Reaction to the Action

Obama has finally opened up and showed us the guts of his housing plan. USA Today does a fair job of outlining the details. This is a program that appears to have some potential, and addresses three core areas, refinances, loan modifications, and lender incentives.

What I like:

The loan refinancing is only available to those with good payment histories. We are rewarding those who have acted responsibly and paid their mortgage in a timely manner. This is the sort of thing that we should have been doing in the first place.

The loan modification requires proof of hardship. Those who simply overextended themselves will not qualify. The borrower must prove they can sustain payments on the new loan. The cost of the home has a maximum, so we won't see 5 million dollar mansion qualify. The plan is proactive and can be used BEFORE they fall into default.

Incentives to servicers have a set dollar value. I like this because it keeps them prioritizing high cost loans over lower value loans. The loan is reduced to 31% of income, IE affordable terms, through reducing the first mortgage and extending the loan term.

What I don't like/see:

No requirement for financial education. This is the magic wand approach. We fix the loan but do nothing to help the borrower keep themselves out of this situation in the first place.

The dollar cap on homes is still pretty high, and does not appeared to be adjusted by where they live. Lots of homes in LA cost more than $720,000...none of them will qualify. In contrast I am guessing 98% of the homes in Cache Valley would meet this requirement. We shouldn't be modifying a mortgage on a $700,000 home in Cache Valley!! It may be a regular home in LA, but here that is a mansion. FHA already has loan limits that are established and adjusted by area, why on earth aren't we using those, (or some percentage of them, like 120% of the limit or something?). Any time the government takes a blanket approach it is both unequal and unfair, and families lose.

Dealing with lenders/servicers is all carrot no stick. Asking them to play nice is fine and dandy, what about legislation that penalizes lenders who give loans that are blatantly unaffordable/inappropriate? Many of the subprime loans that were issued over the last 5 years were to families who would have qualified for prime loans.....but the lenders don't make as much money that way.....

Conclusion:
Anything is better than nothing. While it begins to address the problem we have today, it does nothing to lay the framework for avoiding this in the future. We are seeing more reaction to the problem, rather than action that leads us to a more permanent solution.

Give that home a snorkel.

I want to play a little game called spot the swimmers. Take a gander at this. Look at the average listing price, then look at the average home sales price. Some of the states really shine..... do you see it yet? Look at Wyoming, for example.

Avg List price: $610,035 Avg Sales Price $130,702

So, the average listing price is 4.67 times higher than the average sales price?!

Utah: Average List $486,538 Average Sale $129,000 3.77 times.

Idaho: Average List $357,490 Average Sale $85,000 4.2 times.

Anyone see a pattern?

Why is the average list price so high when the average sale price is so low?
What does this tell us about the type of homes that are having "problems" right now?

Well, there are a couple of possibilities here, so lets toss some around. Perhaps there are more homes for sale in big cities that had higher prices and are experiencing the largest decline in home values. With a few exceptions this seems to hold true.

There is another possibility here: that there is a higher concentration of expensive homes on the market across the state. I used a fairly crude method to test this. I jumped back to the trulia.com website and pulled up the data on Cache county , and compared this to the data on population pulled from this site on area codes and inputting those at the and the census bureau fact finder.

Then I put the numbers in a little chart so I could see the population of each zip code (this information is dated, last census was 9 years ago but no other data by zip code is available)compared to the average list price and number of homes that are on the market. One quick thing I want to point out, the LOWER the per person number, the more homes are being sold in the area per person.

The zip code with the most homes for sale per person is 84325 with just over 1 home being sold for every 32 people compared to the overall average of one home per every 103 people in the zip code! It also has the third highest average sales price. The two zip codes with the highest average sales prices are just above and below the average per capita. The next 3 are all well below average (meaning more homes on the market than you would expect for their population). This is interesting to me, since it seems to imply that the wealthiest families (those in the 2 zip codes with the highest average home price)seem to have an average number of homes for sale. Just below that, in what could be termed wannabe wealthy zip codes we have a disproportionate number of homes for sale (especially in that number three slot). I have to wonder if this might hint at a group of people who got in over their heads. People who perhaps wanted to appear well to do, and are now reaping the consequences.

One thing is for sure, being upside down or "underwater" on their loans is something we are sure to see more of. The washington post indicated that 1 in every 5 homeowners now owes more on their loan than the home is actually worth . I plan on taking a closer look at that article more indepth on my next post. In the mean time I plan on waiting a month and then doing this little exercise again to see how home sales are doing for each zip code. (Note, this does not include homes that are for sale by owner, or by a builder who has not posted them on the MLS.)

While we wait, maybe we should invest in some fins and a snorkel?