Recent research suggests that properties near foreclosures normally suffer falling home prices, but a new paper from the Federal Reserve Bank of Atlanta challenges the claim.
It’s the condition of the distressed property progressing through the foreclosure process that weighs most heavily on home prices in the area, not the finality of foreclosure itself, the study found. The negative effect on nearby home prices actually peaks before the distressed property even completes the foreclosure process.
After foreclosure, when a lender-owned property is in below-average condition, nearby houses will trade at lower prices; when it’s above average condition, nearby homes will trade at higher prices.
But even then, if there’s a delinquency or foreclosure down the street, there’s not a huge economic effect on the prices of nearby homes.
The study found that a property in serious delinquency for less than a year or a property foreclosed on and now owned by the bank reduces values of homes within a tenth of a mile by about 0.5% to 1%, “an amount that would most likely go unnoticed by the typical seller who does not have many distressed homeowners living nearby,” according to the report. Researchers analyzed housing information, including public records in 15 metropolitan areas, with a focus on single-family homes.
“We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner,” the authors wrote in the report.
“The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in ‘above average’ condition.”
It’s assumed that the owners of the distressed properties aren’t making as much investment in their properties or are doing as much general upkeep as foreclosure looms. And that’s what’s impacting nearby prices.
“The most important take-away is the effect [on nearby home prices] starts when the property is delinquent. It’s not the foreclosure itself that is the problem,” said Paul S. Willen, an economist at the Federal Reserve Bank of Boston and co-author of the report, in an interview.
In order to minimize the effects that foreclosures have on the surrounding area, it’s best to minimize the time that a property spends in serious delinquency and in bank-owned status, the authors concluded. To do that means accelerating the foreclosure process and putting pressure on lenders to sell bank-owned properties more quickly.
Moreover, policies that delay foreclosures, slowing down the transition from delinquency to foreclosure, don’t protect the neighbors, Willen said. These policies are exacerbating the effect of distressed properties.
“When you talk with community groups… they’re aware that long, drawn-out foreclosures are not good for the community,” Willen said. “The first choice is for the foreclosure to be prevented in a way that is good for the investor and the homeowner. Failing that, it’s good to get this process done it a faster, more humane way.”
An active, income-producing ranch now, bringing in around $100,000 per year, with huge potential.
Subdivide the lower half into 19 homesites (developers are offering to pay $5 million over time to do it for you), harvest the 10,000 palm trees that are worth approximately $1,000,000 wholesale, and then keep the upper portion of 19+ acres for yourself.
Only $2,950,000!
The sellers want to cash out now, for tax reasons.
The Senate Finance Committee approved a bipartisan bill before summer recess that would extend the Mortgage Forgiveness Debt Relief Act through 2013.
The debt relief law spares homeowners who receive principal reductions on their mortgages from being hit with federal income taxes on the amounts forgiven. Without it, millions of owners who go through foreclosure or leave their homes following short sales would experience even more financial stress by being taxed on the amount of debt that the lender forgave in the short sale or that was not recovered in the foreclosure sale. The law has provided relief to thousands of people who have debt balances written off as part of loan-modification agreements is set to expire at the end of December 2012.
The bill now moves to the full Senate for possible action next month, also would extend tax write-offs for mortgage insurance premiums for 2012 and through 2013, and continue some energy-efficiency tax credits for remodelings and new home construction.
The mortgage debt relief extension affect millions of families who are underwater on their loans, delinquent on their payments and heading for foreclosure, short sales or deeds-in-lieu of foreclosure settlements. Under the federal tax code, all types of forgiven debt are treated as ordinary income, subject to regular tax rates. When an underwater homeowner who owes $300,000 has $100,000 of that forgiven as part of a modification or other arrangement with the bank, the unpaid $100,000 balance would normally be taxable.
In 2007 the Mortgage Debt Relief Act agreed to temporarily exempt certain mortgage balances that are forgiven by lenders. The limit is $2 million in debt cancellation for married individuals filing jointly, $1 million for single filers. This special exemption, however, came with a time restriction. The current deadline is Dec. 31, 2012. Without a formal extension by Congress, starting on Jan. 1 all mortgage balances written off by banks would be fully taxable.
