Why your neighbor's foreclosure is bad for you

It's impossible to stay away from the news that foreclosures are up, and way up.

If one listens to any broadcast news, if one reads any print or Internet news or websites, if one just drives around, the word FORECLOSURE looms large.

It's very easy to assume that, when one has a steady job and pays one's own bills, this foreclosure crisis won't affect one's personal world. It's very easy, in that situation, to assume that those losing their homes to foreclosure are financially irresponsible, are too stupid to have properly read the contracts, or too greedy and bought way over their heads.

In reality, it will affect your world. I'm going to explain the foreclosure process, and why it will get far worse before it starts to get better, and how the increase in foreclosed properties affects everyone at the consumer level.

Pre-foreclosure

It all starts with missing a single house payment. "Missing" a payment means that you've not made the payment, and the new one is now due. Now, you owe two house payments.

So many reasons can presage the first payment going delinquent: medical bills, family holidays, car repairs, a brief job loss or change in job which delays payroll for two weeks, a DUI and the bail, attorney's fees and court costs that go with it. As a practical matter, the large body of people in this country are two paychecks away from financial meltdown. When your largest monthly obligation is your home, it's the one that feels like it will provide the greatest benefit by letting it go delinquent - meaning, that you have the most money to spread around by not making the house payment.

No one makes that decision thinking that they won't be able to recover. Everyone thinks they can pull it together soon enough.

Of course, once someone is behind a payment, the next one comes running up in no time at all. Now, they're two payments behind. They still think that they can catch up.

Then, they're three payments behind.

The foreclosure process

Here in Texas, we have non-judicial foreclosure, which means that a lender doesn't have to bring a lawsuit to foreclose, except for home equity loans. In many other states, a lender has to bring a lawsuit to foreclose and has to prove to a judge that there has been a default and that all of the rules have been followed.

In Texas, though, a lender has only to issue a notice of default and acceleration, and publicly post notice of their intent to foreclose on the first Tuesday of a given month, not fewer than twenty days from the date of posting.

Banking law and accounting rules motivate lenders to begin this activity after 90 days of non-payment. Usually, much more time passes before the foreclosure activity starts; of course, by failing to pursue default or workout, the lender can unwittingly create a situation where there is no easy solution other than foreclosure.

After the foreclosure sale

Once the foreclosure has occurred, the former owner becomes a squatter. In most states where the court has ordered the foreclosure auction, the Sheriff is sent out to evict the former homeowner. In Texas, and most other non-judicial states, a contractor is sent out by the winning foreclosure bidder (9 times out of 10 being the former lender) to request that the former owner vacate peacefully. If they don't, then they are evicted - a process that takes only about two weeks.

The lender, having foregone collection of payments, probably having paid property taxes for the former owner, having paid attorney's fees and court costs, now runs the post-foreclosure playbook.

The house, now sitting vacant, is offered for sale as is, meaning that any deferred maintenance or repairs are undone, and the house is offered at near a top market price and as a foreclosure. Yard work is minimal, and aside from sticking a sign in the yard, there is essentially no marketing done.

After a few months of unacceptable offers, the price is dropped to below market or the bottom of the market. This produces a sale, and sets the bar for neighborhood value at a new low.

Why this affects you

So, you're good in your home, the payments are current, your job is secure, everything's fine - why does this affect you? The common opinion held by someone in this position is that those who are suffering in the foreclosure mess are personally to blame, and that resources should not be deployed to help those people.

Here are the reasons why it does matter to you if your neighbors start losing their homes:

* Most people keep their homes only for five to seven years
* Divorce, job change, transfer or illness are the top motivating factors to sell
* Divorce, job change, transfer and illness are nearly always unplanned
* Most lenders now won't loan in a neighborhood with more than 10% foreclosures
* Vacant, un-kept homes begin to affect neighborhood values
* These value changes create an environment where only cash buyers can buy
* Most buyers of foreclosed homes hold them for investment
* Investment owners rarely, if ever, update or improve a property
* Renters (those who occupy investment homes) NEVER update or improve property
* You could find yourself unable to sell at any price

A little history lesson

Twenty-five years ago, the price of oil was lower than the cost to extract it from the earth - which, given today's prices, seems impossible. Houston experienced an "oil crash," and thousands were laid off. We had a foreclosure crisis here, and whole sections of the city became investment property.

Those neighborhoods have only just come back to an inflation adjusted sales price that matches what they sold for newly twenty-five years ago. After twenty-five years of deferred maintenance and upkeep, most of those homes will NEVER be owner occupied again.

So, it really does matter

If your neighborhood starts a cascade of foreclosures, your value could be stripped away from you, never to return. The real estate bubble will take fifteen years to recover from in terms of any rapidly appreciating real estate values. The idea of a property gaining in value due to market conditions is likely over for most neighborhoods and most parts of the country. Only in those few neighborhoods where foreclosures aren't rampant, and where demand exceeds supply will one see an increase in value. Even here in Houston, we have a buyer mindset that it's a buyer's market and that prices are too high - when they're not too high at all.

I hear Realtors now reciting the mantra that it's a buyer's market. It only is if we say it is. Effective and different marketing will get properties sold, coupled with appropriate pricing.

The "assistance" so far offered by the government amounts only to tax breaks for large corporations. None of the "assistance" helps most homeowners facing foreclosure, because they're voluntary on the part of the lenders.

