Breaking Up is Hard to Do: How Real Estate Broke Our Hearts, and How We Can Get over It!

Posted @ Oct. 03 2011 08:52AM by PCL Staff - marketplace

What’s happening in the Phoenix area real estate market today is unprecedented. If you bought a home anytime between 2005 and 2009, chances are you now owe more than what the home is worth. It’s painful.

Working in real estate, it’s easy to become a little blasé about the devastation that’s occurred in our communities, even though it happened to us, too. I started selling homes in Casa Grande in 2008, just before the values plummeted. The desert community of around 50,000 people is approximately halfway between Phoenix and Tucson – right at the heart of the housing crisis. When I talk to out-of-state buyers about how much the values have dropped, they eye me skeptically.

“We heard foreclosures are selling at a 40% discount,” they say. “We want a deal.”

“Everything’s a bargain right now,” I reply. “There’s a fire sale going on.”

The reality is that our values are now being set by distressed property sales – short sales and foreclosures - and they have been for some time. Rather than the odd foreclosure popping up only to be snagged by a daring investor, the bulk of all of the homes bought and sold in the greater Casa Grande area are either bank-owned or about to be. If you want to sell your home, you either compete with those prices or you don’t sell.

So…how bad is it?

This year, distressed closings accounted for around 75% of all homes sold in Casa Grande; values are breathtakingly low. I recently showed a home that sold for $290,000 in 2005. It closed this year for $85,000. Unbelievable? The fact is that this home sold at fair market value, 2011-style. Property prices in Casa Grande have almost halved in the last six years—the average home in 2005 sold for $186,000. In 2010, that figure was $102,000.

But if real estate agents are ‘used to it’, the enormity of the losses to our community are felt anew daily by homeowners who have reached the end of their tethers - and their bank balances.

“I’m embarrassed,” said one of my clients as we discussed his short sale. “We’ve always been on top of our finances. Our credit scores are over 800. How can this happen to us?”

“We’ve been watching the market for years now,” said another client, debating whether to short sale or let the bank foreclose. “We can’t keep paying $1,700 a month knowing our home is only worth $110,000. Our lives have changed. We don’t want to be here any longer.”

The honest truth is that we, as a community, are in the middle of a monstrous break-up. Our love affair with our homes is coming to an end, and our hearts are breaking.

Of course, it’s a hollow comfort to know that we’re not alone – but we’re not. The average person moves houses every seven years, often forced to by re-location, illness, or divorce. Life can change a lot in seven years. In the good old days when real estate was “safe as houses”, you’d simply sell your home and move.

For many people in Arizona nowadays, that scenario is just a fantasy.

How did we get here?

When the foreclosures first started to trickle through, it was a little disconcerting, but probably nothing to worry about, right?

Wrong.

As the enormity of the situation began to emerge, the obvious scapegoats were the “irresponsible” home owners who’d borrowed more than they could afford, buying at the peak when the Federal Reserve requirement was low and lending restrictions were non-existent. Loan officers used to joke that if you could fog a mirror, you could qualify. These buyers had fallen hard for the American Dream, head over heels with their McMansions, giving no thought to the option arm readjusting sometime in the distant future.

It gradually became apparent that these reckless zero-downers were not entirely to blame, however. I remember making a phone call myself to a lender in 2006, who assured me that the interest rate was indeed an astonishing 2%. Despite not being a REALTOR ® at this point, this was hard for me to swallow. “Does this rate adjust?” I asked, firmly. “No ma’am,” I was assured. “That’s just what the rate is.” “But where does the unpaid interest GO?” I insisted, ever the scourge of call centers. “It doesn’t ‘go’ anywhere ma’am. That’s the rate,” he replied, as if I were nuts.

Of course, negative amortization, adjustable rates, balloon payments, and interest-only loans contributed greatly to our current woes. That, and downright lying on behalf of unscrupulous (or under-trained) lenders under pressure to sell more loans. “Half the people we can supposedly lend to wouldn’t even meet my credit requirements as a tenant,” one lender and landlord confided to me shortly after the crash began.

For the first few years as home prices softened, we were all reluctant to address reality.

“It’ll change,” we told ourselves, rationalizing that with 30 new home builders in a city this size, of course values couldn’t continue their astronomical rise. “This is just a blip. And anyway, a house is a home, not just an investment.”

The builders gradually went away, and with fewer homes to compete for buyers, the market reached a sort of plateau. Everyone breathed a silent sigh of relief; the love affair was back on.

And then prices fell off a cliff.

