Saturday, April 28, 2007

This Time It's Different

From Business Week:

Why This Slump Is Different

Don't call them bill collectors. Today, the industry has a softer term, "debt counselors," for the swelling ranks of people who are pounding the pavement trying to stem the tide of mortgage foreclosures. Says Steve Bailey, senior managing director at mortgage giant Countrywide Financial Corp. (CFC ), who oversees the company's $1.4 trillion portfolio: "You need to keep the revenue stream flowing and keep hope alive."

As the housing downturn grinds on, that has become the mantra for everyone from homeowners and lenders to agents and investors. There have been previous busts, but this one is markedly different. Never before have home prices fallen so broadly: Median national home prices slipped 0.3% in March from a year earlier, and the National Association of Realtors predicts a fall of 0.7% for 2007, which would mark the first annual drop since the Great Depression era.

Foreclosure is never an attractive option, but now it's even less appealing. With prices falling nationwide, lenders are wary of holding on to properties whose values could sink further. And unlike in previous cycles, a big chunk of the loans made recently are held not by federally insured thrifts or banks but by hard-charging hedge funds and other big investors that are aggressively pushing lenders to stop the bleeding. What's more, the steep rise in second mortgages that accompanied the boom means lenders in foreclosure proceedings are increasingly fighting one another for the scraps.
For the first time in years, houses are hitting the market with asking prices below the value of their mortgages. Stretched owners are hoping for a so-called short sale, in which the lenders forgive the difference. National statistics are scarce, but according to a study performed for BusinessWeek by the online agency ZipRealty, there are 1,100 such listings in Miami, nearly 1,000 in Atlanta, and 700 in the Washington area. In Sacramento, real estate agent Patrick Hake counts 1,079, more than 10% of the total homes on the market.


djr said...

Maybe someone can check this out - the irony of the short sale is that the former 'owner' has to report the difference between the mortgage balance and the sales price as 'debt forgiveness' - that is, as income for tax purposes. Anyone know if this is really true?

anon1137 said...

Here's the key statement in the article:

By keeping borrowers in houses they never should have bought, lenders could simply be setting everyone up for a steeper fall down the road.

Perfect Storm said...

Just drove through North Natomas, plenty of homes for sale and a lot bank owned signs. Also, tons of new homes going up.

Housing/Mortgage Doom 2007

Were on track for a 50% decline by 2009.

Patient Renter said...

We've come a long way since this time last year, where most people including the "experts" couldn't conceive of the picture painted in this article. It's definately sobering for those not in the know.

Cmyst said...

PR:"It's definately sobering for those not in the know."

Which is one of the many reasons that I keep compulsively reading this blog and Ben's blog. A year ago, when I was pointed here, I didn't know why I couldn't afford a home -- I just knew that I couldn't, and I didn't want a crazy loan to get one. Now, I know why I couldn't afford it and I know that no one else could afford it either.

Garth Farkley said...


Yes, "loan forgiveness" is taxable income for IRS/FTB.

But it gets worse, per an article I just read--the citation escapes me. The author was a big real estate investor. He says in the good old days short sales were rare and were approved by the lender (the banks, who were keen to avoid REO's). It was a haphazard, desultory business--a sideline to the bank's real business of lending even more money. The author/investor said that the banks didn't bother sending 1099's to their short sellers. It just fell through the cracks and the IRS had bigger fish to fry.

Now the fund managers holding huge commoditized mortgage bonds are gearing up and institutionalizing the short sale/foreclosure business because it's central to the everyday business of holding large MBS's. Thus, he said the 1099's will now be going out--as required by law. The operators of short sale businesses must fear IRS litigation themselves if they routinely ignore this legal requirement.

So it just keeps getting worse. This "loan forgiveness tax" is where legislative bailouts may get their foot in the door. Look out.

Cmyst said...

Of the six homes that I'm tracking, one is listed as a short sale. In reviewing the sales histories of the others, 3 were bought at the height of the bubble. In 2 of those cases, the sellers could only come down about 20K (which is still far less than they need to come down) without losing money. One of those 3 already has the place listed for 15K less than they paid for it, and they lowered the price one month then raised it back up the next month, which leads me to believe that they can't afford to pay the bank the difference.
That leaves 2 homes bought from 5 to 15 years ago for less than half what the owners are asking. One of those homes appears from the pictures to be vacant (an indication that the owner "has to" sell, although it could be rented out I'm sure) and both appear to have had a lot of remodeling and updating done, which means that their owners may have borrowed significantly against the equity.
Asking price has been reduced on both of those homes, by from 5K to 10K, in the last month.
I'm assuming all of these homes are in a "must sell" situation. They've been on the market from 17 to 190 days.
Everyone wants to buy into the tax break benefit of owning, but no one wants to talk about the huge tax hit if you're forced into a short sale.

lexi said...


