Home Prices, Foreclosure & Vermont

Home Prices, Foreclosure and Vermont

by William F. Supple, Jr., Ph. D.

Vermont has the lowest foreclosure rate in the United States according
to a new report by the Office of Federal Housing Oversight Enterprise
(OFHOE).

This report has garnered widespread attention because it is the first
statistically comprehensive analysis to find, for the first time in
nearly thirteen years, that U. S. home prices experienced a decline from
one quarter to the next.  Specifically, in the third quarter of 2007
home prices decreased  nationwide by 0.4 percent compared to the
previous quarter, the second quarter of 2007. However, the annual change
in home prices measured from the third quarter of 2006 to the third
quarter of 2007 showed an increase of 1.8 percent, which was the lowest
four quarter increase since 1995.


The number of foreclosures in the U. S. has risen sharply in the last
two years. During the preceding housing boom, foreclosure rates were at
very low levels, in large part because financially strapped homeowners
could easily sell their homes or refinance their mortgages. With the
signficant market deceleration and the more recent tightening of lending
policies, those options have become harder to exercise in recent
quarters.



Home Price - Foreclosure Relationship

 According to the OFHOE, the causal relationship between home prices and
foreclosures is two-directional: high foreclosure activity can both
cause and be caused by home price declines.  Home price declines can
cause foreclosures by decreasing the equity homeowners have in their
properties. Homeowners are much more likely to default on their
mortgages if the current value of their property falls below the
outstanding loan balance (I. e. their equity is zero or less). Declines
in home prices will increase the frequency with which homeowners find
themselves with no equity and thus may be motivated to “walk away” from
the property and the mortgage.

                               

Vermont

Vermont had the lowest foreclosure rate in the nation.  In fact, in 2007
there were a grand total of 29 foreclosures. (Some sources have reported
1209 foreclosure filings in 2007, BFP  Feb 5, 2008). It is important
distinguish between a foreclosure filing and an actual foreclosure. As a
reference, according to the 2006 American Community Survey there were a
total of 182,389 owner-occupied housing units. Of these, 123,706 had
mortgages associated with the property, while 58,683 had no mortgage
recorded on the property. The foreclosure rate of .00023% is much closer
to zero percent than it is to one percent. 32% of the properties in
Vermont have no mortgage.

One factor that has helped insulate Vermont homeowners from mortgage
difficulties is that home prices have  continued to appreciate while
much of the nation has suffered from stagnant or depreciating home
values. For the one year time period ending September 30, 2007, Vermont
had an approximate 5% increase in home values according to OFHEO 's home
price index.
In contrast, California and Florida homeowners have a high incidence of
mortgage difficulties.  In 2007, California had 66,000 foreclosures and
Florida had over  53,000.  To go along with these high numbers of
foreclosures California had an approximate 7% decline and Florida a 5%
decrease in home prices.

Figure 1 indicates that the differences in home price changes among the
various states may partially explain the differential incidence of
foreclosure.
Inspection of Figure 1 shows that Vermont had the fewest foreclosures
and a home price increase of about 5%.  There are other states too, that
had price increases similar to Vermont ; Massachusetts, Texas, New
Mexico, Colorado, Georgia among others, yet their foreclosure rate is
much greater than Vermont.  The differences in foreclosure rates among
states with similar price appreciation values indicates that price
appreciation can't be the main explanatory factor leading to
foreclosure.

The Picket Fence Effect?
Vermont is weathering the storm better than the rest of the nation -
could the high percentage of for-sale-by-owner real estate sales be a
factor?

Foreclosure is an end-stage event that can have many separate financial
and personal contributors. In addition to lack of price appreciation or
worse, price depreciation, events such as unemployment, divorce, health
issues, etc. can impact the motivation and/or the ability of a homeowner
to continue to pay a mortgage. Another variable that could also play a
role in the financial difficulties that ultimately end in foreclosure is
the proposed method through which a property is sold.  It is noteworthy
that in Vermont, where are relatively large percentage* of real estate
sales are for sale by owner, that there are very few foreclosures.
(*Professionals involved in the real estate transaction such as
attorneys and appraisers have reported that they believe that one in two
deals they see are Picket Fence sales).  Whatever the  exact percentage,
it is fair to assume that more people sell by owner when there is a
strong resource like Picket Fence available to them.

While there is currently no objective method to know the true percentage
of property sold by the owners (no government agency directly records
the method of sale in any documents), anectdotal evidence of a strong
for sale by owner presence in a small, relatively confined region like
Vermont might be exected to produce profound economic ramifications for
property values and the overall economic well-being of those involved.

Indeed, if a 6% sales commission were routinely subtracted from an
homeowner's equity in a zero or near zero, price appreciation
environment, the incidence of substantial negative equity would occur
more often.  The transaction costs of selling a property using an agent
could present more owners with the option of selling at a loss and
actually paying money to get out of the property, or walking away from
the property and starting over at some point in the future.

After almost 16 years, tens of thousands of transactions and nearly a
billion dollars of recaptured commission fees kept in the pockets of
Vermont's homeowners may be revealing itself .  By avoiding real estate
commissions, Vermont's homeowners enjoy relative financial stability as
the value of their properties is not systematically deflated by repeated
real estate sales commissions that would magnify any real decreases in
home values.  Vermonters also enjoy a high rate of mortgage-free
homeownership at 32%. Another emergent feature that might be expected to
grow as individual homesellers repeatedly reduce transaction costs of
the sale and apply those savings toward a subsequent down payment or
mortgage principal.

The Sky May be Falling, but Your Roof isn't Caving In

In the first week of March, many media outlets were screaming the
following headline "Homeowner Equity is Lowest Since 1945" citing a US
Flow of Funds Report from the Federal Reserve.  The reports cited that
homeowner's equity nationwide had dropped below 50% (actually 47.9%) in
the last quarter of 2007.  That means that for most people, the bank or
mortgage company would own a greater share of their home than they do.

Fortunately, Randall Olsen of The Ohio State University re-examined the
data used in the Federal study. He found that the government study did
not factor in homeowners who had paid off their mortgage and therefore
had 100% equity.  When this data set is added, the percentage of
homeowner's equity rises to 70%.  Not such a headline-grabbing finding
when all the relevant data are analyzed together.

The two examples mentioned here, foreclosures and home equity
percentage, indicate the importance of critically reading beyond the
headlines, and asking questions regarding the source of the data and the
actual meaning of the information being presented.  Perhaps the best
strategy to prevent getting fooled by the headlines is to ask, "What is
omitted from this report or story?"  Sometimes, the most meaningful and
important information is what is left out of a national media story. So
as the news outlets pound home the doom-and-gloom message of the state
of the real estate market in this political year, take comfort in the
knowledge that your personal situation and that of your neighbor, isn't
as bad at it is made out to be.

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