Recovery will not happen for all…
Blighted Communities: There are whole communities that will be impacted by the game of musical chairs created by the supply and demand gap… With so much inventory to select from, buyers are increasingly avoiding those neighborhoods with those functionally obsolete homes, neighborhoods with high foreclosure rates and numerous unoccupied or ill maintained homes. At some point that level of decline is seen as too big a risk. So that, even a well-maintained and otherwise marketable property has little marketability due to the law of location. These communities will not recover, if the status quo is allowed to continue, and truth be known are probably already beyond any realistic hope of recovery.
Overall financial trends: While current lending rates are at historic lows, lending requirements are increasingly troublesome for many potential homebuyers… but not yet unreasonably so. The lack of inflation has reduced the leverage once available to the average homebuyer (more on this in a future column). Declining property values have produced another phenomena: the strategic Walk-A-Way (previously discussed here) is on a disturbing increase and likely to worsen the entire market if treatment remains as is.
Possible Cures/Aids: Any serious effort to restore the market has to be multi-faceted. Following are my suggestions:
1. Rather than extension of tax cuts, provide tax credits for the following activities:
- Energy Reduction Measures for existing homes
- Other targeted activities that create jobs.
2. Realizing that foreclosed and un-occupied homes exacerbate the decline of property values and communities, develop a program to encourage rental of foreclosed homes to existing homeowners at a reduced rate so as to reduce the number of un-occupied homes (something like a section 8 program). Such measures should have a required maintenance clause to qualify for the reduced rental rate. Many may see this as rewarding those who have defaulted on their mortgages. However, to allow homes to erode hurts all in the community, as well as the lender and the overall economy.
3. Develop rules that identify Strategic Walk-A-Ways and charge the loss to the homeowner as taxable 1099 income from which they are unable to claim bankruptcy.
4. Modify Bankruptcy laws to reward those individuals electing to honor their debt through Chapter 13 rather than Chapter 7.
Individual Actions: At the same time homeowners need to be aware of their position in the marketplace and its impact on future values. Planning ahead is the key idea. Consult with a trusted real estate professional to understand what is likely to happen with the market value of your home over time, so that you can avoid or at least lessen the potential negative impact of the market. If looking to take advantage of the decline in market values as a buyer, you will also need this expertise to plan your purchase for the future. A low price doesn’t necessarily translate to a good buy.
May the market be with you.
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