So if you had to short sale..
let's say you make 80K a year.
You have to sell the house you owe
400k on for 300k and that of course
means you have to short sale. Does
that mean at tax time it will be like you made 180k and you'd pay taxes on that amount? What does
anyone think that would be roughly.
Would that put you in a 25 percent
tax bracket so you'd pay like 40k
in taxes? I'm I wrong here?? I guess that's fair if so but I bet with realtor fee's and closing cost
tacked on the cost would be higher than even that...?

Sittin' Out This One said...

Lexi, If you get to $180,000 you are going to pay alternative minimum tax. So forget all the deductions you normally take: Sale tax, state income tax, deductions for children and head of household. No depriciation. No business expenses for employees. And the minimum tax rate is 28%.

Say good bye to some real dollars on your phantom gain.

More reasons not to buy in a down market.

Cmyst said...

And I don't think these people should have that tax forgiven. The money didn't just disappear; the owner before the FB got his/her $$ capital gains tax free, because the FB borrowed it and gave it to them. If the lender wants to take a tax break because they are getting less than what they lent, that's a legitimate loss. If the FB has a huge chunk of their indebtedness forgiven, it is only right that they pay the tax on that money.

lexi said...

Thanks for answering. You're right. They should pay. I feel
bad for 1st time borrowers who
believed the hype about "buy now
or you'll never be able too"and
bought in 05 or 06 but for all the others who sucked out
the money refi'ing and buying new
car's etc... it's fair. I just wonder how long it will take them
to pay off that big debt. Housing
in this market is very scary. I would rather wait till it bottoms and starts coming back up than risk
having to short sale someday and come up with 50k in taxes.
I'm preparing to bunker down for
at least another year.. maybe several. Thanks again, I wasn't sure if I was right on the tax
situation on short sales or not.

Perfect Storm said...

There were a record 2.18 million homes for sale in the first quarter, which were not occupied, up 4 percent from the record levels seen in the fourth quarter, and up 38 percent from year earlier levels. Currently 2.8% of all homes in the U.S. are unoccupied. It has never gone above 2%.

Housing/Mortgage Doom 2007.

Were on track for a 50% decline by 2009.

Also, sales are down not because buyers are fence sitting, but because there are no buyers period.

Dr Housing Bubble said...

perfect storm,

This time it is different because another varying factor is 2nd non-owner occupied homes like you bring up, which most will unload at first sign of distress. Leverage works both ways and these "debt counselors" are going to ensure they get a piece of their pie. What are these folks "counseling" in this market? You owe cash, pay up. You can wrap this turd however you like but there you go.

The major thing we need to focus on is rapid rising foreclosures, notice of defaults, and inventory. Pending sales have fallen through the floor so even though the median price is sticky and even moving up it is an unreliable indicator. Think about it, homes that are moving right now are quality homes that are priced right. Not the 500 square foot Real Home of Genius isn't moving.

We'll see some "sudden" changes in Q3 and Q4. Summer won't bring the sunshine for these doomed sellers.

Dr. Housing Bubble

smf said...

Ah, those second home owners will save us all, riiiight?

Have not met a 2nd home owner, and both sets of parents here are wealthy. Plus, having a 2nd home limits where you can go on vacation, and they become RENTALS when unoccupied.

When the selling season goes bust, then we'll see that hidden inventory come out, as the owners will try to dump them, realizing (as many still do) that prices will NOT come up after all.

Gwynster said...

a small Davis update: at an openhouse this weekend, the agent confessed that most of the homes for sale are by people who have either already relocated out of the state or that will be once the house sells.

I asked if these were student occupied but "Daddy bought" homes. She said no. The Daddy homes aren't going on the market as much because a 2003 price plus commission is too high to sell now. Those are becoming rentals. What is going on the market is people leaving for lower cost of living areas.

Nice to get a little reassurance that this is happening.

Patient Renter said...

"The Daddy homes aren't going on the market as much because a 2003 price plus commission is too high to sell now."

Wonder how long they'll hold onto 'em. I presume they could probably hold onto them a while being that they were able to buy them in the first place, but I doubt they envisioned becoming longterm landlords when they first bought the places.

anon1137 said...

After another weekend of reading about the economy and the housing bubble, I've decided to make some changes. It looks like the Sac housing bubble is going to take years to unwind, so I'm going to hunker down in my rental and start moving a small portion of my housing-allocated savings into gold, euro bonds and stocks, and developing markets, like E. Europe and Asia. I think the deflation of real estate values in the US could have a larger effect on the economy than I thought at first.

I'm also going to try to wean myself off these blogs, maybe hit them once a month or so (ha!). Good luck everyone.

patski said...

the lender sends you a 1099 with the amount if the "debt forgiven" as income.... so, you have to pay "self employment" tax on the windfall...

patski said...
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patski said...
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buying time said...

There is no cure for the obsession...just a bit of preventative medicine....

Reading the blogs (and all the well informed commentary) and playing with the data are what help keep me sane.......otherwise I am too tempted to start looking at some of these houses that are almost affordable ......

It's soo hard to wait....heart tells me to buy...but head says don't do it!

Also really glad to see others think about the economics of the market the same way. Its all supply, demand and building costs!