There are five bills in Congress, so hopefully one of them will make it through for the homeowner.
The CHBR begins January 1st, so the scrutiny should be ramping up. While this is a great article, it ends abruptly because no one can quantify how the CHBR might limit credit availability. If it means down payments will be 4% to 6% larger, that isn’t a bad thing for the overall health of the market.
Two key ingredients going forward – 1. California foreclosure laws are fantastic, and 2. FHA and other low-down payment mortgages aren’t going away, they might end up being tougher to get – creating more distance between the haves and have-nots.
While some of the California Homeowner Bill of Rights provisions are reasonable, given the recent problems resulting from an unprecedented wave of foreclosures in the state, many others will needlessly interfere with a process that has mostly worked as intended.
California legislative bodies recently passed the group of bills, and Gov. Jerry Brown signed the bulk of them on July 11.
The new laws represent another terrible example of populist policy ignoring both data and logic. Ultimately, CHBR will cost California’s future homebuyers by limiting the availability of credit.
Some of the new rules are modest — requiring mortgage servicers to provide a single point of contact for delinquent borrowers, and giving local governments certain tools to prevent blight, for example. But the centerpieces of the laws are quite disruptive. One statute prevents banks from pursuing foreclosure while there is any effort on the part of the borrower to obtain some sort of loan modification. Another puts the onus of communication on the loan servicer — forcing them to make significant effort to contact borrowers regarding the foreclosure process. And most significantly, the new rules open servicers up to the potential for spurious lawsuits on the basis that the borrower has some yet-to-be-defined “reasonable” suspicion that the servicer does not have all the appropriate paperwork.
In short, the rules will substantially extend the length of time it takes to complete the foreclosure process and raise the overall cost.
CHBR supporters claim the new procedures will improve a homeowner’s chance of staying in his or her home through a loan modification, and that this will help “fix” the state’s real estate market. Unfortunately, the authors of the bill failed to consider the ample and solid evidence that contradicts both assertions. Even more unfortunately, the new rules will be of little benefit in the short run, but have very real costs in the longer term.
While it is always sad to see someone lose their home, a foreclosure is the result of failing to pay the debt that was secured against the property. California has, at least until now, had one of the more efficient systems of foreclosure in the nation. Is the efficiency good, or does slowing the process help?
SLOW VS. FAST
A December 2011 study from researchers at the Federal Reserve Bank of Atlanta found that states with slower foreclosure processes did not see more modifications, but did have high rates of foreclosure — something they attribute to basic incentives. When a borrower can live rent-free for a longer period of time, they are more likely to strategically choose foreclosure over other options.
As for the question of market recovery, consider a state with a less efficient system — such as Florida and its judicial process. Florida’s housing market is a veritable mess. More than 14% of all mortgages in the state are still somewhere in the foreclosure process. Compare that to California’s efficient system, which has already cleared the majority of bad loans from the system. Today, California isn’t even in the top 10 states in mortgage distress — only a few years ago, we were No. 2, just behind Florida. And with new owners, who have long-term interest in their properties, investment is once again flowing, confidence is growing, and sales and permits are rising. California’s seemingly “harsh” foreclosure model has ultimately given all homeowners a leg up by clearing bad loans from the system quickly.
And while there is little benefit in the short run, researchers have also found that lengthy, difficult foreclosure processes have very real implications for future borrowers. A 2003 study from the Federal Reserve found that states with more onerous foreclosure laws had less available credit. Specifically, the down payments that were required in such states were 4% to 6% larger. This is a critical issue in California, a state with the second lowest housing affordability in the nation.
Of course, facts were no deterrent to lawmakers who prefer a few juicy anecdotes for sound bites. The ongoing condemnation of the robo-signing scandal completely disregards the fact that if borrowers had made their required payments there would be no paperwork in the first place. Casting the banks as the exclusive bad guys helps avoid the fact that many borrowers committed fraud by lying about their income on their mortgage documents. We are also asked to feel sorry for owners who are losing their homes without acknowledging that they took thousands of dollars out of their properties in the form of home equity lines of credit, and spent it.
Sadly, sound bite policies such as the CHRB will ultimately cost California’s future homebuyers.
Christopher Thornberg is an economist and founding partner of Beacon Economics.
