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"WALKING AWAY" IS A MAJOR TREND---LET'S NOT PUT OUR HEADS IN THE SAND!

IF YOU WATCHED 60 MINUTES LAST NIGHT ON CBS, YOU TOO CAN SEE THE WRITING ON THE WALL! Homeowners are considering walking away from "underwater" homes---and they are doing it in great numbers. These are not your "subprime" mortgage foreclosure---they are average homeowners who have been making payments and CAN AFFORD to keep paying! They choose to move on because they do not see a future in their homes!!!

FALLING HOME VALUES. This is still A REAL ISSUE TO CONSIDER......prices are still falling , and may fall further! Let's not put our heads in the sand---we need to act now! With attention on the seriously underwater middle class homeowners, walking away from their obligations, we now have another possible situation that will cut into the already lower home prices.

Falling home values have not stopped--they may have slowed somewhat in certain markets, but prices are still coming down! With foreclosures still a factor and short sales increasing each month, we need to take a long hard look at what we need to do in order to prevent further erosion in the housing market....What we DO have in our favor are BUYERS!...People are looking to buy in this market because of percieved value, Perhaps for the first time in a decade!

WASTING TIME WITH OUR HEAD IN THE SAND

There is no way to say how far home values will fall; we can look at prices as closings happen or we can look back on a 3 month time period to try to catch the trend for the next 3 months. None of this information is usable, however, because the actual price where a property trades appears to be based on the homeowners situation, not on any market trend. No longer can we use 1 year or even 6 months as a criteria for pricing homes

So, given the fact that we are not able to price properties based on a trend, it is now essential to know the motivation of the seller in more detail than in the past---How do we measure home values NOW? How do we determine the real price of a property in a market where the homeowner, desperate perhaps, needs to sell fast?

Measuring home values in this market is like measuring a moving target....we can be very wrong very easily and the homeowner who is more vulnerable then ever before, can easily become the victim of a distorted sense of home values if we use our former ways of pricing.

MEASURING THE VALUE OF HOUSING

LET'S NOT PUT OUR HEADS IN THE SAND ABOUT VALUES AND LOSE PRECIOUS TIME IN THE PROCESS!

One thing that I have noticed here in the Hamptons is that the "new builds" are selling quite quickly and they are selling at prices that were "set" before the downturn--in other words, at the highs of the market in '07-'08! Builders are more optimistic than I have seen them in a very long time; they are able to buy up properties in ideal locations for 1/2 the price they would have paid in '07-'08 and they are tearing down and building new homes that appeal to a "new" buyer. This new buyer has money and has been waiting to buy a new home in a great location....and the builders are making hay while the sun shines!

MEASURING VALUES IN A VERY DIFFERENT HOUSING MARKET: The challenges that we face going forward in measuring the true value of a home is going to cripple the housing market unless we fully understand the motivation of both the buyer and the seller. I have the sense that if we go about doing the same things we did in the past with prices, we will find ourselves in a very bad, longer term crisis than is now projected.

PROPER PRICING MAY BE THE ONE THING THAT IS PROPPING UP THE HOUSING MARKET!!

PROPER PRICING IS PROPPING UP THE HOUSING MARKET

IN my opinion, there are 4 definitive categories that we need to focus on when pricing properly in this very precarious time. I have broken them down with pricing strategies by category so you can see the importance of giving each property the best chance to sell quickly:

1."Original" condition homes: those homes that may be coming on the market for the first time in it's history. These homes are usually 25 years old or older and need major work to bring them up to date.

Because the pluming and electric is old, the appliances and fixtures are out of date, this property needs to be priced to allow for replacement of these things---save time and money by pricing this house to motivate buyers to want to buy it...maybe even list the approximate costs of replacement.
These homes need to be priced at the lowest level possible, based upon mostc recent sales and in-contracts of similar homes in a given area. Emotion is a major factor in additon to price when a buyer is looking at this category.

2."Good" condition homes: those homes that have been well maintained and may have been recently renovated but are 10 years or older.

Here, the home has much to offer in terms of less work to do but again, offering the approximate costs of anything that needs to be re-placed will help to motivate the buyer who wants the charm of an "older home".
Proper Pricing is critical in this situation because a buyer knows that he/she will have to do work to make it like their own and is looking to have a good reason to buy it. The price will make the difference here; emotion willl be less of a factor.

3."Prime" condition homes: these are the houses that we may have considered "like new" or "mint" condition and are no more than 10 years old, have been very well maintained and are up brought up to date on appliances and baths.

This category of home is surprisingly easy to sell to the buyer who wants to move in and not have to do any work what-so-ever. Emotion will be a major factor and a good price will be the cherry on the top of a great "buy"

4."New build": is new and has never been lived in....generally no more than a year old.

This is a category that took a big "hit" during the downturn; prices could not go low enough for the buyers of those houses! Motivation to sell became a sheer need to sell; builders were making deals that were hard to say "no" to.
Because the "new builds" of yesterday ('07-'09) were going up in less than prime locations, they sat! What is that old saying: "LOCATION, LOCATION, LOCATION"....well it is still the key to selling a brand new home! Top dollar can be the result when a new home is in a desirable location.

With the additional factor of "walk aways" on top of the lost value through forelosure, we have an obligation to be at the top of our game when it comes to pricing homes in this market.

LET'S NOT MAKE THE SAME OLD MISTAKES WITH PRICES THAT WE HAVE IN THE PAST!!! LET'S NOT PUT OUR HEADS IN THE SAND WHEN IT COMES TO THIS ISSUE--OUR LIVELY-HOODS DEPEND ON IT!

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**ALL INFORMATION AND CONTENT IN THIS BLOG IS ORIGINAL TO PAULA I. HATHAWAY

Paula I. Hathaway, Senior Vice President, Prudential Douglas Elliman

Southamtpon Village Real Estate Specialist since 1995; Also Specializes in North Sea, Noyac, Water Mill and Bridgehampton, New York

Diamond , Gold and Chairman's Circle Awards; Top Producer since 2005

Click here to see my Hampton's website to see all my listings; please email me or call me for all your real estate needs in Southampton, Bridgehampton and Watermill:

http://www.prudentialelliman.com/paulahathaway

http://www.hathawayhamptonhomes.com

http://www.realestateshows.com/576624

http://www.realestateshows.com/576620

Posted by Paula I Hathaway, Senior Vice President, LBA on 05/10/2010 06:53 AM

Comments (189)

Sales Strategies in a Declining Value Economy in the ActiveRain Channel

walking away, buyers, desperate sellers, location, foreclosure, shortsales, motivated, proper pricing, hamptons, falling home values

Originally posted at: HAMPTONS REAL ESTATE, SOUTHAMPTON, NY: "WALKING AWAY" IS A MAJOR TREND---LET'S NOT PUT OUR HEADS IN THE SAND!

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189 Comments on "WALKING AWAY" IS A MAJOR TREND---LET'S NOT PUT OUR HEADS IN THE SAND!

MAY

2010

Have to agree with your content. New builders will make hay when they can. Location is not just the criteria in this market!

Having been a custom home builder and a Realtor for many moons I can tell you that more often that not I would be more inclined to purchase what you describe as "original" condition home than a "new" build.

The motivation for home buyers to buy "new" vs. "resale" are numerous. I've heard every reason thinkable. Some day I may write about them. Who knows, perhaps later today.

John: I think you are right about the builders--but location is still THE one factor that will get the higher prices! Thanks for reading and commenting

Tom: I'm with you! If I were going to buy right now, I would go for the "original" too! The new builds here go up in 3 months or so and they may look great but I wonder if we will look back on this time as a time of fast building and low quality! Thanks fo reading and commenting.

Paula, you hit the nail on the head with proper pricing. There is still way to many agents taking on overpriced listings. The average failure rate on listings in most Atlanta neighborhoods is now a whopping 80%!! Ouch!

Lenn: That would be great to hear! I personally think that in our times, one motivation is to be in a home for a very long time--to have room for extended family and to be in an environment that is more conducive to family life. Thanks for your input and I will look for your post on "New" vs "Resale"!!!

Hi Paula, I certainly agree with your analysis. I did a CMA last week for a potential client in category 2. When I suggested a very realistic price, based on many facts and figures, he went into "emotional shock" and couldn't come to grips with the fact that his home would most likely sit on the market for years if he insisted that it should be priced in the $2.0M-$3.0M range like the rise of his neighbor's homes ......that have been sitting on the market for 2+ years!!!! He's still thinking about it.

Jennifer: 80% percent!! I bet most of us would find similar results--- a real study is long overdue here in the Hamptons! Thanks for your comment....

Very interesting Paula and thanks for putting so much work into this article. I am surprised that HVCC is allowing those appraisals to go through at the prices for those time periods? (the height of the market). I would imagine, if I was a conspiracy theorist, the new housing is making getting the loan through the builder extremely attractive. Unfortunately I am not :-)

Lynn - you should write it up, I am sure we would all grow stronger by the sharing as usual.

Used to be location, location, location. Now we have a price, price , price market. Most of my builder sellers are waiting for the smoke to clear before they try again.

