Wednesday, April 23, 2014

Foreclosure crises over but more changes on the way

From page HS3 | November 01, 2013 | Leave Comment

The most difficult part of writing a weekly column is choosing the topic. It shouldn’t be too technical, like attempting to explain a capitulation rate, it shouldn’t be too legal because there are always two sides to every story and it shouldn’t be too personal. Too many statistics are mind-numbing and much of what we do in the real estate business isn’t very noteworthy. My brain had been in search mode for a few days for an interesting and timely real estate topic and I was beginning to feel the pressure of an approaching deadline when early one morning the Sacramento newspaper arrived and on the front page was the headline “Foreclosure crisis over.”

Actually, the “crisis” was over some time ago. Foreclosures have been declining since they peaked during the third quarter of 2008 when the banks owned 7,000 foreclosed homes in our four-county region. By the first quarter of 2011, REO inventory was around 4,000 homes and dropped further to less than 2,000 foreclosed homes early this year. With the foreclosure crisis officially behind us and no sign of any “Shadow Inventory,” homes that the banks own but have not yet put on the market, we should finally be able to put this unpleasant housing experience behind us.

Going forward, we can expect a much slower property appreciation rate than what we have experienced over the last 18 months. This year is also likely to be a peak year for sales activity. Much of this year’s sales were driven by low home prices, investors and low interest rates. Those factors won’t be as prevalent in the future.

Another trend that will keep future home prices and sales in check is the larger number of folks choosing to rent rather than buy. Despite all the good reasons to buy a home, the percentage of families who own a home is at the lowest level in 18 years. From 69 percent in 2005, the percentage of homeowners has fallen to 65 percent across the county and in California the ownership rate is only 55 percent. Most housing economists are predicting homeownership will fall further. Here’s why.

The housing recession may have only lasted five years but it has taken an economic and emotional toll that will likely continue for a generation. Despite the increases in property values over the last 18 months, the median selling price of county homes are still 32 percent from what they were at their peak in 2005. Many homeowners who lost their home through foreclosure will not be anxious to commit to another mortgage.

Lending conditions are difficult. There was a time when lenders actually wanted to make loans. Today, I’m not so sure. Even well-qualified buyers with high credit scores and with down payments of 20 percent or more are having a difficult time qualifying. According to a study by Zillow, nearly a third of Americans will not qualify for a mortgage under today’s lending standards.

In many areas of the country families were forced to purchase a home simply because they could not find comparable homes for rent. Renters have more options today. When prices hit bottom, both institutional and small mom and pop investors started buying rentals. In addition, many homeowners who were underwater on their homes but needed to move became “accidental landlords,” renting out their first home so they could move to a second. The result, four million additional single-family homes are available for rent than were prior to the beginning of the recession.

Younger first-time buyers that would normally account for 20 percent of all home sales are not showing up. The Millennial generation, 78 million of them, all between 18 and 29, are not buying homes. Their higher unemployment numbers and student debt has forced many to move back in with mom and dad. Last year, according to Pew Research, 36 percent of 18- to 36-year olds lived with their parents, that’s the highest percentage in 40 years. Millennials will eventually move out but not likely from mom and dad’s guest bedroom to owning their own home. They will likely rent.

Smaller families aren’t buying homes. According to the U.S. Census, just 21 percent of current households are married with children. That’s down from 24 percent in 2000. Meanwhile the number of single households has reached 27 percent, more than double the percentage 20 years ago.

“There’s less of a need now for people to stay put and buy a house with space for all their kids,” says Jim Lapides, with the National Multi-Housing Council. “They’re more interested in living close to work and being able to walk places.”

Increasing interest rates are already turning off a number of buyers from signing mortgage papers. Nearly two-thirds of potential buyers recently told real estate brokerage Redfin that rising rates have negatively impacted their ability to buy a home. If the increase from 3.5 to 4.5 has an impact on their behavior, what’s going to happen when rates are at 5 percent next year?

The American Dream used to be synonymous with homeownership. Not so much anymore. Today, the most popular definition of the American Dream is a good job, retiring with financial security and being debt free. Only 18 percent of respondents to a survey by said that buying a home was the American Dream.

Expect significant social, economic and political consequences if and when the majority of American families decide to rent rather than own a home.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached at


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