Home Foreclosure Activity In State Shows Signs Of Improvement In March

By Kenneth R. Gosselin, The Hartford Courant, click here to view online

Home foreclosure activity in Connecticut rose again in March, but there were more signs that the state's foreclosure troubles are beginning to moderate, a report released Thursday shows.

One component of overall foreclosure activity — first-time notices — fell 16 percent in March, the first year-over-year decrease after a string of 13 months of increases, according to the monthly report from RealtyTrac, which monitors foreclosure filings nationally and by state. RealtyTrac also markets foreclosed properties.

First-time notices totaled 1,022 in March, down from 1,221 a year ago, the report showed.

"This could signify a turning point for the recent rebound in foreclosure activity in Connecticut, indicating that lenders and the court system are beginning to catch up with the backlog of delayed foreclosures in the state," Daren Blomquist, vice president at RealtyTrac, said.

He added, "The latter two stages of foreclosure activity — scheduled foreclosure auctions and bank repossessions — continued to trend higher in March, but the decrease on the front end of the foreclosure process is a good sign."

Foreclosure auction notices rose 75 percent, to 156, and bank repossessions rose 65 percent, to 717.

Residential properties in some stage of foreclosure rose nearly 9 percent in March, to 1,895, from 1,742 for the same month a year ago. While an increase was still registered in March, it was in the single-digits, far below the 40 percent, year-over-year increase in the previous month.

The nation as a whole saw overall foreclosure activity decline by nearly 23 percent.

Experts say recovery in Connecticut was slowed by the robo-signing scandal in 2010. The scandal involved major mortgage lenders and servicers signing off on foreclosure documents without verifying their accuracy. The controversy touched off far-reaching federal investigations that led to paperwork reforms and hefty monetary settlements — and also delayed lenders pursuing foreclosures.

That, some experts have said, led to the spike in activity in Connecticut and a backlog in the state's courts. Not all states process foreclosures in the courts, so the fall-out varied from state to state.

In March, one in every 784 residential properties in Connecticut had a foreclosure filing, compared with one in 854 for the same month a year ago. Connecticut ranked the seventh highest among all states in this measure, compared with sixth highest in February and 13th highest in March, 2013.

 

Hartford's Buyers' Market

Hartford is currently listed number 9 in the list of the best markets in the country for buyers.  To put that in perspective, Phoenix is listed as one of the hottest sellers' markets.  So what do they really mean?

The people who compile these lists rate as a buyers' market anywhere where prices are not rising, where homes sell below the asking price, and where the median home in on the market longer before selling.  Now think about what that could mean.  In Phoenix, where everyone knows that there are tons of short sales and there was a huge oversupply of homes built, with declining values and high rates of foreclosure, sellers are very realistic.  They may even expect to lose money.  Also, many people have seasonal homes there, in which they are less emotionally invested, and may just be willing to dump them to be done with things.  They may rate outside advice more strongly, since they may not be Phoenix natives.  And they know that they are competing with banks and corporations as non-emotional sellers.

Now compare that to the Hartford area.  Most homes are primary homes, with owners living in them and feeling strongly about their value.  There was not a great deal of building down in the prior decade, nor were there daily articles in national news media about the poor market and the high foreclosure rate.  Most foreclosures, since Connecticut is a law state (meaning that you must go through the legal system to foreclose), are still in the works.  Finally, prices went up in the past decade and a half, but not like they did in the Sunbelt, where jobs were growing and the economy was expanding.

Then, add in the factor that every home is different, so its value is subjective, and it is not a commodity (although it may have gotten close in the Southwest).  It's not like buying a Honda here versus in Arizona; you are not comparing apples to apples.

However, numbers don't lie.  Sellers here have not been as willing to drop prices or make concessions, so their homes have not sold.  Buyers have chosen to rent and wait for values to bottom out.  Also, they have probably been less inclined to put their homes on the market for what they are truly worth, since they are still hoping to get out whole, and, often, to buy another home.

When will things change?  Either the market will get much better, and, like a rising tide, raise all boats, or prices will come down until those homes that have rusty For Sale signs out front are all gone.  But it does seem like a stretch to say that sellers are better off in Phoenix than in Hartford, overall.  Like much of life, it's just not black and white.

More Reasons to Buy Now

The Wall Street Journal this morning had one of the most positive articles about the current real estate market that I've seen in a long time. They said that, if you take out foreclosures, the real estate prices are really off less than 1 percent from a year ago, suggesting that we are at the bottom of the market. In addition, mortgage rates are near a 50-year low, and the ratio of housing prices to income is over 20 percent better than the fifteen-year average. Although household formation rates have fallen recently, the aging of the baby boomers portends an uptick in home purchases and second home acquisitions over the next number of years. They even went on to say that most people still want to own homes, even discounting or ignoring the investment value, because of control over their environment and access to schools and other amenities. They predict that prices will start to climb soon.

All of this seems to indicate that now is the time to buy. It never pays to try to find the low point at its exact nadir. All indications say that we are now close to that point, and therefore buyers should be rushing out to buy. The article does talk about the new difficulties in qualifying for and obtaining mortgages, but there are many other people who simply aren't buying because they are worried about the future value of their investment. Do those people not worry about the stock market? The bond market? The value of art and antiques? In fact, do they sleep at all?

It seems clear that we need to continue to convince buyers that the time to act is soon. If not today, then later this week or month!