Hi Paula...

New homes are still a very tough sell here, and houses in the over $300K range sit for a long time before selling. It's still unpredictable and frightening, but you have to live somewhere!

Robert: You know the type: well healed, does not NEED to sell, thinks he/she has the most precious property yet to be found, and thinks "someone will see the real value and pay the price". We have them here in droves....and I just lost a deal because of a stubborn homeowner; he never told his wife about the high offer I brought to him and when she found out the buyer was long gone---she knows they will never get that price again!!!

What they didn't mention on 60 Minutes is that in some states, Florida being one of them, the lender can and in most cases will come after you for a deficiency judgment.

Another perfect example of regionalism. We don't have a walk-away problem here. Prices never soared, so they're not crashing, either. Sure, there's some softening -- but not enough for people to just throw in the towel.

Connor: Here, the buyer has been waiting to live near the ocean and a new build on a great block never used to come on the market---so the pent up demand is superceeding the lower prices elsewhere--location here is still "it", but this time "it" has to be "new". I don't think the buyer needs the builders financial backing---these buyers have the money and have been waiting for years to buy here, in the right location...

Randy: As you can see in my comment above--location is still key--but the house has to be new before a buyer will step up and pay a higher price. When you hear "little Plains Area" and you see a new build--the house is usually in contract very quickly!

Richard: I would think they would be a hard sell everywhere---but I am proven wrong by what is happening right now. There is a "pent-up" market for certain parts of the Hamptons and this "pent-up" demand is being fulfilled right now---thank goodness! Thanks or reading and commenting

Paula,

I didn't think the 60 Minutes piece was very balanced. There could have been more emphasis on the fact that this is not a nationally systemic problem.

Rich

Gabe: I heard that there are firms out there to guide the homeowner through the process with very little risk of ruination--they have a 3 year time period to work it out with the firm and then they are clear to move on to the next home!

Richard---Lucky you! We don't have a big problem with walk-aways either; that could still happen though, as prices continue to plummit across the country. It does eventually begin to make an impact on other areas.

Richard: I don't know the real numbers but even if they are small at the moment and limited to certain areas like AZ, the impact with the news on 60 minutes can have a huge impact on the way people think. It does influence great numbers of people and may give the idea to many people in other spots...people are still desperate and I think by not emphasizing the most affected homeowners (those out of work!) 60 Min does not cover it in a balanced way.

I also watched 60 Minutes last night. I was very supprised with the Candor of the one younger couple they said they could make the payment but were choosing to walk away because they were underwater on the mortgage. Also, them saying they planned to stay in the home rent free until the bank completed the forclosure. Walking away is one thing, taking advantage of the 6 month without paying anything is another think. Then saying with the savings over the 6 months will allow them to save enough money to rent something nicer for a few years was very bold in my eyes. I believe the State Law prohibited the bank from going after other assets of the couple

I do have compassion for people that have no choice, but this couple is using the system and laws. I would be ashamed if I were them.

Tim:"The Times They Are A-changing!" How appropriate that song is now! I agree with you 100%--they were shameless and are using everyone else's pain to game the system! This sort of person is out there; it scares me to think that those too will start the process and everybody else gets the shaft---so to speak!(with loss of value and the blight that will set in as a result!)

Thanks for sharing the 60 minutes segment as I did not see it. Like some of the other commenters, we never saw huge increases in values here in Cleveland and prices seemed to have stabilized for the most part in a lot of our suburbs, at least for now. While I have nothing to back this up, my take is that here in the Midwest, where people are much more conservative, sellers would be less likely to walk away than perhaps other areas of the country.

The collapse of the housing market and the expectations which preceded it continue to change how people make decisions and behave in the marketplace. Your post certainly described the trends which 60 minutes presented. It will certainly play out differently in local markets. The bottom line is real estate has changed and those of us in the trenches everyday can not afford to put our heads in the sand.

People aka investors default aka walk away from poor investments all the time. Now homeowners can. Will this behavior have an impact on what we do? You bet.

Paula,

You raise some good points. In Canada, a proactive policy was initiated to ensure that home values were maintained. That adds stability to the market and encourages investment.

I'm sorry to see that there are so many troubled areas in the United States.

Brian

Paula,

I did catch this on 60 Minutes. Plan on investigating the website that was mentioned. Quite an interesting report!

I like the term "original condition"...I think it is going to be my new word of the day..I wish I had seen 60 Minutes last night.

Excellent commentary, Paula. Of course getting agents to properly price is only half the battle, the other half is getting the sellers to buy into the strategy. It's a worthy goal though.

Speaking to the 60 minutes piece, I found it bordered on irresponsible journalism not to at least comment on the fact that the people who were walking away were doing so because they had no HARDSHIP. If someone does have a hardship, they can do a short sale and save their credit a bit while affecting the market a bit less. The segment made it sound like the choices are pay your mortgage or walk away.

I thought I was going to read an article on home owners under water on their mortgages and ended up reading an article on how to price home in various conditions. I think these are two different articles or there's a third section on how to tie the two concepts together ... how to price homes when sellers are under water on their mortgages. Maybe I need to go back and re-read this post. Thoughts?

If it weren't for strategic defaults here I would say we would only be slightly higher than normal with our foreclosure rate.

Unfortunately the strategic defaulters are killing it when banks that lend analyze risk and make lending tighter and tighter all the time ~ which causes more price declines with less buyers in the pool and more strategic defaults and then newer and more strict lending guidelines! (feel like a dog chasing your tail yet?)

At any rate, the I see the pricing differential here all the time between different sale types. For me a no brainer is buy new construction if it is possible. I see newer neighborhoods where the REO is priced at $130 and the new construct is $150. I would go for the new construct because after you put in new paint, flooring, appliances and take care of the deferred maintenance - you just spent well over $20K.

Everyone, I believe this is a Link to the 60 Minute Segment http://www.cbsnews.com/video/watch/?id=6470184n&tag=contentMain;cbsCarousel

Stephen: Interesting that you picked up on the fact that I had written this article before the 60minutes show and then added that after the fact because it was so timely an issue to say nothing of the fact that it will certainly affect the way we price properties in the future! Thanks for reading and being so observant!

I wonder if the people walking away have tried to modify and been rejected? After trying 3 months to get their mortgage principal reduced, they give up...go for a short sale...if that doesn't work...then it goes to foreclosure...then some buyer gets it for what the original owner could pay and was willing to pay.

Such a shame.

Dan and Amy: Tim (above) has added the link for you to watch--I highly recommend it!!

Tim: Thank you so much for your valuable contribution to the post! i hope those that missed the show will watch it--it is very eye opening and..... scary!

Emily: Thank yo for "getting" it so concisely! You narrowed it down so well--maybe you should do a post on the subject as well?

Brian: wish the Amrican Government can incorporate something that WORKS---so far, no good! Thanks for your input

I think many people today are just jumping on the band wagon of walking from the home, especially in a non recourse state.. They get themselves situated so they can ride out the bad credit years, and then walk away.

I saw the 60 minutes report too. I don't see strategic defaults becoming a problem in Manhattan. In fact according to the 60 minutes map, there were no red dots in the whole state of NY.

Markets go in cycles, what goes up must come down. I was upside down through the early 90's. I bought in a new development in 1989, the end of the height of the last boom. My apartment declined in value 40% after I bought it. Fortunately I didn't walk-away because 15 years later it tripled in value.

1-Q 2010 and April 2010 our market has been very strong. I've been selling categories #1 and #2 some #3. Bidding wars are very common. People are renovating again. Here new construction is much more expensive and not always in the most desirable locations. New construction is the only category that showed declines this year.

People are buying in good established buildings in good locations. They are buying a place to call home and not as an investment. From the market reports I've seen including Douglas Elliman's the Hampton's market mirrors Manhattan.

Paula,

You are absolutely right. Condition of the house DOES play into pricing. When the "world is the Buyer's oyster" they can be extremely picky. I find that they want "turn key" more than ever . When they see a dated house or one with deferred maintenance, they add a huge premium for the aggravation of having to get the work done over and above what it might cost.

Thank you for this well thought out post!

Marianne

Gary: I got that term from my many years in real estate in NYC. The older apartments--in"Pre-War" buildings are always the most desirable (not many people appreciate the white brick buildings of the 60's and 70's!) and always commanded more in price than post-war apartments---the "Original condition" moniker comes in because if you can find a pre-war aprtment in original condition, it means the details have not been removed or changed significantly; even though the price reflects a place that needs a lot of work, the price is almost always better than that in a post-war building. Current trends to "modern" interiors has affected the desirablity of the white brick buildings so the difference now is not as great as it was in the 90's when in was in the city. Gosh, I got all carried away with why the "Original" condition name but it helps does it not???

