The still downward spiraling housing market

Contradictory to what some suggest the housing market is still being brutalized where I’m from.   I’ve uploaded a chart from Zillow so that you can see the Arizona market specifically.

If you look at this chart light blue represents AZ and dark blue represents the United States.  It appears as if the US has hit a bottom or slightly starting to curve flat.  I’m not here to discuss whether or not this is the bottom however.  It appears to form a bottom but I’m not speculating.  The reason for this blog entry is to outline the policies that are flawed and that need to be changed.

Let’s start first with the banks.  They refuse to do principle reductions on properties yet they will let them foreclose become REO properties then sell them at 50% off.  Where is the common sense in this.  Why not do a principle reduction of 5-49% you’re going to lose the money regardless right?  Especially for home owners that pay their mortgage every month on time.  This would reward the responsible borrowers.  Instead what happens?  You have to stop paying, start the foreclosure process, then the banks will finally work something out with you.  Worst case scenario again, you foreclose and they pickup a house that is worth 50% of the loan they were carrying.

Next let’s talk about interest rates.  Why is it that a responsible lender who is break even or slightly upside down in there house cannot refinance?  The banks are telling these people to go fly a kite because they already have them roped into a loan and they know they will not stop paying or else face foreclosure.  Yet if someone picks up a new mortgage today they will gladly lend at lower interest rates.

All of this being said why would a responsible person stay in their house at this point?  If they are slightly underwater, hugely underwater, or if they owe what their house is worth they would be outright stupid to stay there.  Think about this for a second.  You can find foreclosures all over the internet today for 50-75% off of value.  So hypothetically lets say you purchase a $400k house for $200k.  You can take out $50k extra on a 2nd fix the foreclosure up exactly the way you want and your loan to value ratio is somewhere 62%.  Plus the banks will give you super low rates on your new property.  So if your existing house is worth $200k.  You get twice the house for only $50k more.  This includes the costs to make it your dream home!  Or what if you buy your same house foreclosed for around $100k or 50% off?  You cut your payment in half and walk away with the same house.  Surely your credit goes down the drain.  But with some many people with limited credit today are the banks truly going to maintain the same lending standards pre-Bush era?

The reason the housing market is still in the gutter today are simple common sense problems.  Some I’ve outlined above I’m sure there are tons more.  But until the government or the banks give people a reason to keep their houses you can expect a 3rd wave of foreclosures that nobody predicted.  It’s going to be from responsible borrowers.  The reason it will happen is simple.  First wave was ARM loans, second is alt-a, and the one that will hit everyone by surprise is the 3rd phase or “responsible borrower” phase.  I predict when the amount of foreclosures add up to the number of houses purchased from 2004-2009 that is when you’ll see this crisis end.  Some may think that is a staggering number and is outright crazy.  I say common sense always wins in the end.