By adjusting the tax code to make it more beneficial for a lender to work with a borrower, even with one that has already gone through foreclosure, this crisis could be stopped dead in its tracks. However, that is remote and unlikely, as only the Realtors have the lobbying muscle to make such a demand.

And Realtors aren't generally willing to look to their future marketplace and make choices - they, like most people, deal strictly in the present day and hope that tomorrow will be better.

Things that make me crazy

Today's Houston Chronicle has an article that describes a declining Houston real estate market - again. While I find the reporter's work to generally be of acceptable quality, today's article is less helpful or reliable.

In fact, it skates along the ragged edge of "if it bleeds, it leads" journalism.

Several things about the article that bear sharp criticism.

First, the most prominently quoted Realtor is someone who has only been in the business a year. I know Realtors who have been in the business ten years who don't understand market fundamentals. She's advising clients not to list? Why is she given voice?

Listing and pricing property for a Realtor is part wizardry, part gut feeling and part solid research. My best Realtor buddy has what she calls "Susan's Rule of Pricing; if it hasn't sold in a month, it's priced too high."

There are several examples in the article that are designed to "show" that the property market in Houston isn't doing so well - that we're following the rest of the nation down the toilet.

Mais non, I say to you. Do you remember my article back in January about the appraiser whose seminar I attended, and that his position is that the worst housing value performance was in partially developed, new neighborhoods where the builder was still building?

Now, go back to the Chron's article - notice that each of the "bad" value examples are .. partially developed new neighborhoods where the builder is still building.

Now, a 1700 sq foot house in Timbergrove for under $300K? That's a steal, and no wonder she's getting a lot of traffic.

Let me give you an example - in 2005, I lived in a huge four bedroom house in Country Village. Great house. Needed a lot of work; probably more than ten years' deferred maintenance. The house was pending foreclosure, as the owner hadn't been making payments for a good long time. I made a short sale offer to buy the house; I did my research and determined that the house was worth a maximum of $235,000 in the next five years, and that work was needed - so I offered $210,000. They declined, and countered at $265,000.

I moved. Four months later, they sold the house for $195,000.

Now, a week ago, I found a glorious example of the identical floor plan from the same builder, about a mile and a half to the north of where I was. I looked up the listing, and they're asking $575,000. Okay, it's in terrific shape, but the SAME floor plan (with slightly fewer square feet) sold for $67 a square foot, and the one being offered currently is listed at $167 a square foot.

Here's one of the real issues in the real estate market in Houston, one that my Realtor friends are talking about. People are pricing their homes far too high, and then complaining about the market when they don't sell.

The house listed at $167 per square foot is on a corner lot to a primary surface road (big negative,) and is ONE HUNDRED DOLLARS PER FOOT HIGHER THAN THE MARKET. Even if one takes property condition and that it's a slightly better neighborhood into account, it won't appraise. Ever. And it will languish, extending the statistic with HAR for property time on the market, and the Chron will dutifully write about how everything's gone to hell in a hand basket.

If someone makes a financed offer on this property of which I speak, lending rules will now require that there be at least two comparable sales within a mile of the subject property that support value. Meaning, at least two homes within a mile have to show that the house is worth the price from the last ninety days.

The SMART Realtors, the ones who have a good business, are the ones who look for comparable sales BEFORE turning in a contract offer. And, the ones who refuse to list a house at an unsupportable price just "to see if it sells."

Through it all, our local media follows the national media trend and focuses on what doesn't work. Does anyone remember the late 1970s, when Houston (and, thereby, Dallas) had economies that were contrary to the national climate? Our reporters were touting our cost of living, our opportunities, and how exciting it was to be here.

We're again in a similar climate. I note that the Chron's article reviewed the opinion of a Texas A&M researcher about how people in Houston are "afraid to make a move, because of the possibility that the oil industry will be punished after the national election."

Uh, hello? Were any of you paying attention to politics inside the Beltway? They aren't interested in doing ANYTHING but hoovering up every free dime that the corporate lobbyists can shill out. Congress is unwilling and/or unable to do ANYTHING to make change happen, and you think that this is a valid point how?

Did Congress and this government set the price of oil today over $100 for the third day running?

Nope.

Have any of these people talked to people in the oil industry?

Nope.

In three weeks, Singapore Airlines begins non-stop service from Houston to Moscow and thence to Singapore to service the OIL industry. Our Sonangal Express flight operated by World is going to up-gauge to a 747 (according to a charming World employee who works that flight.) My friends in the oil patch are feeling fairly confident (albiet more poorly paid than before.)

I don't hear ANYONE holding back because of speculation that the oil business will be punished, save for a single expert at A&M.

Why didn't they ask Barton Smith?

Simply put, if you price a home consistently with other, similar homes in that neighborhood, it's going to sell. If your Realtor pre-screens proposed buyers to make sure that they have a loan, it's going to close. The Chronicle's own research tool shows that, in established neighborhoods, prices are moving upward consistent with the pace of inflation and sometimes higher.

If you "think" your house is worth a certain value, if you have something really unusual or out of character for the neighborhood, if you don't pre-screen borrowers for loan approval, you'll have trouble.

If you're thinking of selling your home, look for a Realtor with a successful history of business in the neighborhood in which you're selling. Take the small steps to make the house show as well as it can. Price it according to neighborhood trends, and not what you "need" to make on it, or what you "think" it's worth.

This ain't San Jose, California two years ago, folks. It's good old Houston, Texas, and we haven't had disco price increases outside the loop since the early 1980s.

And, thank God we haven't. It gives us a foundation of stability from which to move forward.