Here is what I think we know. A crisis was created by financial folks. It caused a big tumble in housing. That tumble in turn ,as it relates to housing, led to many people thinking about their home in a dollars and cents way only instead of a quality of life way. So in the end the tumble continues as folks walk away. Now you have other folks getting into the market because of the lower prices. So at some point , which I think we have reached, we create a state of equilibrium. Buyers coming in put upward pressure on homes about equal to sellers and walkers putting downward pressure on home prices. I think new construction starts and sales starting up again is a sign that the market has for the most part reached the Equal state. How long it stays that way(low) is anyoone guess. And also of course many markets are increasing and some are decreasing . As we all know Real Estate is local. But I think nationally and the numbers are starting to show this , we are at that almost in balance state. Liked the post it obvoiusly made me think this morning

I've met with homeowners who won't even bother doing a short sale. They would rather live mortgage-free while waiting for the sheriff to come. Not good. They are contributing to the under water homes. They actually laugh knowing they are saving money and do not care that they won't be able to get a mortgage in 7 to 10 years. Right. They will care when reality bites them.

Here in the Town of Babylon, falling home prices have slowed. In 2009, the Babylon market fell just under 10% compared to 2008. From January - April 2010, it's down .97% compared to this time in 2009. Unfortunately, when doing a CMA, we have to include short sales and foreclosures for pricing as long as the condition is comparable. And I'm sure you see the overpriced listings that are out there. I will not contribute to the high % of expired and withdrawn listings.

Around here, there is barely enough land to build new anymore. But then again, everytime I think that, up goes more new construction. It's very tight and of course those homes are sitting due to high price and they are on top of each other.

Nate: You said it! I think it does no one any good when a 60 Minutes takes a subject such as this and does not include an experts input as well....a great dis-service to real estate in general!

Renee: well said! It looks like a bit like a dog chasing his tail! I think, when all is washed out on the circumstances of this market (maybe 15-20 years from now!) we will see the ral impact of how the banks are handling the troubled homeowners....they just don't get it! They got the money from the govrt to modify and they are not doing it! Desparation has now set in and people are walking away---even here in the Hamptons!

Missy: it is such a shame---and I don't see how it ends, do you? We are in a downward spiral in the housing market and it is going to take a miracle of some sort to bring us out of the spin!

Bill: Well said---and that is the key--they start over in 3 years and like a brand new baby, all is washed clean!

"...they choose to move on because they do not see a future in their homes..." aka they move because they want to. BINGO. This is happening in markets that never had a bubble! How many of you know someone who moved to Dallas/Fort Worth or Houston or Austin following work and affordable housing? We have it! We also have very small steady increases in home values over the last few decades, as well as markets here, which, compared to last year, have NO declining sale prices, despite the economic struggles. Most of our mini-markets here are down a hair, but some are actually on the up this year to date as compared to last year. But I can still name names on people who are moving just because they want to. In a year when their name is mud and they can't get that new something they want, what will they bend on then to get what their heart desires? Their right arm? Their first born? Maybe havin' what God gave 'em... ug. Forget it -- I won't go there...

I watched 60 Minutes and was not surprised by the young couple's decision to approach it from a business perspective--much the same as the banks approach it. If nothing else this housing bust has shifted home ownership from the emotional arena to the business/investment arena. It's business, not personal now.

Mitchell: Thank you for bringing that to light! I have seen people walk away out here, though--they are usually the investors who thought they could clean up by buying a number of properties and those are now not as attractive because, if they bought them at the height of the market--they paid too much and they bought in a less desirable area to get a lower priced home! These people are walking!

Marianne: I think it would make a great subject matter for another post, don't you? New houses are getting top dollar here and that is very encouraging! Thanks for pointing that out!

Charlie: you are such an optomist! Thanks for giving it thought and giving us your positive input!!!

Jackie: sounds like you have a big problem there with property values---good luck to you as we go forward!

These are certainly interesting times and I can't really figure out people's motivation for walking away from their home by choice. I recently met a couple who purchase a home for $325K, last year they were one of the lucky ones who qualified for one of the government modification programs and were able to reduce their payment to $1800 per month from $2800, had part of their principle forgiven AND STILL WALKED AWAY. They can afford to stay, both have good jobs, etc.

Why would you do this?

Kirsten: I think it is a trend that we don't want to face; unfortuantely, by giving it national attention, it could give homeowners another way to take advatange of a bad situation---very, very bad, indeed!

Norma: Well said!---business is business and that will be what guides the majority of homeowners from now on....maybe a good thing???

Jenna: Go figure! I think it has become as Norma above said regarding homeownership: "It's business now, not personal"!

Norma, interesting take. Very ineresting. You're 100% right there is a shift occuring in the mind of the consumer in my area. Problem one, banks don't have a spirit. Many believe people do. Therefore, there is a moral issue. Problem two, it will be real personal when that "walk away" history follows them to their next car loan app or small business loan app. They will realize they have turned the beautiful name their mama gave 'em to two letters -- N-O. I think of this issue much the same as some of the biggest issues on the planet (like aborton) there is what mama deals with years later -- a lot of guilt, remorse, regret, body issues, no telling what all. One must consider the whole pic when making decisions and not simplify or "put it in the can" when they are making decisions about life. Corporations have luxuries humanity doesn't have, so all I would say to a friend if they told me they were doing that is be very careful, friend.

I missed it but I have to agree with that sentiment of "strategic foreclosures" is wrong. Most people I deal with are very concerned about honoring their commitment to their lender in spit of their inability to make the payments.

I believe more people are looking at price over location.

Paula, VERY TRUE about pulling comps for only the past three months. I have been dually licensed for three years and have held my mortgage license for 13. I see this being one of the greatest reasons of choas in a real estate transaction - inaccurate pricing or a buyers agent not having the up-to-date knowledge about how to pull comps. Great Post!!!

Paula:

In some areas of the country the market has decline 75% from the highs. You can't blame a person from walking. The people who bought and quaified in a normal manor did not cause this, government and wallstreet did.

I believe the marginally underwater homeowners will stick it out.

Richard

Oklahoma was lucky in that we were not a part of the real estate bubble, but we were still a part of lax lending practices. Our homes above $350K have anywhere from 1 yeat to even 8 year absorption rates. If has affected our peices becuase this is now the second largest category of repos, next to the very low end. When I see homes listed for six months or more I wonder, is the seller unrealistic, the realtor unrealistic, or both?

I did not see 60minutes. But, I think that most agents price homes according to "your formula" of pay now or pay later. The buyer pays for the repairs to be made along with the lower asking price, or, they pay for the care and quality that the home has already received and found in its asking price.

Yes, it is definitely difficult to accurately price homes in today's market with so many factors to consider.

How interesting to hear about such a different market. My perception of the Hamptons from having been there is that it's mostly upper end homes and it looks llike our Paradise Valley which is now foreclosure alley.

Strategic defaults in places like Arizona are becoming common place -- especially with the wealthy. We are a non-recourse state.

All that said, we have constrained inventory in several areas at lower price points because the banks aren't releasing enough. 50-75% of our market is foreclosure and short sale sales....

REALTORS also need to get our heads out of the sand and be willing to say the hard words. You know, words, like, "Your home will NOT sell for that number." "Your home is grossly overpriced for today's market." "Your home has no value because it needs so many repairs that what you have to sell is the lot it sits on less the cost of tearing down and removing the structure." HARD WORDS. Just say it.

Lot's of opinions and guesses here. Here's what I know for sure. Price's for goods are rising at an astronomical pace. Check out grocery store bill compared to last year for proof. Mine's about 30% higher now than it was just 2 years ago. Job growth is pretty much stagnant with salary's & wages declining as a result. Last time I checked the average home price nationally was around 180K. That means that average salary or wages need to be around 60K for the average home price to make economical sense. But they're about 25K lower than that and have been stagnant since about the year 2000.

The real estate housing bubble was caused by favorable financing options not inflation which would normally be the case. The whole thing is fake. Based on that knowledge, either salaries & wages need to increase by around 38% (Unlikely in this environment) or home prices need to continue to fall by about 38% for home buying to make economical sense for most potential Buyers. Nothing we say or do is likely to change any of this anytime soon . . .

MHO

Carl S

Proper pricing is a must in any market

I, too, thought your post was going to focus on short Sales and Foreclosure. But since you addressed the "60 Minutes" segment I viewed last night, I thought I'd join the discussion. I felt the news show presented a clear view of what these particular homeowners believed ---- and why. These well-heeled home owners attempted to immediately negotiate a loan modification with their lenders, to no avail. At this point, a homeowner can do one of two things, bankruptcy not being in the stars: Short Sale or Deed in Lieu.

Because this particular segment of homeowners believe a lowered credit score poses less of a long-run financial impact than continuing to pay out on a mortgage which is now worth half its worth, they are making a business decision. The sellers interviewed last night on "60 Minutes" were not investors who didn't give a hoot for their property, they were living, breathing sellers who loved their homes and hated to part with them. Yet in this economy, the bottom line is what counts.

Great post. Everyone jumped on this one. Uncertainties scare people into bad decisions.

Great post, but it's really a "two-in-one". First, the 60 minutes story makes my blood boil. Borrowing money is a commitment, not one that you walk away from because you now don't like the situation. People who do this are taking money from all the rest of us. Second, I really like your categories of homes that create the starting point for pricing.

