, the winds will shift to the homeowner, because they are the best bet to keep the house from falling into neglect. Then the question becomes, even if the homeowner uses quiet title or a similar strategy, the debt has not been satisfied. So, the County courthouse now has a completely clouded title as well as a hanging mortgage. The homeowner is also stuck in limbo, because he/she probably can’t/won’t be able to improve or sell the property. Likewise, property taxes will likely stop being paid, or the local jurisdiction will start to take on an incredible amount of property. I really don’t see how this whole thing plays out, without someone starting some serious action against BOA, Bank of New York, LPS and the whole lot…its going to get a lot lot uglier…before it gets anywhere better, this is just the calm before the storm.

  14. Glen

    Moody’s only has an opinion when somebody pays them to have it. I wonder what this one cost.

    Which reminds me:

    Churchill: Madam, would you sleep with me for five million pounds?
    Woman: My goodness, Mr. Churchill… Well, I suppose… we would have to discuss terms, of course…
    Churchill: Would you sleep with me for five pounds?
    Woman: Mr. Churchill, what kind of woman do you think I am?!
    Churchill: Madam, we’ve already established that. Now we are haggling about the price.

  15. Antifa

    Homeowner’s insurance. Our insurer cancelled our policy abruptly in January (after 9 years), saying the assessed value of our home was 30% less than when we bought it in 1997. (It’s a log home, so it is hard to find a house to compare it to in our neighborhood).

    Insurers are cancelling and reissuing homeowner’s policies across the country based on the reduced value of maintained properties. They don’t want to pay off what your house used to be worth if it burns down or gets washed away.

    A further drop of 10%, 20% or more in housing values and no doubt there will be more homeowner’s insurance policies cancelled and reissued, to keep actuarial tables in line.

    It’s just another damn nuisance arising from this stewpot of mortgage fraud.

    1. bob

      I did some major imporovements on a house and wanted to up the HO insurance. It was a pain in the ass, I went as high as I could, and it’s still not going to rebuild it after a total loss, IMO.

  16. Small.Business.Guy.1

    Another issue. With many foreclosures occurring on properties not located within municipalities, or on properties which are reliant on private wells and/or private septic systems, are those properties operationally compliant with current environmental health laws?

    When the initial appraisal was done, there was supposed to have been an inspection and a written report on the water well and/or septic system(s), and water testing with written report besides of the property’s drinking water.

    I’m told (anectdotally; here in IL) that there’s been more than a few cases where reps for Fannie and Freddie are finding out that such documentation, if it exists, is often somewhat ‘problematic’ on mortgages that they now hold.

    Nothing like getting hit with a $10k+ bill per for repairing a well or septic system. And that’s assuming one can even get a permit to fix the system(s).

    1. bob

      Banks in PA, WV and NY are just beginning to look at this with natural gas fracking. Some wells probably never were good, but now they are testing them, and finding mixed results.

      A house without water a water is less than worthless. In the rural areas that the drillers are working in, it’s not even remotely possible to bring in Muni water, much less sewer service.

      What’s a hazardous waste site worth?

      1. ambrit

        Dear bob;
        Considering that people have to live somewhere, now would be a good time to invest in or develop a robust water filtration system for single family homes and small multi family units.

  17. davidgmills

    I checked into refinancing my home several months ago and when my house was appraised, the appraiser valued it at 63% of what I paid for it in 2001. Thankfully, I am still above water, but just barely, and a refinance would have added enough principal back into the mortgage that I would have been underwater if pricies fell any further.

    My home is in an upscale Memphis suburb. My home was built in 1996 and originally sold for more than I paid for it five years later.

    I think a fair assumption is that if my house burned down it would cost far more to replace than it is worth. In fact, it might cost more to rebuild it than even it cost my builder to build it 15 years ago. Building material costs just haven’t come down much from where they were 15 years ago, if at all. Now you get Chinese junk for the same price you paid for American materials then.

    So far, I haven’t had any problems with getting replacement insurance but I wouldn’t be surprised if that becomes a problem soon. How can insurance companies provide replacement cost if replacement cost is nearly double the value of the house?

    How much farther can housing here decline? Well, since the jobs seem to be paying less and less to the younger people who would buy a house like mine, I think housing prices here still have yet to hit bottom and I think bottom is going to be more than 10%. There are just too many foreclosed homes here sitting, which, like mine, cost far more to build than they would ever sell for. So that means new housing construction is not going to happen any time soon. That means fewer jobs, which means lower wages….

    1. Sleeper

      there is something funny going on – Housing prices have and are falling dramatically.

      But labor rates and construction materials still price new housing at about $ 100 per sqft.

      Is this the impact of clouded title issues ? or is the existing housing stock over sold ?

      Or something else.

  18. Kunst

    Yes, houses left unoccupied generally deteriorate and thus drop in price. But that’s because of the deterioration. It isn’t the same house, in terms of value. This is separate from value based on supply and demand.

    Take a house worth $200K at some point. Now take a bunch of that type of house that get foreclosed, do not suffer deterioration, and get dumped on the market. Maybe they are now worth $180K, because the supply has increased relative to demand. One of those houses that has deteriorated because it wasn’t maintained may be worth $150K, but it is not the same house as it would be without the deterioration.

    This is relevant because someone sitting in a $200K house is interested in what his house is worth if he sold it. It is not in foreclosure, but it is affected by the supply problem, so the answer is that it is worth $180K. Not $150K, because it has not deteriorated. If you are a buyer, which would you rather buy, a deteriorated house at $150K or a non-deteriorated one at $180K? Answer: overall, they have the same value, take your pick depending on your situation. If you pay $150K, you are getting less of a house than if you pay $180K. Likewise, if you sell an undeteriorated house, it is worth $180K, while the same house deteriorated is worth $150K. Obviously, simplifying by talking about a “standard” house and a “standard” amount of deterioration.

    So let’s not confuse the two. Reduced price for deterioration reflects the damage the house has suffered, on top of market conditions. Damaged houses are not comps for undamaged houses.

    1. Tyzão

      Neglected properties have significant negative externalities which effect neighboring properties, regardless if those neighboring properties have likewise gone into neglect, or are simply suffering from clouded title or an unsatisfiable mortgage. Then there is the multiplier effect, which compounds the cycle exponetially.

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