A reader mentioned the new Pardee tract in Pacific Highlands Ranch near the existing Brightwater and Hampton Lane tracts, which have been selling briskly (at least in the smaller-sized phases they are dripping out). Here is a brief video tour of PHR:
The North County Times threatened to throw me in the hoosegow if I ever published any of their articles again at bubbleinfo.com.
Even though I had helped their reporter Zach Fox with a number of his reports, and the NCT themselves were running my blog on their website without permission, they threatened to send the suits after me if I ever did it again.
So instead I’ll direct you to CR, who apparently has permission.
This is a must-read for those who are concerned about the local shadow inventory:
It’s not every day you see up to 60-foot-long, factory-built pieces of a home trucked, lifted and stacked over a course of two days.
Nine pieces that make up a multi-million dollar “green” project named Casabrava took shape on a prepped site in La Jolla on Thursday and Friday after a trip from a factory in Utah. Over the next two weeks, workers will “stitch” together the pieces to prepare for finishes.
The project’s vision: Homes made on factory lines can look and feel as sophisticated as traditional homes built on-site, said Heather Johnston, an architect and future occupant of Casabrava. Johnston added that prefabricated construction is also more efficient and more environmentally friendly.
“This is not a manufactured home, which are used for trailers and mobile-homes,” said Johnston, who will live in the home with her husband, David Dickins.
“We’re building a prefab home,” added Johnston, who took a year off to do the modular project. “They’re basically house parts. And the parts have to be stronger than a normal house because they have to be transported and lifted by a crane.”
She said prefab construction — which has been around for decades but has yet to gain wide acceptance — is more time efficient. It will take roughly nine months to finish Casabrava, from factory build time to finishes on site. A custom home takes about 18 months to be completed, she said.
“This can really affect the bottom line,” she said.
Savings also come from prefab homes being precision-cut, so there’s less waste. Plus, everything is built indoors, so there are fewer delays. The company that manufactured the pieces of Casabrava was Irontown Homes in Utah.
Building Casabrava will end up costing $220 a square foot, based on Johnston’s figures. The home takes up 4,100 square feet, including a three-car garage. The per-square-footage cost is significantly lower than the per-square-footage cost of a home resold in La Jolla. In July, the median price was $518 a square foot, DataQuick numbers show.
The hard costs of the project, including construction and land but not things like permitting, will total roughly $2.6 million.
Over time, Johnston expects to save money on energy by just the way the home is positioned on the site.
The design is meant to increase ventilation and nix the need for an air conditioner. Other “green” features include rain-catchment systems to water plants and recycled materials.
Consumers around San Diego County are probably scratching their heads in response to a new report from the Bureau of Labor Statistics showing the region’s rate of inflation is among the lowest in the nation.
The report shows that the Consumer Price Index, which measures changes in retail prices across a broad range of products and services, rose by 1.3 percent over the first six months of 2012 and has advanced just 1.7 percent during the past 12 months.
San Diego has the third lowest rate of inflation among the 27 metropolitan regions in the United States tracked by the Bureau of Labor Statistics.
SAN RAMON (CBS 5) – Would-be homeowners have been camping outside a new subdivision in San Ramon, some of them for weeks, in hopes of buying a home this weekend.
A new phase of homes in the Gale Ranch community will go on sale Saturday morning, with asking prices starting around $700,000.
“We’ve been here for more than two weeks. We have camped here day and night so that we are number one on the list,” said Komal Dutta.
“For new homes, lines, lotteries, luck of the draw, very competitive, very stressful,” said Bill Clarkson of Golden Hills Brokers. Clarkson, who is also Mayor of San Ramon, has worked in the area for 34 years. He said the market hasn’t been this competitive since before the housing bubble burst.
“Inventory has been shrinking since February. We’ve seen San Ramon have up to 250 homes on the market. It’s dropped to around 70 or 80,” Clarkson said.
The study found that a property in serious delinquency for less than a year or a property foreclosed on and now owned by the bank reduces values of homes within a tenth of a mile by about 0.5% to 1%, “an amount that would most likely go unnoticed by the typical seller who does not have many distressed homeowners living nearby,” according to the report. Researchers analyzed housing information, including public records in 15 metropolitan areas, with a focus on single-family homes.