I saw that segment and it did not surprise me. Of course, as some have said we are not privy to what happened before they decided to walk away.

Location is still an important factor in everything, as evidenced by all the comments. Each area has a different take due to what is happening in that area. The Hamptons vs the Bronx may have different trends going on.

I know a couple who has tried everything to stay in their home without success. They have now walked away and to be honest, they had no other choice. The couple in the segment that "could afford" their home and were walking away, well that is a different matter, however, I can understand where they are coming from.

When homes are depreciating instead of appreciating, perceptions have and will continue to change.

Morals and ethics seem to no longer be a part of these choices, possibly because many people feel betrayed.

As for pricing, we still need to rely on the 3 months past rule, otherwise we would be using our crystal balls. In my state, all home prices have dropped substantially due to both Short Sales and REO's. Homes that were not otherwise underwater are not worth what they once were. Waterfront properties, which is a big thing here in the Ocean State, can now be had for some very enticing prices. People do not buy because someone is not underwater. This does not make them want to pay more. They all want the best house, in the best location for them for the best deal. This has never changed, in my opinion.

I agree with you that people may be swayed by the 60 minute segment, and in fact, it may have given some people ideas they had not previously thought possible. Scary times!!

Paula: It's scary to think that folks will eventually make a calculated decision to leave an asset because it's upside down. Inevitably, they are slowing the recovery for those of us that won't leave our homes. As for the pricing issue, our market went through this about two years ago, maybe a bit more recently. Homes sell when they are priced right. It's not impossible to determine value using comps. It's just hard comparing conditions, as you point out.

Thanks for the great analysis in your post. We all need to be reminded daily to wake up to reality. We are deffinitely not "in Kansas anymore"! Our sellers constantly need this reality check as well - nobody is going to speak as clearly as we will. Tell the truth sooner...

I just don't understand this walking away thing. Did your car lose 1/2 its value when you drove it off the lot? Did you still make your car payments because you just contracted and agreed to make the payments until it's paid off?

Why are people "allowed" to walk away from their houses when very few walk away from their cars when they lose value? My 4Runner is probably worth only $15k and I paid more than twice that!

I know at times this is all a homeowner in trouble can think of, but there ARE other ways!

Paula: I feel you are right on pricewise. I do feel prices will fall even more and your pricing stategies are very realistic. Thanks for sharing.

I think it is location, location, location and price, price, price....

It should be a crime with consequences - this walking away. People with this plan to walk in these situations really show lack of integrity. What goes around comes around to such. Too bad they have not understood you can never be sorry for doing the right thing.

Missy has wisely pointed to the "black hole" in the government's and lenders' thinking about mortgage modification.

Yes, Our MLS stats in my area say that only 33% of listed single family properties selling. The ones that are listed at compelling prices go fast and with mulitple offers. We do need to be honest and not take overpriced listings! Listing a home at an inflated price hurts the values for everyone involved!

I missed the 60 minutes piece. Maybe I can find it online. Prices have been rising for months in certain segments of my market. I think each market is it's own beast, but if things are priced right there is demand and they sell.

You are on point on several fronts and proper pricing being one of them. I am however not so sure about homeowner motivation. I just wonder, like Donna #65, how many are just shucking their responsibility. Sure there are some owners that I wholeheartedly believe are credible and I believe that they have put forth a great deal of effort, but I also believe that it may be difficult to separate them from those who have ulterior motives and just want to be relieved of the mortgage.

When you consider that upon purchasing their homes perhaps 2 years or even 3 years ago, did the buyer (now owner) plan to live in the home only 2 or 3 years. If not, then their attempt to escape their mortgage may be premature in that if they planned to stay in the home longer than 2/3 years (say 10 years), that may be ample time for the market to bounce back and thus turn them right side up as opposed to currently being upside down in their mortgage.

I'm not without sympathy, but we all know that everyone is not on the up and up. Given the credibility of the homeowner, you post is highly laudable.

Price it right and it will sell. Why anyone would sell just because their value drops is beyond me- lack of equity is only an issue if you NEED to sell.

Paula,

Excellent detail blog. Crazy that so many folks have their heads in the sand. If the person can afford to pay, they should stay. Prices will rebound, what goes up must come down and vice versa.

Having said that, the detail on pricing was great. It is very difficult to put a value on a home today, because of so many factors. Those factors, condition, location, and age make a HUGE difference!

All the best, Michelle

Proper Pricing is very important. Even in the Dallas area where values have been more stable than most, I still see homes priced higher than what they end up appraising for!

I guess Philip and I must have been writing our post at the same time because we are definitely in sync regard to selling pre-maturely due to lack of equity.

Great post...

The 60 minutes segment while entertaining is unfortunately a reality for many here in Arizona. I have heard many stories where someone stops making the payment and lives for free for well over 1 year. In regards to strategic default, foreclosure used to be a dirty word, I just don't think that is the case any more. In AZ, (for the most part-unless you are over 2.5 acres) there is really nothing (there are exceptions of course) the bank can do-no deficiency. Bad credit is not a deterrent anymore either. My wife and I are well into the 800's, can we buy anything on credit-NO. Debt to income (new baby, wife not working) prevents us and many others. I talked to one gentlemen after a foreclosure that said "The banks cannot prevent us from buying a home for 7 years, there are so many others that are in this situation, that the banking future relies on making loans to us-I will have a house in 3 years when this mess is sorted out"

The only way I see strategic default not becoming a bigger problem than it is today is Strtegic Principle Reduction. Walking Away is the 800 lb Gorilla in the room.

News shows do like to sensationalize so they can get viewer ratings, I did not see the show and I do know that some homeowners are walking or considering walking from their homes. However I believe it to be a very samll percentage.

Builders, at least those that are in this for the long haul, understand adaptability, I know of one here that typically builds custom golf course homes, which is a very slow market currently, and will no longer build spec homes, strictly homes that have been purchased. He has also made the decision to build track homes that are 1/3 to 1/2 of the sales price of his customary homes

Why wouldn't people want to walk away after the banks set everybody up on price appreciation and pulled the rug on the people they told they would re-finance at a later date.

Did anybody continue to hold Enron stock after everybody knew they were being fleeced?

Now everybody has turned into irresponsible "in over their heads" consumers, for example "you shouldn't have borrowed money to go to school if you cant pay it back now" or Invest in a business or have children if your job wasn't secure and the economy was at risk and now are filing for bankruptcy.

Oxymoron of the day "Bank of America"

I'm pretty disappointed in people that can afford their mortgages, but walk away as some did in that 60 Minutes segment. I don't think that they even considered the true ramifications of walking away, or going into foreclosure. It may seem like a great idea, but in a few years they may want to own a home again.

I'm in a short sale right now, divorce-related. And there are times I wish I'd just handed the keys back. My lender has been sitting on a pre-approved offer, at BPO, no-second mortgage, on my home with represents very little under the amount owed. It's been 4 months now, as the files are shuffled around. Tried to do the right thing by working with the bank and getting the most we could for the house.. and yet, we sit. Their negotiators have hundreds of files each. So maybe I won't be so quick to judge the people that walk away, after all. Sometimes doing the right thing is nearly impossible. Credit's taking a dive anyway because the bank insisted we had to be in default to get help... and as the days keep rolling by it gets worse. You can't get through to the person handling your file, because her mailbox is filled by 10am. I learned yesterday that this is because 1) they're handling hundreds of files personally. 2) Many people trying to get short sales or modifications are calling and leaving 10 messages a day, thereby making it more impossible for their files to get approved. (if you have any clients going through this, please let them know to not call 10 times a day, it's only making it worse for them. It's counter-productive)

But I still believe in my heart that trying to get the most for the bank is the right thing to do. Maybe I need to think more like a bank.

plus.. should banks disclose to potential buyers of nearby neighbors who are not paying on their homes but do not have a notice of default yet??

To # 74

The house next door to me is a rental. If I walk away from my house and move next door, I can save $1,000 a month.

What struck a chord with me in the 60 minutes story was the couple who spend 400k on a home now worth 85k. If I was in their shoes, I'm not sure how I would feel or what I could do.

People are not walking away in Westchester NY - which in some ways mirrors Manhattan. We are having a few short sales and some foreclosures in the usual areas...but people don't seem to be walking away when they can afford to stay. Most of this market has location, location, LOCATION! So although what goes up must come down - what comes down will eventually go up. I emphasize location with my buyers. I know some areas will always do well over the course of time.

Westchester is expensive, but it is expensive for a reason. For most locations the commute to NYC is so easy peasy that a mid-town Manhattan commute can be faster and less of a hassle from commutable communities in Westchester than parts of upper Manhanhattan, lower Manhattan, Brooklyn and Queens. That bolsters prices and although we have had a significant correction - we appear to be leveling off for the moment - though I do see some additional downside if sales fall off or if taxes rise.

I do understand homeowners walking away if they can't afford their mortgage anymore - everyone's hurting.

