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Saturday, June 2, 2012

How long will you be underwater?

How long will you be underwater? Timeline to reach desired equity position depends on 3 factors By Jack Guttentag Inman News® About 16 million homeowners owe more on their mortgage than their homes are worth, which means they are "underwater." So long as that condition continues, they have no equity that can be used to help finance the purchase of another house. On the contrary, they can't sell the house without digging into their pockets to pay the difference between what they owe and what they can realize from the sale net of expenses. But time heals most wounds, and negative equity is no exception. The principal component of the monthly mortgage payment reduces the loan balance by the same amount. Refinancing into a mortgage carrying a lower interest rate reduces the interest portion of the monthly mortgage payment, thereby increasing the principal component and the rate at which the balance is paid down. Although underwater borrowers generally can't qualify for a refinance, those fortunate enough to have their mortgages held by Fannie Mae or Freddie Mac comprise an important exception. The government's Home Affordable Refinance Program (HARP) permits negative equity, though borrowers must be in good standing to be eligible. The other component of negative equity, depressed home prices, also appears to have turned the corner. Prices have begun to rise again in some areas in which the houses listed on the market have fallen short of demand from purchasers. It is plausible that within the year home prices in most areas will again be on the rise. It is now time for underwater borrowers to start planning to get their heads above water. To help in that process, Chuck Freedenberg and I have designed two calculators designated 2d and 2e on my website. The first shows the borrower's equity in the property month by month for any combination of the various factors that affect changes in equity. These include the interest rate, property appreciation rate, and extra payments. Some examples are shown in the table. Changes in Negative Equity with Initial Loan Balance of $200,000, Property Value of $150,000 and Monthly Payment of $1,300


Factors Affecting Change in Equity

Month When Equity Reaches:

Interest Rate

Appreciation Rate

Extra Payments

0

10%

20%

6%

0

0

122

148

170

6%

1%

0

98

123

147

6%

1%

$50

89

112

134

6%

2%

$50

74

95

116

6%

2%

$100

68

88

108

4.5%

0

0

79

99

117

4.5%

1%

0

67

86

104

4.5%

1%

$50

63

80

97

4.5%

2%

$50

55

71

87

4.5%

2%

$100

52

67

83

The table shows, for different combinations of interest rate, appreciation rate and extra payments, when the borrower will no longer be underwater, which is the month when equity hits zero. The table also shows how long it will take before equity hits 10 percent, at which point the borrower who is otherwise qualified will be able to refinance, and 20 percent where a refinance won't require mortgage insurance. Borrowers may want to raise their targets to cover the expenses of whatever action they plan. If the goal is to sell the house, for example, they will need positive equity of 5-7 percent to cover sales costs. This is easy to find with the calculator. The second calculator is designed for underwater borrowers who want to know how much extra they have to pay each month to reach a target equity level within a specified period. For example, the borrower paying 4.5 percent in the example above wants 10 percent equity in five years and believes his house will appreciate at a rate of 1 percent a year. The calculator tells him he must pay an additional $315.50 every month for 60 months to reach his objective. If his house does not appreciate, he has to pay $418.05. While the calculator tells you what you must do to reach your objective, it doesn't tell you how to develop the commitment and determination to see it through. I am working on that. The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com. If you'd like more information on the market, like to list your property, or want information on any property from any broker, you may call or email at anytime.

Thank you,

Suzanne O'Brien
Your Expert Advisor
P: 313-516-6644
suzanneo@realestateone.com
http://www.movingmetrodetroit.com

Friday, June 1, 2012

Michigan Real Estate Market Update - May 2012

Michigan Real Estate Market Update - May 2012 After watching the market numbers over the past 12 months, a solid (positive) pattern has been set that appears to be spreading across the nation. The housing market, for all practical purposes, has shifted from a Buyers Market to a Sellers Market. In the five-county Southeast Michigan market, 84% of all sales are homes that have been on the market less than 90 days. These homes are well priced and in the best condition, but also only represent 30% of the homes for sale, which means 84% of all buyers are bunched together chasing 30% of the available listings. With a limited supply of desirable homes and increasing buyer demand, good things are starting to happen for sellers, the most important of which is appreciation. (The Northwest Michigan market is about 6-8 months behind SE Michigan so the inventory numbers are not as dramatic, but the same improving patterns are still evident.) The "average" market statistics hide the true strength of the current market. Overall, the average Months Supply of Inventory (MSI) is 4.1 months (for SE Michigan), but in reality, 84% of the market is operating with a MSI of 1.5 months while the rest of the market (70% of the homes for sale) is operating with a MSI of 18.5 months. The result is a strange world where 70% of all sellers complain about a slow market with few offers while 84% of all buyers complain about a wild market with no saleable homes to purchase. Both are correct! The reality is those 70% of the homes that are in the 18-month MSI "slow zone" are not really relevant to the market since they are not attracting much market attention. The chart below outlines the "true" MSI for the majority of the market as well as the hidden MSI for those homes that are not priced in a saleable range. MSI Analysis Chart What does that mean for a buyer? It means over bidding on list prices, sight unseen offers, waiving appraisal contingencies and pricing wars above the asking price. Most importantly, it means make your best, strongest offer the first time since we are approaching 50% of all transactions with multiple offers. So buyers have two choices: jump in and play by the new rules of a Sellers Market – move fast, be aggressive and patient since you will most likely lose out on a few before you get one, or go after the other 70% of the listings that are sitting quietly and find that diamond in the rough. For sellers, throw your line in the water. Don't be crazy about the price. You might be surprised what the market will give you, but be prepared to be honest about the condition and features of your house. Buyers are willing to pay a larger premium for a home that is updated, without deferred maintenance, and with a design consistent with the neighborhood (i.e. points off for a contemporary in a Colonial neighborhood, etc.). It may be worth the time and money for some basic updates before putting your home on the market. April of 2011 was really the start of our heated up market, but even so we still showed growth over our previous year, which was strong, and buyer demand continues to grow. If you'd like more information on the market, like to list your property, or want information on any property from any broker, you may call or email at anytime.

Thank you,

Suzanne O'Brien
Your Expert Advisor
P: 313-516-6644
suzanneo@realestateone.com
http://www.movingmetrodetroit.com