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ZILLOW REPORTS: 12 Million STILL Underwater

The news has been alive with reports of the growing U.S. housing market recovery and a cursory observation suggests that the entire country is on the mend, but the truth is that there are millions who continue to battle foreclosure at every turn. Zillow reports that nearly 29% of all Americans who hold a mortgage, more than 12 million borrowers, still owe more on their homes than what they are worth. Of those, 57% owe more than 20% on their homes, which mean they will likely be underwater on their mortgages for years to come. For more on this continue reading the following article from TheStreet.

Rising home prices have helped pull more than 3 million borrowers from underwater over the past year, but in the hardest-hit areas, the crisis is far from over.

According to Zillow, there are still millions of borrowers who have debt so far in excess of the value of their homes, that it would likely take years for them to regain equity in their homes.

The national negative equity rate fell in the second quarter to 12.2 million borrowers. That’s 23.8% of all homeowners with a mortgage who owe much more than their homes are worth. In the previous quarter, there were 13 million underwater borrowers while in the year ago quarter there as many as 15.3 million.

While the negative equity rate is improving, about 57% of homeowners in negative equity are underwater by 20% or more. Roughly one in seven owe more than twice what their homes are worth.

Zillow expects home prices to rise by 4.8% over the next year. If home prices rise at that pace annually, it would take a homeowner underwater by 20% roughly four years to reach positive equity, according to Zillow.

Between rising interest rates, flat incomes and a still lackluster job market, it is unclear if home prices will indeed expand at that pace for four years.

“The frustratingly slow pace of negative equity declines in the face of such robust home value appreciation is a direct result of the fact that many people in the hardest-hit markets are underwater by an enormous amount,” said Stan Humphries, chief economist at Zillow. “Because of this, negative equity will be a factor in these markets for years to come, constraining the supply of homes for sale and keeping people out of the market who might otherwise get involved.”

Zillow also calculates the “effective” negative equity rate, which includes borrowers who have less than 20% equity in their homes. Such borrowers usually will find it difficult to sell and trade-up to a bigger home because listing a home for sale and buying a new one involves not only a new downpayment but considerable closing costs.

The effective negative equity rate declined in the second quarter to 41.9% from 43.6% in the first quarter. Still, it means roughly 42% of homeowners with a mortgage are unable to sell their homes. About a third of homeowners do not have a mortgage at all.

Zillow expects rising prices will lift an additional 1.9 million borrowers out of negative equity over the next year, with the majority of the freed homeowners anticipated in Los Angeles, Riverside, Calif. And Atlanta.

Zillow calculates negative equity by looking at current outstanding loan amounts for individual owner-occupied homes with those homes’ current estimated values.

Estimates of underwater borrowers vary. According to CoreLogic, the number of underwater borrowers was 9.7 million at the end of the first quarter. An additional 11.2 million have less than 20% equity in their homes.

But the Zillow analysis is significant because cities hardest hit by the housing bust are still crying for more relief. But rising home prices has made mortgage relief a less urgent issue in Washington than it once was at the peak of the crisis.

That has pushed some cities such as Richmond, Calif to consider seizing mortgages from investors via eminent domain and writing them down for borrowers, a plan that has been vigorously contested by the mortgage industry.

As Humphries noted, deep negative equity discourages borrowers from selling homes, thereby constraining supply.

Underwater borrowers are also considered more likely to default.

California home prices near 4-year high

California home sale prices came close to a 4-year high in July, with the pace of sales year-over-year growing for the fourth month in a row, the CALIFORNIA ASSOCIATION OF REALTORS® reported.

Making sense of the story

  • The median home price in July for an existing single-family home was $333,860 last month, up 4.2 percent from $320,540 in June and nearly 13 percent from a year ago, when the median home price in California was $296,160.
  • July’s median home price was the highest since August 2008, when it was $352,730.  July also marked the fifth consecutive month that the median price increased month-over-month and year-over-year.
  • Sales in July rose to an annualized pace of 529,230 homes, an increase of 15.3 percent compared with last July.
  • California’s housing inventory was nearly flat in July, with the index of existing, single-family homes at 3.4 months compared with 3.5 months in June.  However, July’s inventory was down from a revised 5.6-month supply in July 2011.  The index indicates the number of months needed to sell the supply of homes on the market at the current sales rate.  A 7-month inventory is considered normal.

Read the full story

Real Estate Talking Points

  • When it comes to assessing a home’s value, homeowners tend to be overly optimistic.  However, appraisers are much more cautious, as they have to predict a realistic value for the home that the bank can use to extend credit to a buyer.
  • There are five areas where homeowners often misjudge the worth of their abode: The outside, basic systems, the basement, the market, and a remodel.
  • On the outside, if an appraiser sees overgrown bushes and chipped paint, he is likely to slice as much as 3 percent off the value of an average-size home.  According to one appraisal firm, that’s because curb appeal is important, and an unkempt yard is a sign that there may be other issues.
  • A brand-new roof generally does not affect the value an appraiser assigns a house; however, if a roof is in disrepair, a homeowner should replace it to increase the chances of a buyer making an offer.
  • A recently finished basement with a half bath can add as much as 2 percent to the value of a home, but homeowners shouldn’t expect the value to increase as much as it would with the addition of first-floor space, which can increase value by as much as 20 percent.
  • Although similar homes in the area may have recently gone into contract for more than the asking price, this will have little to no effect on the value an appraiser assigns a house.  Appraisers are bound by the data of recent comparable sales, meaning he must abide by the actual sale prices of homes in the area.
  • An expensive, custom-made, built-in entertainment center may be perfect for the current homeowners, but it could lead the appraiser to make a negative adjustment to the valuation because cost doesn’t equal value.  Renovations that are trendy will be assessed at the cost of ripping them out.  Timeless improvements, however, such as deep sinks or new wooden cabinets will add value.

