If you’re left brained (logical), we probably already lost you at the headline. But this isn’t a blog on positive thinking (not that we have anything against that). We’re talking about negative equity and how it gets measured. More importantly, where are the opportunities?
Just before Thanksgiving, the Wall Street Journal ran a headline that “One in Four Homeowners are Underwater.” This isn’t because California slid into the ocean, but is one of the lingering effects of the mortgage meltdown that began over three years ago.
The article says that 10.7 million households had negative equity (about 23% of all households) according to research firm First American Core Logic. Nearly half of those, or 5.3 million households, owe at least 20% more than the current value. And nearly 10% of those (520,000) had already received Notices of Default. An even more telling statistic came up later in the article, when the Mortgage Bankers Association was cited as stating that 7.5 million households are 30 days or more late on their mortgage payments.
What we think is interesting is that 24 million households, which would be about 50% of all households, have NO mortgage. Therefore, they have equity! But just because they aren’t in imminent danger of losing their property doesn’t mean they didn’t suffer loss. If your property went from a fair market value of $500,000 down to $250,000, then you lost $250,000 of net worth. Last time we looked, that’s bad. Especially if you were counting on using that equity, through a reverse mortgage or moving to a less expensive area, to help fund a chunk of your retirement.
Of greater interest is one line buried in the middle of the article which said that First American Core Logic had changed its methodology for calculating these numbers and “using the old methodology, the portion of underwater borrowers would have increased to 33.8%”. Wow! That’s 1 in 3. Think about that. Go outside and look up and down your street and count every third house. Underwater!
Of course, it doesn’t really work that way. There are certain areas that are more underwater than others. We’ve been talking a lot about Dallas lately. This is a market that didn’t lose value anywhere near as much as say, Phoenix or Las Vegas. In fact, according to the Wall Street Journal, citing First American, homeowners in Nevada, Arizona, Florida and California are more likely to be underwater. Funny, but weren’t those once the hottest appreciating markets?
So what does all this mean?
Well, our headline had double meaning. Obviously, changing the methodology for generating the statistics resulted in a report of 23% of households underwater, instead of the nearly 34% under the old methodology. If you’re watching trends, this might mislead you. Lesson: Always be sure to dig a little deeper when relying upon statistics.
The bigger lesson is that one person’s problem is another person’s opportunity – and not necessarily in an opportunistic way. In other words, someone doesn’t have to lose (worse than they would anyway) for you to win.
If you’re a regular listener of the show, maybe you’re already picking up on where this is going. Obviously, we see a lot of opportunity in a landscape covered with problems. Problems are every entrepreneurs dream!
With 7.5 million people behind on their mortgages and millions of those with negative equity, they can’t refinance or execute a traditional sale to get relief. Millions have negative equity of over 20%, so they don’t qualify for the government sponsored loan modifications. And according to this same Wall Street Journal article we’ve been discussing, Sanjiv Das, head of TARP recipient Citigroup’s mortgage unit, mortgage companies are reluctant to reduce mortgage principal over worries about “moral contagion, with people not paying their mortgage or re-defaulting because they believe the bank would reduce their principal.”
So banks won’t modify. Homeowners can’t refinance or sell for enough to pay off the loan. Problem, problem, problem!
But what would it look like if an astute investor were able to buy the home on a short sale, taking advantage of today’s fabulously low interest rates, and then rented the house to the former homeowner for a payment that the now tenant could afford?
You could even go one step further and provide a lease option to the former homeowner, with a price point designed to make you (the investor) a nice profit, even through the re-purchase price would look like a bargain to the former homeowner. It’s still less than their original mortgage (which was paid short when you bought the property). Do you think the former homeowner turned tenant would be willing to pay a little bit more than market rent to stay in their home knowing they have an option to get it back? Do you think they would take better care of the property than the average tenant? Do you think they are more likely to stay long term, thus reducing your exposure to vacancy and turnover expense?
Put yourself in the position of every party in such a transaction. Are there positives for everyone? Eveyone’s situation is improved. Win-win-win. We like it!
This blog is already too long, so we’ll leave you a homework assignment. Especially, it you’re sitting there thinking to yourself, “Great, but I can’t afford to do anything.” Go listen to our show on reverse mortgages. Then look for the stats in this blog. Then go outside and count the houses. Do the math.
We get giddy when we think of all the opportunity in today’s market. But of course, it’s all a matter of perspective.
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