Southern Maryland Real Estate News! Winter 2009! It is almost certain we will look back on this economic cycle as the catalyst for the most significant transfer of wealth in our lifetime. Our retirement accounts have probably lost much of their value. Home values are certainly not what they were. Each of us has a friend or neighbor that has lost a job. Deficit spending has taken on a very brisk pace and is likely to accelerate.
There is no question we will see equity and real estate values surpass their previous highs...it's just a matter of time...perhaps a long time. In the short term, what goes up and what goes down will be influenced by spending initiatives as much as by fundamentals. Government stimulus programs will guard against systemic failure, but eventually, we will return to an economy where markets determine value.
Today's challenges are also opportunities. Everything is on sale. If we stay positive, understand the facts, plan thoroughly and execute with resolve, we will survive and prosper.
Many believe there will not be sustainable recovery until such time as residential home values stabilize and the value of collateral for existing mortgage loans is restored. The "Troubled Assets Recovery Program" (TARP) was originally presented as a plan to purchase "toxic assets" (non performing residential mortgages) to clean up a bank's balance sheet and thus restore liquidity. Mortgages acquired with TARP funds would then be evaluated for "loan modification" with the goal of keeping the homeowner in the property rather than foreclosing and adding to already excessive inventory. Instead, the taxpayer funded program provided capital to failing banks without acquiring the problem loans. Loan modification activity is minimal and foreclosure rates are accelerating. W hile helping select financial institutions, the "toxic assets" remain toxic and will need to be resolved before sustainable recovery can occur.
What started as a "sub-prime" crisis is now impacting every family's balance sheet and causing some to choose alternatives which were not even remote possibilities a few years ago.
We, as real estate professionals, encounter situations on a daily basis where a family has no choice but to sell and owe more than market value. These families are not speculators that made a bad bet with an exotic loan product. Rather, these are families that pay their bills, encounter some life altering event, and simply don't have the means to wait out this cycle.When these owner occupied properties become a "short sale" or foreclosure, a lender is now the decision maker and selling from a distressed position. The institutional sellers adopt a pricing strategy designed to sell the asset quickly rather than incur additional carrying costs. In markets where the majority of inventory is bank owned, properties are now offered below reconstruction cost. Even solvent owners are losing motivation to continue making payments on an asset whose value has diminished so significantly. The stigma associated with losing, or just walking away from a home, has diminished as well.
Recovery could be speeded by incentive, or penalty, to lenders which will make foreclosure a secondary rather than primary alternative. Loan modification is a complicated proposition but is the means which will keep responsible people in their homes and inventory off the market. One of the more compelling recent considerations is empowering bankruptcy courts to modify mortgage loans; lower principal balances, extend repayment terms, lower interest rates. Some feel it would level the playing field for homeowners and might motivate lenders to work with families rather than risk being bound by what the court might decide.
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