“If there were some new, inexplicable plague that was sweeping the nation and the presidents of all the big banks caught it, we’d have a cure within a week.”
That’s what a friend of mine sarcastically commented when we had a long chat about real estate over the weekend.
It’s an understandable frustration. After all, when the stock market crashed, the banks got a huge bailout. Some still haven’t paid back their loans. Meanwhile, anyone who bought real estate after 2005 is likely underwater — meaning they owe more on their mortgage than the underlying home is worth.
The latest housing numbers aren’t pretty. But they’re about to get better.
Here’s why that’s happening, and why you should be concerned over declining foreclosure rates.
Banks are increasingly offering underwater homeowners a way out that’s less familiar than the well-known process of foreclosure. Instead, they’re employing a strategy called a deed-in-lieu of foreclosure.
Essentially, a homeowner (currently paid up on their mortgage or not) can voluntarily sign the deed of their home over to their lender. In exchange, the loan is canceled.
It’s different — but not that different — than a foreclosure. It lets an underwater homeowner out, and saves everyone the legal hassle of a foreclosure. It extinguishes a debt that might have been a bad idea for the purchaser in the first place.
It’s not an entirely free lunch. A bank may report the deed-in-lieu to credit bureaus, although a lender’s credit might not be as harmed as it would under a foreclosure.
But it still means that housing supply is ratcheting up. It still means former owners are being driven to renting. It’s good news for banks, who can avoid legal expenses. Overall, its bad news for real estate… but the increasing use of deed-in-lieu will also create the illusion that foreclosure rate are dropping.
Undoubtedly, declining foreclosure rates will play a role in pretending that the economy isn’t so bad, especially during next year’s presidential election. But make no mistake. Housing prices continue to reflect the underlying reality of the economy.
With other data on employment and GDP growth showing an economic slowdown ahead, housing could fall another 10 percent to 15 percent.
But, for investors with the financial resources to obtain a loan, the willingness to put in some hard work, and the patience for a long-term investment, real estate remains a great buy in cash-flowing markets.
Just expect fewer foreclosures and more “bank owned” properties. And don’t expect to flip a property for huge profits anytime soon.
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