What I find disgusting is homeowners that are able to pay but walk away because they don't want the home anymore because its value is lesser than what they thought it would be. What kind of thinking is that? Didn't they put their name on the piece of paper promising to pay back the loan? I remember when the government bailout thing was big in the news, there were actually homeowners the could afford to pay but complained because the government was only going to help those that couldn't afford to pay. Seems like those are the people that now walk away from their homes because they have lost value, not because they are experiencing a hardship. What kind of attitude is that?

The homeowner in yesterday's program that opted to walk away while being able to afford his mortgage should not ever get a loan again from any lender because, clearly, his name on a piece of paper means absolutely nothing.

Great, post. I also have to agree with the majoriy of posters. However, I call it "strategic failure."

Thanks - a very informative article and I will check out 60 Minutes. I try to avoid TV - gave mine away a few years ago and now check things out on the internet. Perhaps if sellers embrace sustainability they can create a more desireable product for buyers to purchase! Just saying...... :)

I am finding more and more people are choosing the option to walk away...

I've spoken to a number of these folks here in Myrtle Beach and encouraged them to talk to mortgage people, work-out folks, all sorts and each person has said, no - this is a well-worn path and the path of least resistance. Someone, somewhere took "moral obligation" off the table... and I can see only loan modification working in the short term.

Paula....

Excellent food for thought post and well written....All the facts are not out and if they ever came out, you would clearly see that offering too much candy to a child makes them sick. Allowing people to have access to something they do not understand is not in the interests of anyone. I have counseled many people and advised them to go over their finances, make allowances for unforeseen problems and understand the downside if something goes wrong. I have a feeling I will be doing that more so now. However, I have learned to do that years ago with all my clients. We, as agents.... are responsible to give good counsel to the layman. The 60 minutes session was incomplete and limited to one dimension. That should have abeen a two hour program, but then everything would have come out.....I have also read the White Paper. But more importantly, I have looked into the eyes of people and have sat in peoples living room and watch them be beaten into the ground over the fear of being dispossessed while being unemployed and without health insurance to boot.

people first........the most valuable thing on the planet......bar none

Thank you

Banks got their bailouts from homeowner tax payer money. Why would anyone continue pay on a property that has lost significant value? Take the loss and live to fight another day. People forget, the banks are just as big culprit (if not bigger) in the housing bubble.

Short sales are a technique for market correction. It's basically last ditch attempt to force banks to accept reality. Banks will never voluntarily reduce principle on their loans.

If people choose not to pay it helps retail sales :) see the story on cnbc

Mortgage Defaults Drive Consumer Spending: Experts Weigh In

http://www.cnbc.com/id/36503380

in this economy we can't have it both ways.. just a thought

You are right on with this problem. I was told by several asset managers that borrowers who are not doing short sales and just walking away are opening themselves up to loan file review. I was also told by a MI company that standard practice on defaluted loans is a loan doc review. I don't know why anyone would just walk away from a loan without attempting to complete a short sale. Seems that borrowers would want to communicate with lenders and come to some agreement on the liquidation of the property. In Florida we have so many sellers like the couple featured on 60 minutes. I do understand the thinking and wonder why a lender lets something get so out of control. These lenders are not communicating with borrowers on initial call or worse routing the calls to Bombay. These call centers are not set up for intake calls on troubled loans. Something needs to happen quick or we are only going to drag out this market for several more years.

Just my two cents.

It's only a loss when you sell. Home values fluctuate up and down, just like stocks. You only realize the loss when you actually sell the property. Why so many people are in a snit because their home value has gone down is beyond me. Are you not receiving the tax benefit of owning a home? Yes you are. Do you not have a comfortable place to live that you can afford? Yes you do. So then why are you so busy staring at someone else's grass and deciding it's greener. The value will come back.

Nice post Paula, it's an unfortunate reality that many people are walking away from their homes. I refused to help a couple that was walking away from their mortgage find a rental and that was two years ago. It just didn't feel ethical.

With regard to your comment to John "The new builds here go up in 3 months or so and they may look great but I wonder if we will look back on this time as a time of fast building and low quality!" take a lesson from South Orange County, CA. In the late 70's through the mid 80's. Houses and condos were built so fast that by the early 90's there were so many construction defect lawsuits going on, it was difficult to find a good attorney. The Builder's Property Management company was still in place when I purchased my 1st condo in '94 and the 10 year statute of limitations to file a construction defect lawsuit was rapidly running out. I got on the Board and it didn't take long to figure out what was going on. The Management Co. didn't want to file a lawsuit; the HOA's attorney didn't want to file a lawsuit. I convinced the rest of the Board to find a new attorney & not only file a suit, but to replace the Management Co asap. The end result was a $6.5 million settlement and extensive reconstruction. My experience with new builds is that no matter how great the warranty is, there's no substitute for a good home inspection, and even that's no guarantee.

Rose Clime, Altera Real Estate, Monarch Beach, CA

I was told by loan officers they could not Re-Fi past clients after they went back to full docs being required due to liability issues.. too little too late

Hi Paula,

Great post.

I just found and posted the actual 60 minutes video...worth watching.

60 Minutes, Strategic Default, Walking Away Video.

Hope this helps!

Tim

Really like the way you'vbe segmented houses based on their age ... and you could add another category for historical, say more than 100 yrs old.

I hardly ever watch network tv, but that caught my attention last night as well. It's shocking to see how society is turning what was once evil into good. The unremorse in the people was just appalling and quite sickening to us. Congrats on the feature.

I NEVER would have believed that I would turn down good listings and advise people to stay in their homes but I am. Homeowners need to consider the quality of life in their own loved home, not to mention that discounts you get as a homeowner vs renter (car insurance etc) and the HUGE TAX DEDUCTION that allows you to file more deductions other than the standard deduction. Also, forget about banking or security jobs if you go through foreclosure.

Thanks for the analysis of the market situation, very clear and insightful!

If I were a lender, I would go after strategic defaulters hard. And extend the time that people have to wait to buy again.

I loved it! We are all in this together and it is up to us to price property properly. And moving target is the truth!

Paula you have an obligation to be at the top your game while pricing a home in any market.

The "victims" who are underwater are bailing out. If the home increased in value by 50% would they give a portion of that back? Sorry things didn't work out. There will be audits of loan files and Startegic Default cases will be pursued with collection companies and garnishments.

Your post has two topics in one. You start off with the 60 Mins., then get into pricing. I missed the 60 Min. but #29 posted the link. Keep in mind that the first several years of the payments, even on a conventional (not interest only) "amortized", and the principal remains constant (with very little reduction) for many years. The banks get the creame off the top. They receive the interest, with barely a drop in principal. Homeowners are treading the water for the banks. They pay the mortgage, and it's interest, straight no chaser. The banks don't give a fig newton about the owners principal reduction, devaluation, depreciation. The interest payment on that loan is the cream. Banks are stupid. Who do you think set up the "amortization" tables?

Great piece! And another reason I'll continue to work with only buyers for now. The piece on 60 Minutes was certainly interesting. I liked it when one of the guests said that the owners had signed a contract--and yes, values are down, but this seems to be the first generation of people who will blatantly walk away from commitments.

There was one guest that mentioned that during the Depression people were horrified to foreclose, regardless of circumstance--I doubt they would have gone on national television. We teach our children to tell the truth and do the right thing, how will this play out to them?

The lender never twisted the arms of the homeowners, bottom line. And to walk away, when you can afford the payment is wrong--in my opinion, and as a homeowner. If you have a change of circumstance then it is between you and the lender. We have struggled ourselves in the down turn of market and as a result my husband works 2 jobs, we scaled down the childcare, and we adjusted. It never occurred to us to walk away because the property has lost value--after all, it will pick up--and in 30 years this will be but a memory....

Geography and price range are two essential market segments that must be considered. Weather we like it or not,strategic default is a very real part (as evidenced by the 60 Minutes report) of the market and cannot be ignored. We cannot expect to 'monkey' with any real part of the market dynamics without some sort of unnatural or undesired consequence. The market will adjust on its own one way or another. The sooner we are able to allow for that, however painful it may be, the better for everyone.

Nice article, Paula. Especially liked your pricing framework. I think the "big markets" are the ones who got hardest hit and are subsequently suffering this "walk away" phenomema. We're not seeing it here in Central PA, to be sure...I'm still on the fence about the issue of the responsibility of the homeowner to the mortgage in that situation.

Thanks for the post. Great content and great match of content and photos.

As a Phoenix, AZ realtor, I felt compelled to watch the 60 minutes story. Unfortunately, that exact scenario is happening all over in our county - the second worse in the nation, only behind Las Vegas. Values in many neighborhoods have declined by 50% or more. Our unemployment is at an all time high. We no longer have double digit growth as less people are moving here. It's a nightmare. Do I think what that couple did is morally wrong? No. Is it legally wrong? Yes, they signed a contract - their mortgage and note and should be held liable. But, alas, we're a no recourse state - unless they got a new second mortgage after closing - banks can still go after that.

I have had quite a few clients ask me what to do. I tell them they have to make the decision. Ride it out with no end in site to our declining values or take the hit now and start rebuilding your lives with less stress and less debt.