Source

Higher home prices reduce California housing affordability in second quarter 2012

Higher home prices offset record-low interest rates and lowered housing affordability in California in the second quarter of 2012, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) recently reported.

Making sense of the story

  • The percentage of home buyers who could afford to purchase a median-priced, existing single-family home in California fell to 51 percent in the second quarter of 2012, down from 56 percent in first-quarter 2012, but matched the 51 percent recorded in second quarter 2011, according to C.A.R.’s Traditional Housing Affordability Index (HAI).
  • C.A.R.’s HAI measures the percentage of all households that can afford to purchase a median-priced, single-family home in California.  C.A.R. also reports affordability indices for regions and select counties within the state.  The Index is considered the most fundamental measure of housing well-being for home buyers in the state.
  • Home buyers needed to earn a minimum annual income of $62,390 to qualify for the purchase of a $316,230 statewide median-priced, existing single-family home in the second quarter of 2012. The monthly payment, including taxes and insurance on a 30-year fixed-rate loan, would be $1,560, assuming a 20 percent down payment and an effective composite interest rate of 3.92 percent.  The effective composite interest rate in first-quarter 2012 was 4.16 percent and 4.85 percent in the second quarter of 2011.
  • The San Francisco Bay Area experienced the largest quarterly declines in housing affordability, resulting from double-digit price increases with little movement in the interest rate.  However, when compared with the previous year, changes to the affordability index were minimal, thanks to a near-one percent drop in the effective composite interest rate.
  • At an index of 78 percent, San Bernardino County was the most affordable county of the state. At the other end, San Mateo County edged out San Francisco County (24 percent) to be the least affordable, with only 23 percent of households able to purchase the county’s median-priced home.

Read the full story

Real Estate Economic Update

Last Week in the News


The South Gate Real Estate Market is looking good.

Existing home sales rose 4.3% in January to a seasonally adjusted annual rate of 4.57 million units from a downwardly revised 4.38 million units in December. The inventory of unsold homes on the market decreased to 2.31 million, a 6.1-month supply at the current sales pace, down from a 6.4-month supply in December.

Retail sales rose 3% for the week ending February 18, according to the ICSC-Goldman Sachs index. On a year-over-year basis, retailers saw sales increase 3.2%.

New home sales fell 0.9% in January to a seasonally adjusted annual rate of 321,000 units from an upwardly revised rate of 324,000 units in December. The initial December reading was 307,000. The November rate was also revised higher to 318,000 units. At the current sales pace, there’s a 5.6-month supply of new homes on the market, the lowest reading in six years.

The Mortgage Bankers Association said its seasonally adjusted composite index of mortgage applications for the week ending February 17 fell 4.5%. Refinancing applications decreased 4.8%. Purchase volume fell 2.9%.

Industrial production at the nation’s factories, mines and utilities was unchanged in January after advancing an upwardly revised 1% in December. Compared to a year ago, industrial production is up 3.4%. Capacity utilization fell slightly to 78.5% in January from 78.6% in December.

Initial claims for unemployment benefits for the week ending February 18 were unchanged at 351,000. Continuing claims for the week ending February 11 fell by 52,000 to 3.392 million, the lowest level since August 2008.

Upcoming on the economic calendar are reports on pending home sales on February 27, the housing price index on February 28 and construction spending on March 1.

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Real Estate Economic Update

Last Week in the News


The index of leading economic indicators — designed to forecast economic activity in the next three to six months — rose a solid 0.4% in January, following an upwardly revised 0.5% increase in December.

Retail sales rose 0.4% to $401.4 billion in January. On a year-over-year basis, retail sales increased 5.8%.

Total business inventories rose 0.4% in December to $1.55 trillion, up 7.7% from a year ago. Total business sales increased 0.7% to $1.23 trillion in December, up 8.9% from a year ago. The total business inventories/sales ratio in December was 1.26.

The Mortgage Bankers Association said its seasonally adjusted composite index of mortgage applications for the week ending February 15 fell 1%. Refinancing applications increased 0.8%. Purchase volume fell 8.4%.

The National Association of Home Builders/Wells Fargo monthly housing market index rose four points in February to 29 from a reading of 25 in January. It was the fifth consecutive monthly gain and the highest level since May 2007. An index reading below 50 indicates negative sentiment about the housing market.

The combined construction of new single-family homes and apartments in January rose 1.5% to a seasonally adjusted annual rate of 699,000 units. Single-family starts decreased 1%. Multifamily starts rose 14.4%. Applications for new building permits, seen as an indicator of future activity, rose 0.7% to an annual rate of 676,000 units. Housing starts for the year are up 9.9%.

Initial claims for unemployment benefits fell by 13,000 to 348,000 for the week ending February 11. Continuing claims for the week ending February 4 fell by 100,000 to 3.426 million, the lowest level since August 2008.

Upcoming on the economic calendar are reports on existing home sales on February 22 and new home sales on February 24.

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