Most of us take a pretty optimistic view of life. We expect good things to happen. We instinctively believe we will find the perfect mate, advance in our career, enjoy good health and have a happy life. Those expectations are reflected in our decision making. We make decisions based upon our general perception of the way we believe life should be. We don’t hesitate when making long term financial purchasing commitments, confident that we will be able to repay the obligation while enjoying whatever benefits are associated with our purchased item. It is this unique American positive “we can do anything” belief that has contributed to making our country a leading economic world power.
Those positive expectations of the American worker and consumer are changing. After four years of a declining housing market, the worst recession since the Great Depression, trillions of dollars of new federal debt, billions of dollars of state debt, a failed federal stimulus plan and a bailout plan that benefited Wall Street more than Main Street, many Americans are beginning to question their traditional optimistic views on life. If it were only one or two specific segments of our economy that was experiencing economic setbacks such as we have weathered in the past with technology or the defense industry, the mood of Californians would be tempered. This time around, Californians are experiencing a vortex of declining activity in nearly every public and private facet of the economy. It’s disappointing and frustrating given the state’s resources.
One difficulty when analyzing the direction of the housing market is accurately predicting the future supply of inventory. For the last four years and into the foreseeable future, excess housing supply, primarily REOs and short sales, has depressed property values. The market’s recovery is linked to a more even balance in the supply and consistent demand for housing. In an economy, with no serious signs of job recovery, the number of future REOs and short sales is likely to remain a significant hindrance to a full recovery for another year or two.
According to RealtyTrac, California accounted for 21 percent of the nation’s foreclosure activity during the third quarter of this year with nearly 200,000 properties receiving some kind of foreclosure notice including 83,000 initial notices of default. Bank repossessions in California for the quarter totaled 47,000 including 17,750 in September. The Sacramento region which includes El Dorado County reported 8,341 initial default notices filed. Although a slight decrease in initial filings from this time last year, initial filings were 26 percent higher than the previous quarter.
Across the country, there were 930,400 foreclosure filings during the quarter ending Sept. 30, a 4 percent increase from the second quarter. One out of 10 mortgages across the country is in some phase of delinquency. There are signs that the number of foreclosures is slowing but some housing economists are concerned about a second wave of foreclosures called “shadow inventory” that could postpone for years any hope of a housing recovery.
Shadow inventory would originate from homeowners who are currently making their mortgage payments, still optimistic that the economy and housing values will bounce back to previous levels. Their patience has its limits. How long will their confidence in the housing market’s recovery hold them to a home that no longer meets their needs or a mortgage that continues to drain their reserves?
Currently 15 million homeowners are seriously underwater and 7.8 million owe at least 25 percent more than their home is worth, according to Moody’s Analytics’ calculation of Equifax credit records and government data. More than 4 million borrowers including 672,000 in California were underwater more than 50 percent with their average negative equity $107,000. If you own a $300,000 mortgage, attached to a $200,000 house, how many years, at our current inflation level, will it take to be able to sell and break even? Twenty!
The underwater borrowers are stuck. They can’t refinance without equity. They can’t get a home equity loan, selling at a huge loss is out of the question and since most have jobs and assets, they don’t usually qualify for a short sale or loan modification. Yet underwater homeowners hold the key to our housing market recovery. They are the wall holding back a flood of new REOs and short sale inventory. If underwater homeowners start defaulting in large numbers, it will make the number of previous foreclosures seem like a test run.
Then we have untold millions of homeowners holding on but approaching the end of their resources. Perhaps they were prudent with their home purchase, with a downpayment and a fixed interest rate. They may have had a saving account and prepared for two or three years of tough times but now many have faced five years since the housing balloon began its decent. How long will their resilience hold?
Fortunately, one-third of homeowners are sans mortgage and 90 percent who do, continue with their mortgage obligation. Both, equity rich or underwater homeowners are all in the same housing boat, holding together through a typhoon of trouble over the last four years. It has stayed afloat, albeit battered and leaking because most of us confidently believe we will once again experience clear skies and calm seas.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through kencalhoon.com.