Tuesday, July 29, 2008

An Update from the Front Lines in the Housing Market

I am a realtor working in the greater Detroit metropolitan area and last month I found an amazing home for buyer clients of mine, truly one of the most beautiful homes I've had the pleasure to tour. It sits on a premium, treed lot backing to the course in a prestigious golf community. The house has many upgrades including hardwood floors, a double sided fireplace, tray ceilings, two-story windows with a magnificent view of the green, and a cherry wet bar in the gorgeous finished walkout. Drapes and covers that match, pillars in the living room, an oversized jetted tub -- you name it this house has it.

Built in 1999, it sold again in 2003 for $480,000, after which the new owners put $50,000 worth of upgrades into it for a total of $530,000. My clients signed an agreement to purchase it from them a month ago at $385,000, which we thought was a pretty good deal for a great home with this many special features. A few days ago, however, the appraiser for my buyers' lender evaluated its worth at only $335,000, and as a consequence the bank won't underwrite a loan for a penny more.

That is a 30% drop in value in five years, not counting the upgrades.

At $385,000 the property was already selling for less than the owners' equity in it, forcing them to bring almost six thousand dollars to close instead of profiting from the sale as we've all been taught to expect. At $335,000 the sellers, who were already being forced to relocate out of Michigan due to a job loss late in a career, simply don't have the available funds to make up the difference. And to boot, they've lost all the equity in the home that they expected to remain in until retirement.

Further complicating things in a situation like this is that even if the seller were to agree to sell the home at the appraised value, at this much lower price it would force them into a short sale situation, requiring their lender to now get involved and dragging this whole process out for another two to three months, at which point the buyers may have walked away and the home dropped in value even more - and that's if the bank and the seller can even come to an agreement satisfactory to both parties on what happens with the oustanding debt.

This is the second time in two weeks a bank has refused to underwrite a loan at a price agreed upon by a buyer and a seller one of whom was a client of mine, and I hear realtors talking about this happening more and more often now. Banks forcing parties to rewrite their purchase agreements to reflect a lower sales price may be another emerging factor conspiring to drag down home values in this country right now, and illustrating how the housing market is entwined in a vicious death spiral with the banks.

For instance, a bank (even the same bank) might have a foreclosure home in the same areas as this home that they have priced artificially low in order to get it off the books and cut their costs -- and when it sells it ends up being a comp for this sale, dragging down its value even further and causing a potential short sale and loss for another bank!

So what happened with the sale of this home? The outcome hasn't been decided yet. The buyers want the home and believe it is worth more than the appraised value but the sellers are simply unable to sell it at that price. Because of that the buyers are taking the unusual step of disputing the appraisal. They're arguing that home is worth more and that, in fact - they should pay more for it than the bank wants! This is not as crazy as it sounds as they buyers stand to lose almost a point on their rate when the lock expires, reducing the amount of home they'll be able to finance. Were that to happen, they'd likely not find a home as nice as this.


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