Homes which are priced right are selling in record numbers in our area, many with multiple offers and some areas are rebounding SLOWLY. However, it's very location specific and the area where the 60 minutes couple was is a remote, outlying area, which will take longer to recover - the old adage, location, location, location.

I can't imagine people just walking away from commitments like this, but know it is happening. I had someone tell me they were just thinking of "mailing the keys back" to the bank. Why should this be their bank's problem? I realize many people are in over their heads, and that many banks may have had a hand in their problems, but to just walk away?!?!?!

Hello Paula,

I did not see the 60 minutes program last night but do agree with you on the pricing of what you term an original home. Usually this category of home needs a fair amount of updating and the listing price should allow margin for the new buyer to make improvements and not be above the upper range of value for the location. Having some general estimates of costs to improve can help the seller understand what the new buyer may be thinking in their purchase analysis.

Location, in my opinion, is still the bedrock of real estate. I am a Realtor in Sacramento, CA and over the years when we do have a recession the best located neighborhoods suffer the least decline in value and are the first to recover. Location, Location, Location, the best foundation for a thoughtful purchase.

Paula: I also watched the 60 Minutes... It seems like our society is experiencing a "Crisis Of Culture". There is no shame in using and abusing our system and there is no shame in not fulfilling our obligations and responsibilities. "Anything goes" seems to be the motto.... If I do not pay, somebody else will pay it for me (Hmm... this reminds me of another system on different continent...) How sad...

As to pricing: I am a strong believer of "Pricing It Right At The Beginning" according to current market and the condition of the property.

Hi Paula,

Good analysis. Pricing is very tricky in this market. In our area, most homes fall into the "original" or "good" condition. And yes, the buyers seem to prefer the "prime" condition. Who can blame them?

~Lisa

saw that last night myself and I do think its growing but hey you reap what you sow and the banks did a lot of reaping ,,, great artilce you put some time and thought into this

Great post.

How do you know when to strategically default if you have a condo?

Two "identical" units in the lower price range where one is FHA approved and one association that is 75% rental are not really comps.

Say I live in the FHA approved building, but I watch "the market" (meaning I sit on my couch and track my Zestimate...daily).

If a listing goes up on my block in that 75% rental building, there is no readily available financing. Still, some cash buyer scoops it up for song. My Zestimate drops 20% immediately.

Would a default based on bad data still be strategic?

Paula, I also watched 60 Minutes... and found it very upsetting. Another example of the media showing a small portion of what is going on in our market. They tend to focus on the negative and want you to believe it is the norm.

What bothers me the most about that segment was that the home owners could afford to stay and make the payments, but would rather walk away and buy down the street for a lower price.

Hi Paula, Outstanding post. Not to support the practise but many offices and some coaches tell agents to take an overpriced listing and do a beat down on the seller to lower the price.

Seriously, the walk away home owner WILL be able to get a mortgage in most likely 5 years. Meanwhile, in many modification and shortsales the bank reserves the right to pursue defeciency for up to 17 years. The homeowner is actually choosing 5 years of financial pergatory or 17 years. Really, you don't need to be a rocket scientist.

Paula, great insight, and you are absolutely right this market ischanging very fast. If we as Realtors don't change with it we will be out of business in the near future. One problem with your analogy is that when we go into a listing appointment and give the info necessary to price the property properly, the seller usually goes through a price shock. And in reality if the seller keeps getting listing appointments they will finally get an agent that just wants their name on the sign, so they tell the seller what they want to hear and list the property. After a few weeks they begin to reduce as necessary until it eventually sells. It really ruins the good Realtors' reputation and makes us look like all we want to do is list low for a quick sale and go on the next client.

This discussion is rife with arguments on both sides. Thanks for your insight and prespectives! The Wonder Women Team does short sales and it's always a fine line to walk when discussing strategic walking away from obligations.

I think we still have three to four years to go until the over all market gets stabilized. Until then for the buyers and sellers both if you have a reason to buy or sell other than the price, just get it done. When buying or selling a "HOME" there are lots of other factors to consider other than price.

Paula:

Great post. I attended a California REALTOR® Association meeting last week and the local economist stated that he thinks California has 4-5 years of struggle ahead. He does not see the the market stabilizinguntil them. His main concern is the unemployment rates which is at an all time high of 12.7%. Just this morning several companies that are major players announced lay-offs that will impact the local economy

Excellent post. The points regarding pricing and segmentation are well taken. Proper pricing is critically important and is extremely challenging. I am sure the issues facing each of us are different for every market.

Strategic Default is a very complex issue that involves ethics, finance, market forces and other things. A few years ago, I was fairly ardently opposed to strategic default. I found it unethical in the extreme. However, as I have watched this crisis evolve, I find myself torn. Is a young family that is deeply underwater with very little prospect for getting ahead truly to blame for a "strategic default"? Considering that banks and sophisticated investors (even countries) default on a fairly regular basis when it is in their interest to do so, why is it so horrible? Hmmmmmmmm. I haven't had to stare this issue in the face personally, but quite frankly, I think I can understand the decisions being made by some. Does it hurt the overally market? You bet. Is it unethical? Tough to answer. Is it what some people deem necessary for their families? Yes.

As Realtors and trusted advisors to our clients we have to look at their interests and help them understand all of their options. At the end of the day, strategically defaulting on a home is much like buying a home, a very personal decision that should not be taken lightly.

Good post! Getting sellers to buy into the pricing is hard even when you have plenty of facts and figures to show.

As I watched the program, it was apparent that the consumer/homeowner is being educated by the media as suggested that the consumer has the right to "walk away" Highlighted were names of corporations that were walking away for commercial financing on office buildings, residential rental communities, etc. Comments relating to bank and corporate bail-outs suggested that if a homeowner looks at the components of their family's net worth in the same was as a business, then they would "spin-off" loosing assets rather than wait for recovery. The concern about ruining your credit was mentioned but it was easy to see that long term, one might be better walking now then holding on.

As for your credit being ruined, I believe there will be an amnesty during the next three years that will allow FNMA, Freddie Mac, and HUD to lessen the impact of short sales & foreclosures as "non-recurring events" and establish a path to credit excellence & home ownership again. and you can say you heard it here first. Have a great day!

Slide 1 .O {font-size:149%;}

Banks have created the mess and unfortunately norms governing homeowner behavior stand in sharp contrasts to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility....

Strategic Defense may be a better group of words then Strategic Default- until you play in the trenches with these servicers and banks you have no idea how ruthless they are. The bottom line is the ONLY thing they care about is the dollar so all I say is load up on education and defend your personal assets as well as your familys.

Pauline, I too watched 60 minutes last night and it made me very queasy to say the least. US real estate agents are certainly operating in an extremely difficult market! To your description of the "original" ,"good," "prime" and "new build" categories, I would like to add that professional home staging needs to be also factored into the equation as it can lift the perceived value/selling price in any of these categories.

There are many neighborhoods where newly built, or even homes less than 20 years old are rare. In fact I live in one and the average selling price is $715,000 which gets you a 1930s 2,000 sq ft house if you're lucky. Many of these have been renovated, but many also have older kitchens and bathrooms. Home staging is a way of life in this neighborhood which is part of the reason prices have increased 20% versus Q1 2009.

Paula, I saw 20/20 last night and I tried to put my self in the sellers position of being "#17" ... what would I do????? Wow, they have a choice! pippa

I think that the first part of your article that prices are now determined primarily by the motivations of the buyer and seller is right on. I look at sold comps everyday and try to understand why the prices are where they are in my market. A year ago I could walk into almost any property and tell the seller exactly what their house would sell for. Now I just don't know. I see some prices falling dramatically, some stable and some up a little.

The motivation factor is a whole new way of sorting out comparable sales data. I see what you are saying as it applies to my market;

The most highly desirable properties have held their value where the buyer is highly motivated by the emotional factor to want to live in the property the seller needs only to be willing to accept the market value.

The less desirable properties are more price driven and have declined in value. The buyer is motivated by the price and their desire to live in the property. The seller is highly motivated to move on and willing to accept less than what the property was worth at the peak of the market, maybe less than what they paid.

The investor properties have dropped dramatically the seller is desperate/in-foreclosure/foreclosed the buyer is motivated only by price.

I'll go against the flow here. I do understand the "Strategic default" mentality. While market trends in an area, it is built on individual transactions. I feel it is unrealistic to expect an individual to continue to pay on a bad investment so the neighborhood won't suffer, we are all self motivated.

Let me make my point this way - how many of you are willing to give back the commissions on sales you facilitated to buyers that are underwater? How many of you will take your buyers position to spare them foreclosure so the market will remain stable? What about the sellers that sold at the top of the market? Should they be asked to give some back - good luck with that. The banks, lenders and servicers and even the real estate companies are defaulting on bad purchases and leases. Why hold the individual buyers to a higher standard?

We sell the investment potential of real estate to buyers, it seems to be counterintuitive to be offended when some of those buyers actually treat a house as an investment.

There are prices to pay for those that walk away from their house, a real beating on their FICO score, the possibility of deficiency judgments (depending on the loan and the state), and unless the owners are on the same page the strain on relationships and just general stress.

