Good news or bad news? The National Association of Realtors reported Tuesday that 33% of May existing-home sales were distressed (read: foreclosures and short sales) and the median sales price is now $173,000.
If you’re employed by the glass-half-full NAR, you need to spin that as good news, and the eternal optimists did not disappoint. The trade association pointed out that the share of sales that were distressed has declined from the 45% rate in April.
But the half-empty view is hard to ignore. The current median sales price is still 25% below its May 2006 level and down 17% from the year-ago figure. The NAR may suggest that a decline in distressed sales to merely one-third of market volume is a green shoot, but that shoot is still about six feet under.
Plenty of homeowners seem to agree. The National Foundation for Credit Counseling released a survey last week indicating that nearly one-third of current homeowners doubt they will ever be able to buy another home. Forty-nine percent of respondents agreed with the statement, “Because of the current economic climate, the American dream of home ownership is no longer a realistic strategy for building wealth.”
“It appears that whether a person was directly affected or not,” says NFCC spokeswoman Gail Cunningham, “Americans’ attitudes toward homeownership have shifted.” Declines of more than 25% in value will do that to you. (The S&P/Case-Shiller home price index is down more than 30% from May 2006.)
Indeed, the American dream of flipping a house has given way to the nightmare of foreclosures. Refinancing is getting tougher. Mortgage rates are about 0.7 percentage points higher than in early April, and new rules are generating less-friendly appraisals that can thwart a refi.
And then there’s the humongous elephant still in the room: not enough equity to qualify for a refi. The Obama administration is reportedly reconsidering the maximum loan-to-value ratio allowed for refinancing under its
program. Right now if you have a Fannie or Freddie mortgage and your LTV is as much as 105% — meaning you can be as much as 5% underwater — you may be eligible for the federally-backed refinance deal. But the director of the Federal Housing Finance Agency recently said talks are in progress that could
boost the maximum LTV
rate for Fannie and Freddie refis under Home Affordable to as much as 125%.
The implicit message: the market has gotten away from the Feds. When Home Affordable was announced a few months ago the stated goal was to help 4 million to 5 million homeowners refinance over the next three years. But now it appears that housing prices have fallen so far that the Obama administration won’t get anywhere near that figure unless the government lowers the bar to allow mortgages with 25% negative equity to refi. The Feds hinted as much in a mid-May Treasury release: “Fannie Mae has had over 233,000 eligible refinance applications through its refinancing program, with more than 51,000 of these having loan-to-value ratios between 80% and 105%.” And the other 182,000 applications? I’ll take the fact that the Feds are floating the notion of changing the program to throw lifesavers out to folks 25% underwater as a sign that the current cutoff of 5% underwater isn’t doing the trick.
But offering Home Affordable to keep someone 25% under water doesn’t compute for me. That homeowner still has little motivation to keep paying the mortgage if values slip even more from today’s level. I hope I’m wrong, but a year or two from now it it will be interesting to see the default rate on refis with such large negative equity. Perhaps it would be faster and less expensive to let the housing bubble naturally deflate, rather than try to keep propping it up.