August 14, 2018

Location, Location, Location

Where You Call Home Matters

Following the Great Recession many property markets have rebounded nicely in value. But many homes, even some in markets with strong recoveries, still have loan balances 25% or more above market value. Bloomberg reports ‘These U.S. Zip Codes Have Highest Share of Troubled Properties’ based on data from ATTOM Data Solutions. A zip code in Springfield, MO, is worst off with 81% of homes underwater. 

Overall the article reports that 5.5 million properties were seriously underwater or 10.1% of all homes with a mortgage. But more than ‘half of all properties were seriously underwater in 65 zip codes.’ 

The inconsistent recovery in values is likely a function of 2 factors. First, some markets were hotter prior to the Great Recession than others. This likely drove values there up more quickly compared to other markets leading to higher initial mortgage amounts. The crash may have been more severe in these areas. Second, the hotter markets may have led to overbuilding. More inventory was built than the market could absorb after the crash. Working off the excess inventory is likely to depress prices until it's gone. 

The article doesn’t address whether the bigger issues are with certain property types such as condos, multifamily or single family homes. Nor is there discussion of past foreclosure rates or ‘for sale’ inventory levels and how they have changed over time. Perhaps the bigger issue is average home values in these areas. Zillow’s listing of homes for sale in Springfield, MO, shows many homes with modest values in terms of absolute amount and per square foot. 

The implications for lenders is clear. Diversify and look forward. Small lenders focused on their market area are clearly at risk unless they can trade with others to diversify. Looking forward means understanding property valuations in order to assess trends and whether they are outpacing reality. And what’s reality? Hard to know but I’m guessing that smart lenders have evaluated many housing and economic factors to identify correlations and useful early warning signs. 

Of course, convincing business managers to forego booking new business because of market values worries will likely be a challenge. Memories are short. And a ‘bird in the hand is worth 2 in the bush’ when trying to meet short-term  budget targets. It will require foresight and courage to avoid the next market bubble.  

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