Recent years have hosted a surge in residential real estate values in many parts of the nation, fueled by homeowners turned investors lured by the promise of low risk and high returns within short periods.This run up spawned a minor cultural phenomenon featuring television shows on renovating and flipping properties and brought new vigor into real estate investment seminars and infomercials.The record upward trend has now yielded to the largest decline in home prices in the seventeen years that government statistics have been collected.This decline, and the associated evaporation of equity in many homes, presents some significant problems which particularly affect the liquidity of residential real property.
Many current homeowners now find themselves upside down or nearly so with respect to their mortgage loans.This is particularly true for those who either elected 100% financing options or obtained home equity lines of credit based on previously inflated values.The consequence for homeowners is increased difficulty in refinancing, whether it is an impossibility or simply subject to less favorable finance rates.This is of significant concern for those who also partook of another popular mortgage product of the real estate boom:the adjustable rate mortgage, or ARM.ARMs were often used by investors or others who expected to sell or refinance their properties in the short term, and who would accordingly focus primarily on the initial rate while agreeing to premium rates following adjustment.Those who may seek to avoid unfavorable adjustments now find themselves challenged to refinance due to the decreased value of, and equity in, their property, and may even find themselves needing to bring cash to the refinance closing.
The possibility of owing more on a home than it is worth, or at best having lost a substantial portion its equity, also impacts those looking to sell residential real property out of plan or necessity.For many attempting to sell, the decline in surrounding values makes impossible the goal of asking a price that is sufficient to pay all interested lenders.The result is that some are financially excluded from the sales market.Others are forced to fill the gap from other sources.For others whose situations are unsustainable, the path will lead to a short sale or foreclosure.
Despite near daily proclamations that this declining environment as a buyers market, many buyers will find they also are negatively impacted by these circumstances.Financing a purchase has become more difficult, as many appraisers refuse to value properties on anything other than a hyper-conservative basis, making it difficult or impossible to support loan or purchase contract values. Mortgage loans are no longer made on the assumption of continued appreciation.Instead, lenders now regularly identify formerly hot markets as declining and demand larger equity cushions to protect their collateral position.Buyers is these markets will find it necessary to come to the table with more cash, and will be well advised to ensure that all real property contracts include an appraisal contingency to provide the potential buyer with a cancellation mechanism where lenders are not willing to provide financing in the amount that is necessary or on terms that are desirable.
Buyers facing further decline in valuation may subsequently find themselves owing more than their property is deemed to be worth.Furthermore, it is unclear whether county property appraisers are generally recognizing the decline in their valuation algorithms, and particularly whether they are factoring in the depressed values of lender negotiated short sales or other discounted sales.For example, in Hillsborough County, Florida, the Property Appraiser specifically stated at a recent speaking engagement that his office will disregard short sales, foreclosures, and other discounted sales as statistical anomalies not relevant to tax assessment valuation.As a result, the property tax burden on a home may become disproportionate to its market value.
Clearly, during a declining real estate market numerous perils await homeowners, sellers, and buyers.Parties to sales agreements will benefit from the advice of counsel who can identify a plan for addressing possible pitfalls.In particular, property owners who find themselves forced to explore foreclosure alternatives such as short sales and deeds in lieu of foreclosure will benefit from such guidance during what is at best an inconsistent process.Everyone else it seems will benefit from patience, if their personal financial situation will allow them that luxury.