Real Estate Around the Country

I just returned from my semi-annual meeting with other large independent brokers from around the country. This time, we met at Lake Lanier in North Georgia. The weather was great, but the real estate climate is, in some respects, sobering. National experts are saying that equal supply and demand and a "normal" market may come as late as 2015. Sales for the first quarter were down around the country, in double digits. Some of that was weather-related, but the rest is still about jobs and financing issues.

There is a silver lining, though, and it's a big one. The interesting news was that prices of sold properties were up by a fraction, 1% or so. This is counterintuitive, if you think about the effect of foreclosed properties and short sales on the value of homes. What it seems to suggest is that it is the best homes (not the most expensive, but the most desirable homes in every price category) that are moving. What that means for sellers is that homes must be put on the market at levels that seem to be good values.

What it means for buyers is even more important. There aren't great bargains out there, at least on homes that are well priced and well maintained. Putting in a lowball offer isn't going to result in a purchase. It goes back to the old saying "You get what you pay for". If you want it, you're going to have to buy it at its value, and not at a fraction.

We just had an offer on a commercial property with a listing price of $2.1 million. Someone submitted an offer of $700,000. That's just wasting everyone's time. The statistics seem to indicate that the short sales and foreclosures aren't yet changing prices on regular properties, and given what we are experiencing in delays on such sales, we can vouch for that. Those things are backed up in the pipeline. What's moving through are the good deals, but they are good deals at good prices, not bargain basement fire sales. Buyers should assume that they won't get what they want if they insist on bottom fishing. It may be a sport, but it's not a strategy.

The Power of Low Rates

I have a real estate friend in Madison, Wisconsin--where the market seems a lot like ours much of the time--who thinks that the real estate market will not recover unless and until the government aims directly at our industry with programs designed to improve sales. Although the tax credits did that, they expired and left us, arguably, in worse shape than ever (however, people don't realize that, because they look at the fact that housing prices haven't declined much, and in some cases, they have edged up slightly--that's because all the first-time homebuyers have left the market, leaving higher-priced homes as the only ones selling). The government has focused on the banks, using first TARP money and then foreclosure actions to regulate activity. We probably haven't been helped at all by the foreclosure stoppage, since it just lengthens the period of time where the whole housing system is backed up. Until all those homes, which--foreclosed or not--the owners can't afford, get transferred somehow, there won't be a "normal" real estate market. Appraisers can't even use those transfers in computing value, since they aren't arm's-length transactions, but they obviously have an effect on values and on regular sales.

This same friend, although thinking that we need Federal intervention to improve our market, also has the most compelling argument for buying right now. He has made charts that show that a 10% drop in prices actually has less of an effect on monthly payments (the gold standard by which most buyers decide how much they can afford) than a 1% rise in interest rates. Therefore, buying a home now, with the current rates, costs you less than buying it later, even if prices drop by another 10%. If rates go up, that savings in the prices will be more than offset. Whether that obviates the need for governmental action on behalf of the housing industry, I'm not sure. But I am sure that it makes a compelling case for buying a home now.

Market Statistics

I just gave an interview to a reporter about last year's numbers for the state of Connecticut. The Commercial Record showed that sales were about even with 2008, while prices were down about 10% from 2008 to 2009. She wanted to know whether that surprised me. It did not.

The above results are typical for markets that are in moderate recovery. When they decline, they decline first in units and then in prices. On the way back up, we see units increasing before we see prices returning. This is also because, when the economy is not strong, it's people at the lower end of the price spectrum who are most likely to buy or sell property, either because they are first-time homebuyers, or because they are forced to sell. These reasons account for the decline caused by a change in the mix of units changing hands.

The other piece of the decline is caused by the value of the same house going down in this market. Most houses, especially when they are competing with foreclosure sales, are selling for less than they would have a year ago. That's the part of the decline I would call same-sale price loss.

If you add those two explanations together, you can see that the 1% a month loss in value that I've been blogging about is not going to go away any time soon. On the other hand, we should see unit sales beginning to rise faster than they did in 2009, particularly as long as the government continues to give incentives to homebuyers. And that's good news.

The Mark-to-Market Rule

You may have been reading about the mark-to-market rule in connection with the travails of the banking world. It applies to real estate in a very unfortunate way, which helps to explain why appraisals are so problematic these days.

Very simply, mark-to-market means that the value of an asset should be governed by what other similar assets are worth. Since most homes are only valued when they are sold, or refinanced, most people would expect to be unaffected by changes in valuation when they are not in the process of selling. However, the current focus on "stress testing" banks, and the influx of the TARP money, has caused regulators to take a new look at the revaluation of assets already on the books of those banks, and revalue them based on the basis of recent transactions or valuations at other banks.

Let's assume that there's a house on your street that went into foreclosure, or even just got sold to a relocation company when the owner moved. Since either of those scenarios would favor a quick sale, it might well have changed hands at what you would consider a rock bottom price. The mark-to-market rule, however, would then dictate that your home is now worth what the relo company sold your neighbor's home for, at least insofar as they are comparable properties.

You can easily see how things can spiral downward from there. If you then had problems with your mortgage, your bank would be carrying the value of your home at the "new" value, making your home further underwater. If every other bank then writes down the homes they have financed on your street, pretty soon everyone is underwater on their mortgages, and the banks have way more in the way of "troubled assets". All this is true even though perhaps only one or two homes changed hands at the lower value, and maybe not even in an arm's length transaction. The next thing you know, another bank is below recommended capital requirements, and is on the endangered list. At that rate, every bank may end up on the list, when the only thing that happened is that one home in a neighborhood got sold at a bargain price. Scary, right?