Now we really started to feel worried. As option arms adjusted, subdivision after subdivision started to sprout its own crop of foreclosures like weeds after a desert rain. You could almost track each builder’s busy selling period by watching where the bank-owned homes were coming up. “We made a commitment, and we’re in this for the long-haul,” we said out loud. But in our most quiet moments we shuddered to contemplate how our “greatest assets” – our homes – were losing value by the day.

Today, the “irresponsible”’ homeowners who supposedly started all this are long gone. The rest of the Valley, the “sensible” buyers who fixed their rates at a place they could afford, are facing a harsh reality. Even if you “did the right thing” and put down 10%, 20%, or 30% on a home, you are likely to be “upside down”. That money you saved up for your down-payment? It’s gone. You added a pool? That money’s gone, too.

Regardless of the magnitude of the capital you sank into upgrades, if your circumstances have changed and you need to sell, you’re likely to be left with two options: you can either short sale or let the bank foreclose.

For most of us, this concept is a little tough to embrace. How could our equity have vanished like this, sucked into investment banker bonuses like moisture sucked from the desert soil? This realization is made all the more horrifying because it’s happening to everyone. If you’re risk-averse, it’s likely you saw housing as a safe bet. We all did. The savings and loan crisis of the ’80s was far enough away for all of us to feel confident that putting money into property was secure. Ironically enough, we believed it would safeguard our futures.

The emotional toll

Many people reach the point of deciding to short sale after months of stress and self-loathing. They’ve exhausted their savings and drained their retirement funds, spent days questioning their decision and nights rowing with their spouse. It’s traumatic.

According to psychologist Dr. Peter Lambrou, today's market has created unprecedented levels of seller anxiety that mirror symptoms of post-traumatic stress disorder.

"In other times, when people decided they wanted to move, it was a fairly easy exit,” he says. "But when people are in distress or upside-down in their house, they're not looking forward to moving…oftentimes, they're abandoning a home that they really had no intention of leaving.”

Mental breakdowns and divorce is not uncommon, Lambrou claims, explaining that part of the problem can be from sellers magnifying the negativity of the outcome. “"When people imagine the worst-case scenario of actually being put on the street, that could imprint as a trauma…it could be on the order of a post-traumatic experience."

According to Lambrou’s definition, that’s an awful lot of people going through an awfully bad time. How can our communities ever recover?

Like any break-up, facing reality is the first step. Putting away the rose-tinted spectacles and recognizing our homes’ real values is essential – although it’s often a rude wake-up call. Nevertheless, hoping things will change keeps us paralyzed in a state of anxiety which can literally be bad for our health. If you do want to give things “one more chance,” then at least set a time when you’ll revisit your decision. Agonizing over market fluctuations on a daily basis is a slow torture, and it doesn’t help.

Those who decide it’s time to move on need to do so decisively. If you plan to sell rather than let the bank foreclose, list the home at market value. There is no point fantasizing that someone will be so taken with your home that they’ll pay far more than it’s worth. Everyone today is looking for a bargain, and over-priced homes do not sell.

Doing some honest talking about “worst-case scenarios” could also help. Oftentimes, things aren’t as bad as they seem.

“I’m glad we did it,” said one of my clients, whose short sale had closed in less than two months. “It’s a fresh start. I still feel angry when I think of what we lost. But at least the sick feeling has gone. We can get past this."

Positive changes like this are not uncommon when people relieve themselves of a burden they’ve been carrying for some time. For many, simply being able to close the door on a bad patch makes all the difference.

Moving on

So, as our communal love affair comes to an end, are we destined to be once bitten, twice shy?

Probably not.

“I’ll definitely buy again,” another client told me after his short sale went through. “We know we have to wait, but we believe in home ownership. I think we all went a little crazy back there. We’d like to get something we can afford comfortably and pay it off sooner.”

With ownership far less expensive than renting and Arizona inventory shrinking across the board, eventual recovery is inevitable. And when the time is right for us to collectively move on, we may do so with a more jaundiced eye, but perhaps we will have learned from our mistakes. One thing is certain: when the dust settles and the biggest transference of wealth since the Great Depression comes to an end, we will find ourselves older and wiser, and maybe a little more likely to see our homes for what they are – somewhere to live.

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Emma Beyer is a full-time REALTOR® with RE/MAX Casa Grande Yost Realty. Specializing in foreclosure and short sale transactions, Emma is a Certified Distressed Property Expert and Certified Investor Agent Specialist. She is also an active advocate for ‘upside down’ homeowners. You can reach Emma by email at emma@yosthomes.com and follow her real estate market updates on Facebook or Twitter @EmmaBeyerRealty. For more info and to read Emma’s blog, visit www.emmabeyer.net