The government actually could help the strategic default problem. Not by throwing money at the problem, but by protecting owners that try to mitigate the damages. Limit the damage to credit scores for short sales. Currently the fastest way to get approved for a short sale is to be turned down for a loan mod (Fannie and Freddie loans) - most folks don't understand the hit they are going to take when they apply for the mod - EVEN IF THEY KEEP THEIR PAYMENTS CURRENT.

If you are interested in a well thought out, well researched paper on the topic by a professor at a law school take a moment and read underwater and not walking away

This is a complex problem that looks to be around for the next 5 - 10 years or more. Until employment and wages recover to previous highs.

Exactly Debra!!!!

This was a verygood post. I missed 60 minutes. Thanks for the info!

US HUD Just tweeted your blog; nice!

Speaking of getting the word out about 60 Minutes, here's a post I wrote about it: http://bit.ly/9mSyhi

Paula,

The piece on 60 Minutes is going to give more people the idea to walk. We are doing short sales and sellers want to make demands of the bank should a short sale get approved. I will save my opinion on that type of thinking.

well written

I think it's just the feeling of many americans that they rather just get out...........they don't want to think about "it" happening anymore so they just get it over with on their terms, so to speak, and walk away

no mopre worrying about it...................just get it over with

DOMINICK GACCINO

ABC123 Mortgage Corp

Finally, someone who's willing to write the truth! We're in trouble people. Great article and thanks for sharing the truth.

Paula

I think your point in wonderful that we need to also look at the seller's motivation vs. the market value. We have always driven the list price with the current market. Now we have to ask how soon do you want to move?

Great and valuable information.

Paula:

Great post. I didn't watch the show, but I have been reading articles about "strategic foreclosures." It's amazing that people are willing to walk away from homes for which they can pay the mortgages. Thank you for your blog. We all must be aware of this increasing problem....

Bravo Paula,

You've encapsulated exactly what is going on in our market as well. I read a lot of Active Rain posts and am rarely inspired to comment. You and I should have coffee and talk about the real deal!

I've been reading about strategic default on sites like bankrate.com. These homeowners are ruining their credit ratings, but seem to prefer that over paying double for a home. Some are buying new, lower priced homes before walking away from their current homes.

Great post....you know, I really believe in finding the "right" house for the buyers. The strategic defaults are a thing we will see for some time and it's going to affect our markets. Now that the shame has been removed, I think it's always going to be with us in some form.

60 minutes didn't stress the downside of walking away. If all I knew about mortgages and home buying was learned last night during 60 minutes I would have started the walk away process on my own home today.

I'm just able to agree with the last portion of your post. You're acting like a 10 year old house is past it's prime! Well, maybe in the throw away Hamptons it is.

I watched the show also, and feel the impression given was that if you stay in your underwater home, you might not be too bright, although they did interview the token male who is going to stay in his home--for now. You're fortunate to have THE location and people with cash.

It's hard to really say what I'd do unless I'm faced with the situations personally.

I didn't watch the show but have read a few stories about home owners choosing to walk away from their obligations. While it is a very disturbing trend, I am starting to understand the reason why some people are willingly deciding to walk away. They perceive that their home is now worth less than the mortgage they have on it. They are not planning to stay in their home long enough to ride out this downtrend & catch the next upward wave...

This attitude is the result of the general perception of viewing one's home as an "investment" instead of a place of shelter like it used to be. Investors are not emotionally connected to their homes & only keep them if the property will prove to be a "good" investment.

I like Monique's comment above. People are not "in love" with their properties like they used to be.

I have noticed one very distinct thing about a blog post that has had a huge response--both pro and con, and that is this: By the time it is winding down, responses get more and more edgy; maybe edgy is too nice---I live in the "Throw-away-Hamptons"??? Obviously you have never been here---there are more well-preserved houses over 100 years old here than any where else in the country---including Chicago! You have distorted what I said in my categorization of homes when pricing them!

Paula:

Thank you for the wonderful post. I appreciate all of the great info as I missed the 60 minutes story but have heard so much about it. Blessings for a great year.

Lisa Ludlow Archer

www.myCarolinahome.net

Lisa: There is a link on comment #29 if you want to see the clip--it is not very long but it was powerful!

Thanks to all of you who have participated in this post! It is a huge response from the comments and the re-blogs too! I have read every comment and will not be able to respond to all of them because of the sheer numbers of them! Just know that I appreciate the discourse and so do all the other members who have stopped by to read the article!

I'm surprised so few people address the financial consequences to which the Strategic Walk Away must lead. I think people are oblivious to this and think it won't happen to them, or things couldn't be any worse. One of the writers above said the homeowner said "They didn't care". I am concerned people will reestablish themselves and then "someone" will come after their finances later. There are those who will buy these "losses" and look to collect on them later. Margaret C.

MAY

2010

Great post Paula! Thank you for your great insight!

DeeDee

Paula, you make a good point. I wrote a blog that touched on this a few days ago. For now you are right on. As the last of the option arms reset this year and we are hit with the next wave of forclousers, prices will continue to fall. Once these properties are taken care of and the economy continues recovery, prices will stablize and this will become less of a pressure. For now, it will continue to make pricing resales more difficult. The first question to any seller should be "how badly do you need to sell"

I just can't side with the banksters. The whole game is stacked against the homeowner. The lenders got every provision to their advantage-99% the P&I payment goes to their interest. God bless the consumers who walk away from a bad investment-it may be the only leverage they have.

I think walking away in not responsible. Unless the equity position is so far out of whack that the home will never regain equity I don't understand this philosophy. When do they expect to buy again?

Right now our prices are holding steady, but there are still a lot of people underwater.

The real prize in homeownership is to build long term wealth. If this is not happening and is not going to happen why would anyone want to throw good money after bad? We must weather this storm the best way we can. Most folks work very hard for the money they have. It will never make sense to just throw it away no matter what the consequence.

There are some great deals on new construction here that is being sold cheap because the bank got the land back from the builder and is trying to dump them quick so they hire a builder and sell then now.

They are not only walking away from their homes but also purchase agreements. Having negotiated for three weeks with apparently genuine interest during their financing period they decided the deal wasn't good enough.

Now I have a property back on the market with Deal fell thru .... as the previous status.

http://www.youtube.com/watch?v=bPxpQE-Pi_g

What's next

David: I think that is happening a lot in this market---everyday I hear of another deal falling apart--deals that were solid and at really good prices--I think the old "grass is always greener" affect has begun. It does not matter what kind of a deal was done---the other deal always looks better!

MAY

2010

You put a lot of thought and work in this post Paula. This phenomenon is not going away soon.

This trend probably started in California, a no recourse state. If the lender forecloses, there is no deficiency recourse except in short sale situations.

I have keeping tabs on it here, and it is an ironwood sinker for home prices. Buyers want to know how long a property has been on the market and are patient and savvy enough to wait for that price to drop.

This is even true for high end or luxury homes, because the neighborhood next to it is median priced and falling sometimes by 60 - 80 percent, e.g., Homes in Moreno Valley, CA and surrounding area, once valued and selling for over $300k were being listed for $89 - 100K. That is between 2008 and today. What buyer wouldn't wait it out in that kind of market? What homeowner can afford to pay for a home that they won't realize equity growth, probably in their LIFETIME. The logic is bail and buy, if you can! Some experts (an Arizona professor in an article I recently read and cited), say it's a prudent thing to do and the homeowner should not be ashamed.

Some states were not affected by the bubble (PA, NM) so they don't have bubblegum in thier faces.

Ed Borne

Keller Williams Realty, Torrance, CA

Proper pricing is important to getting homes sold. Overpricing makes it hard to sell a home in our market, though well-priced homes under abotu $750,000 are selling fairly well. Pricing is a bit of a moving target these days.

Wayne, Ed, and Christine: Thanks guys for staying in the discourse---some comments huh? I think we have our work cut out for us in real estate---it has become a place of real controversy and now we watch as houses lose even more value due to the long term effects of the money "give-away" of the banks and the gov't and bad loans! My Mother always taught me that "if something doesn't feel right in a relationship, get out and ask questions later." I was getting that feeling for last part of '07 and early '08---guess I should have heeded my Mothers words! If I knew then what I know now, there is no way I would have been out there, buying into the bubble mentality--but alas--I did along with other RE folks and now we get to clean up the mess!! Thanks for reading and commenting!

Great post, I couldn't agree more!!!

Interesting post. I'm glad to see all the interesting comments and that you are still reading them :)

A few people commented on the disjointed writing structure of the blog. Like you said there was the original and then the one talking about 60 minutes. I thought the analysis of the housing condition was great and spot on.

You talked about "The challenges that we face going forward in measuring the true value of a home is going to cripple the housing market unless we fully understand the motivation of both the buyer and the seller." You then go on to talk about the types of houses not the types of motivation. I agree with your analysis that it is mostly the motivations of the buyers and seller that sets the price, not the quality.

