There was a great article by Toluse Olorunnipa in the Miami Herald over the weekend that illustrates just how bad the real estate market is in the Sunshine State. A typical anecdote:
“Wesley Ulloa bought her first condo for $230,000 in 2007, and watched helplessly as it lost two-thirds of its value during South Florida’s historic housing market tailspin. The 24-year-old real estate agent has been selling units in her Coconut Grove building for $80,000, a figure that makes her shudder each month as she makes her mortgage payment.”
Unfortunately, this situation is occurring all too frequently in Florida, where $113 billion worth of home equity has evaporated since the housing market peaked in 2006. Home prices are down almost 55% on average from the peak, and an amazing 43% of homeowners in South Florida (Miami-Dade and Broward Counties) with mortgages have negative home equity.
Now, more and more homeowners are starting to do the formerly unthinkable – they are strategically defaulting on their homes and turning them back over to the banks. These homeowners have given up ever recouping their money and are letting the bank foreclose on their home. While there used to be a very strong taboo associated with mortgage default, this is changing as it becomes increasingly common.
Last week reports from the Mortgage Banker’s Association showed that 25% of the country’s foreclosed homes are located in Florida. Nearly 1 in 7 homes is in foreclosure, and nearly 1 in 5 homes are in foreclosure or are delinquent on their mortgage payments. Of all the foreclosures in Florida, 25% are of the strategic variety. According to the article, there are 50 times more walk-aways then there were five years prior. Since it takes a lender nearly 25 months on average to go from initiating foreclosure to actually seizing a home, these borrowers have plenty of time to save cash in order to rent a new place.
Strategic default is not without consequence, however. Those who pursue this avenue will see big hits to their credit, and may have difficulty getting a new loan in the future. Furthermore, lenders in Florida can pursue defaulters for deficiency judgements for the difference in the value of the mortgage and the value of a foreclosure sale for up to five years after the default.
Still other borrowers pursue a middle road between continuing to pay and strategically defaulting – they attempt to conduct a short sale of their home. Short sales are when the bank allows the borrower to sell their home for less money than is owed on the mortgage. In these cases, the bank generally waives their right to pursue a deficiency judgment against the borrower. Short sales accounted for 20% of existing home sales in South Florida in 2010. Almost half of all home sales were at a loss.
It is worth noting that historically, Florida is no stranger to real estate bubbles. In the 1920s, there was a particularly devastating land boom. Florida was advertised as a tropical paradise, and frenzied speculators bought land under the assumption that it would continuously rise in value. When the bubble inevitably burst, thousands of investors were stuck with relatively worthless land holdings and massive piles of debt (sound familiar?). The Florida economy was essentially crippled for about 20 years until the onset of World War II. I bring this up because it is indicative of just how devastating a real estate bubble can be to a given area, and just how long it can take to recover. If you’re located in Florida, I’m curious to know your take on the market. Do you think we will see a recovery any time soon? Let me know in the comments section below.
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Gregg Pechmann
February 22, 2011 @ 8:34 am
I don’t think so….tough for me to say since I am a positive guy…..but it is also important to understand that you have to be smart and protect yourself and your family.
The “shadow inventory ” will start kicking in this year and next year…
Thanks for sharing Michael
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Jason
February 25, 2011 @ 1:25 am
Recovery soon?…..If recovery is defined by prices back to where there were in 2003-2006, which is I and just about all my friends and colleagues would define it…….No way, not for another 15-20yrs.
I bought my condo in Delray Beach 2006 for $610,000 ……it’s now worth $320,000; my story is typical down here. Its severe and I believe that predictions regarding ever increasing ..so called strategic foreclosures are actually underestimated. I would say that more than half the people I know, successful hard working, gainfully employed homeowners have been studying the best way to walk-away and preserve their families financial futures etc. We spent the last year or so really educating ourselves and wising up to the reality. The big banks manufactured real-estate valuations in order to make enormous short term sums of money off the backs of the American workers. We all are victims of the banks scheme which deliberately manufactured a housing bubble with contrived valuations by giving money away…….
I’ve spent 2 trying to convince Wells Fargo to in effect short sale my house to me for $400,000 which is much more than current market value. I’ve great credit, never missed a single payment, income and debt ratio perfect and Ive been a Wells customer for 17yrs …….regardless, they have not worked with me a bit, they invited me to shirt sale or turn over the keys….
I love my home and can afford the monthly payment but will be turning over the keys. It’s worth about 50% of what I owe, in effect they are forcing me to, it’s the only sound financial decision.
The good news! of course the keys will be handed over after living 2yrs mortgage free……small consolation but Ill take it, Im no fool………He’ll, if the most Senior Wells Fargo financial advisor were giving me advise he’d no doubt say….” don’t pay another cent into that dead asset, get out”
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Miami
March 2, 2011 @ 6:26 pm
This is the biggest problem. A lot of people are just leaving their properties even though they can afford to pay their mortgages. If you lose money on your investment, you can not make others(other home owners/banks) to pay your loss. The government should do something ASAP. Everyone start to consider just leaving their homes.
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Kim Diaz
January 30, 2012 @ 2:14 pm
How is it fair that a family who has paid thousands of dollars in mortgage payments gets booted out so an investor can buy the house for next to nothing? Why can’t the loan be modified to that price for the struggling families? There are few living wage jobs and the upheaval puts innocent children in sometimes dangerous situations, and at the very least is traumatic for them. They often have to change schools and leave friends. This situation clearly benefits the already prosperous and further hurts the chances for the disappearing middle class.
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