The other idea about different markets really applies here. I'm not going to making a comment on the Hamptons marketplace. My knowledge of it comes from "Sex and the City" and the show Royal Pains on USA. I've never watched Royal Pains, but I have seen the commercials.

I think your market is vastly different than 95% of markets in the US. I can only comment as an expert on the Denver market. It looks like from national statistics that Denver and Dallas markets are doing the two best. One of the reasons that Colorado is doing so well is we went into this crisis first. Colorado lead the nation in foreclosures for 7 months out of the year. This was before the media on the coasts recognized this fact. (Does the New York media vacation in the Hamptons)

I work with several investor clients and scraping homes used to be common out here. Now that market is drying up completely. We have YEARS of inventory at the high end.

Sorry I wrote so much but you wrote an interesting blog and I read all 166 comments. Very thought provoking.

Mike, Thanks for reading and making very interesting obervations! Interesting comments all around, huh???

sellers may be in price shock because we told them a few years ago after the initial 10% correction "now is the time" or in '04-05 " If you do not buy now you will never see these prices again...? ominous huh?...

this may take some time as lending is only now based on affordability Full Doc loans with a pretty generous Debt to Income allowance... wages not only need to rise above current affordability but need to rise ahead of increase taxes, energy, food costs, healthcare and heaven forbid a vat tax. I think we will either see some more Gov. help, not just taking the cap off fannie and freddie on dec 24 '09, but something more substantial.

Help is on the way...

Craig: I don't know how much help the help is going to be---sounds a little rediculous but it is afterall time to see that the first round works to help out the troubled homeowner. So far the Hamp, Hafa and all the other things that the banks were supposed to use to help the homeowner out have not worked---another plan??? I would rather we not waste the money!!!

I dont particularly enjoy 60 minutes as I do not like their style of journalism. Most stories you have to wade through the slant to figure out what or who they are really trying prop up or tear down.

I find that the luxury home market in general will be going down alot further. Its a dead horse. Those that are getting out of homes are downsizing or renting. There are opportunities by investors but that is the exception not the rule. In your ara you are really talking about a horse of a different color. If you can afford a house n the HAmptons, then chances are you really arent affected by the bubble or economy and are smart enough to take advantage of any discounts in the market. Even in the other markets, every one is looking for a deal or steal. Even rich people...moreso the wealthy.

As for the other 97% of homeowners, oh well. Real estate has become, like many other commodities, disposable. I do not condone some one walking away from their house because they can rent or pay half the price for a similar house now, but I understand it. Would I? Ive lost about half my equity over this fiasco but my mortgage is reasonable and it is the roof over my head.

What I dont have a stomach for is people walking away from their homes, renting for a few bucks less down the road yet they have a new car, a new Plasma TV, eat out every night....Ive turned down more than a few short sales because these people were just out and out scammers,taking advantage of a trend to be gluttons.

MAY

2010

Paula

What wouod YOU Do?

Just Asking ?

I enjoyed the post and comment string.

This is a symptom of the economics sickness.

It is not the root cause.

Hi Paula. Read article and saw 60 Minutes on Sunday last. We know something about Foreclosures and Power of Sales up in Toronto and elsewhere in Canada. But nowhere near the record numbers shown on the 60 Minute program. Our Banking system is more regulated than in he USA so we didnt have have the reprecussions at the same level. However, we expect a rash of Foreclosures in the next year. We a handle about 8-10 a month at present. Stay in touch, let's see about referral business in future.

Sergio: Thanks for the comment---The Hamptons has been hit by this housing crisis like never before, so there are very few people who are buying--even less renting, which is one way people have used to get by in a downturn. Don't forget, this area is populated by huge numbers of Bernie Maydoff victims---there are 300 second homeowners here that have nothing now...not a pretty picture!

Thor: If you read the post you would see what I would do and what I am doing now--I am very cautious about the listings I take, and about the buyers I work with. I do a more through evaluation of them both to identify their individual motivation to buy or to sell--I ask them very detailed questions about their financial situation--right doen to the money saved, income per month and every obligation they have currently. I do this BEFORE I ever take them out or list their homes.

Marc: Thanks for reading the whole thing! It is one of the more interesting posts because of the comments...

Stan: You are lucky that you are in Canada! I hear things have calmed down there....let me know if you have someone for the Hamptons! Thanks for reading and commenting.

It is fortunate that you are able to sell and list in the Hamptons. Unfortunately 98% of what goes on in the Hamptons does not apply to the rest of the United States. Possibly only 1/2 of one percent of the US population could afford to consider qualifying for a home in your market area. NEW CONSTRUCTION in the US could be considered one of the main reasons for prices plummeting in areas such as Las Vegas and Myrtle Beach and many other overbuilt areas in the US. I understand that builders want to just make money but in the process they need to take some responsibility for the existing real estate crisis in some areas.

MAY

2010

In some markets within the Greater Cincinnati, Ohio region, I am seeing customers "walk-away" because the time it would take to recoup lost equity is greater than the time it would take to restore bad credit. Many are finding themselves tens of thousands or more in home value depreciation and they view the wait to restore equity or appreciation too great. The trend is short-selling or walking-away. Many are filing bankruptcy to avoid the tax/1099 on the deficiency balances after the foreclosure or short sale sells. Another interesting factor in condominium or patio home communities are restrictions against the number of units within the community that can be leased. Many of the community HOA boards are not "sensitive" to the economic issues of their homeowners and are instigating foreclosures in cases where owners want to lease but are restricted from doing so.

Tom: I agree that builders have a very narrow view of real estate: They treat housing as a commodity just to keep them in business--however, it is a double edge sword because as easy as it is to make a lot of money on a home they build, it is just as easy to saturate an already overstocked inventory and there goes the motivation for a lot of people to buy. Too many houses to choose from can affect the whole idea of buying. As far ar the Hamtpons goes, it is no different than any other market in that we have been hit as hard if not harder than a lot of markets because of the double whammy of the recession and the Bernie Maydoff scam....as I said above, there are at least 300 homeowners here in the New York area that have lost every penny---in some case mulit-millionaires who now have nothing. Now, I am not looking for sympathy here, just letting you know the facts--there are retired people walking away from their homes here too, because they have nothing left.

Timothy: I see your plight; it is different here because as you know, this market is made up of second home owners and people who still have money. However, this is also a big retirement area. A lot of moderate income New Yorkers live here after they retire so that they don't have the pressure of big city life as they age. These homeowners have been devastated. Good luck in this time of huge change!

MAY

2010

Great post! We, as Realtors, need to educate the public on their options and get the right information out there.

Kathryn: You better believe it! It is our responsibility to do what ever we can do to guide them, especially now! Thanks for reading and commenting.

MAY

2010

Hi Paula,

Very well said! Price and motivation are the two most important factors when listing a home for sale. I cannot tell you how many times I have seen agents take a listing at any price just to get the listing. All with the hope of beating the homeowner up to drop the price over the course of the listing. Those days are gone along with many agents who took part in that practice. Thanks for the post!

Best wishes,

Matt

Here builders are going under or have stopped building all together. Shorts sells are about over 50% now and growing fast, while foreclosures are the highest is 16 years with plenty more in the wings.

Points well taken, but every market is different. It's hard to imagine prices going much lower than they already are here in the Detroit area. When investors can get a 15-20% ROI on houses in good neighborhoods as rentals, it appears the rental market is supporting the values.

On the other hand, I can see somewhere like San Francisco, where one can rent the same house way cheaper than owning it, as still having a big downside potential. The comparison of rent vs. ownership costs can clue one in to the downside potential, but trends do tend to "overshoot the mark" a bit, as they have here.

MAY

2010

Matt: thanks for commenting--I am seeing the same thing starting to happen here again--I have a listing that I was asked to help another agent with and the price is too high--so my involvement is to get the price down after 30 days, at least that is the agreement. I do know that the house is right next door to a new build that just went to contract at a lot more than the subject property so chances that someone will come along and make a high offer are greater now then even 2 weeks ago. It is still a wish and a prayer though!

Charles--Sounds pretty dreadful there! keep your chin up and forge ahead--What goes down CAN go up again! If I were you I would scratch gravel to find the upside, what ever it may be. Maybe a house sold that was on the market for a LONG time--maybe someone got a modification, FINALLY, and is going to be OK...Maybe a foreclosure was halted by a helpful family member....what ever you can come up with, come up with it!! It is critical that you start building a positive roster of happenings that you can focus on. If you do, you will begin to see the positive thigs start to happen--it's not magic; it is a law of nature that what ever you focus on, you get!!! Good luck!

Frank: You too, Frank! I have a brother who is a retired cop in Flint and his neighborhood has fallen into such a dreadful state--"they" are burning the houses around his--he can't breathe in his own house from the smoke hanging in the air! I would do just as I suggested to Charles above: Keep looking for the positive--it is there; maybe in bits and snippits, but it is there! Focus on that stuff and your inspection business will pick up again--people WILL start buying again....

MAY

2010

We need to educate homeowners as to what their options are, so they can make an informed decision.

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Paula I Hathaway, Senior Vice President, LBA

Southampton, NY

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Prudential Douglas Elliman Real Estate

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