Is Walking Away from your Mortgage Smart?

According to CNN Money, “Some homeowners, no doubt, believe that the credit score hit is worth getting out from a deeply underwater mortgage. They may owe, say, $500,000 when their house value is only valued at $350,000. And, they figure, there’s no way it will ever be worth what they owe so it’s better to get out from underneath the burden.

After default, they reason, they can raise their FICO scores by paying all their bills on time and eventually finance another home purchase.

Don’t count on it. While homeowners who default due to economic hardship, such as a job loss or divorce, normally must wait two to five years before buying a home again, walkaways may face double that time.

“It could be well over seven or eight years before [walkaways] are able to obtain a mortgage to buy a home again,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association.

Strategic defaulters might also be charged higher interest rates, even above the levels other borrowers with similar credit scores would receive.”

Strategic Default Affects More than You Think

Clearly, there are cases where this strategic default scenario makes sense. I am not the type of real estate broker who is going to argue that homeownership is for everyone. Nor am I going to make a righteous or impassioned speech about your financial obligations or modern American contract law (admittedly, that dissertation would be fun to compose). I also understand the argument of those who choose strategic default can rent a replacement property for the next decade until they decide to reenter the real estate ownership arena. Honestly, those who argue for strategic default can make the whole scenario sound fiscally responsible and, sometimes, even a tad sexy. Like a renegade cowboy in Deadwood who frequents the ‘Storyville’ areas of town…until Wyatt Earp shoots me, er, him.

The truth is that your FICO score and creditworthiness are driving factors behind more than just real estate purchases. Unless you are flush with the green, this score will not only drive your ability to purchase automobiles, receive student loans and establish trade lines, but it will also aid in determining the interest rate. Obviously, the worse your credit scores are, the higher risk you present to a potential creditor, the higher your effective interest rates will be. This can make digging out of a hole infinitely more difficult should you ever need to lean on credit during any future time in your life.

Most people don’t even understand how their FICO score is calculated or even what it is. Learn about both, straight from the source: What’s in your FICO score

Proving a Housing Price Increase in Nashville

nashville home prices and closing volume

A very astute investor once told me that if I attempted to micro analyze the real estate market based upon short-term data, I would most likely be missing the soul of that market. Yes, I had the ability to make profitable short-term decisions, but I would lack the true understanding of why my short-term decisions were valid. It is this soul of the market that allows one to make accurate predictions and gain a certain comfort level with the velocity, momentum and overall direction of that market. He suggested that if I were to place a long horizon chart on the far side of a room, I would gain the perspective needed to feel at ease with any purchase or sale decision. I took his advice to heart and, ever since, I have been doing just that. But, I have never shared any of these charts on my website until now.

nashville home prices and closing volume

This weighted average mean price compared with volume of sales study of the local Nashville real estate market is one of my favorite charts. If you believe that the volume of closed transactions is an accurate leading indicator for price, as I do, you will see that the Nashville market is most likely entering into a sideways period for the next 12 months. Based upon an 18 month lead variable, it does appear that home prices in the Nashville market will officially recover in May of 2011. This will be the point at which one can say home prices in Nashville are now appreciating on the whole. However, let me caution buyers, if you try to time the bottom, you’ll almost always miss it.

Timing the Bottom of the Nashville Market

Should the national economic landscape not change in some drastic way, from this point forward, you should assume that the average Nashville property is at or near its bottom price. Keep in mind that we are speaking in averages, there are micro markets within Nashville that will continue to depreciate and markets that continue to appreciate independent of the average. If you are attempting to time the bottom of the market, now is the time to truly put forth effort in identifying submarket value deals. My advice is to plan on consummating your purchase prior to the end of this year. Perhaps, our traditional market doldrums of the Thanksgiving season might be the optimal convergence of seller depression and average price lows. That being said, should you identify a property that is currently under market value, do not delay long as a growing number of savvy buyers are beginning to exit their perches on the fence.

Volume of Real Estate Sales in Nashville

It is already clear from April’s numbers that the closing volume will be significantly higher in Q2 2010 than it was in Q2 2009. Granted, this is mostly an artificial result created by the federal real estate tax credit, but that point is entirely moot in this analysis. Provided that no new real estate stimulus programs be created in the near future, the Nashville market should experience its usual Q3 and Q4 volume declines and return to a very steady market in 2011. Nashville will continue to see modest gains in transactional volume throughout 2011, leading to modest gains in the average home pricing.

Predicting Median Prices of Nashville Real Estate

All of you day traders probably saw this trend immediately upon glancing at the above chart: you saw the bull run on prices from the middle of 2007 through the middle of 2008 while there was a very bearish volume of transactions. This was the period in Nashville before we really felt the “what, me too?” effect of the national housing crisis. Directly after that period, Nashville experienced a year of almost geometric price decline that began to temper just 12 months ago. This period of price decline almost perfectly mirrors the price increase realized in the 2005 period. Since that decline, prices in Nashville have remained virtually flat. I would expect this relatively flat, or even slightly declining period to continue through the remainder of 2010.

By the beginning of 2011, the market will begin to feel a lot like it did in 2003 – 2004 on a volume consistent with 2002 – 2003 (think of a reverse climb back up the same moving average trend line). Prices in the more desirable areas of Nashville will begin to appreciate as much as 5% per annum and even the least desirable areas will experience price stabilization to a certain extent. By the end of 2011, most city leaders, bankers, prognosticators and soap box salesmen will proudly declare an end to the economic downturn, but they will be early in that declaration. The economy still has a ways to go at this point, but the consumer confidence factor will have returned to the residential real estate market in Nashville. It will be during 2011 that Realtors will be able to say that their 4.5 year trip down the rabbit hole has finally ended.

April 2010 Nashville Real Estate Market Analysis

median price nashville housing market

nashville housing market statsThe Middle Tennessee MLS (Realtracs) has reported April 2010 housing statistics. The following graphs and analysis are based on the greater Nashville residential single family homes and condos market only. Note: on April 30, the federal housing tax credit for first-time home buyers culminated giving rise to purchases that may have occurred later in the housing cycle.

Total Inventory (Okay, Increasing)
Inventory levels continued to build in April, up 1.47 percent from March, up 11.28 percent since January 2010. There were a total of 17,705 active homes and condos listed in Nashville last month, compared to April 2009 when there were 17,430 on the market, a modest year over year increase of 1.55 percent. Interestingly, despite this year over year increase, the 2010 adjusted average monthly inventory is still lower than both 2009 and 2008 levels.

Pending Sales (Excellent, Inflated)
Pending sales in Nashville are up sharply in the first 4 months of 2010. Since January, pending sales have nearly doubled, soaring 193.43 percent higher. Additionally, total pending sales are 34.31% higher than their levels a year ago. In fact, the current 2,505 pending sales is the highest total in any month since June 2008 when there were 2,684 pending sales. This is not surprising news. The end of April coincided with the end of the federal $8,000 tax credit for first-time home buyers pushing a number of sales into April that would have normally occurred later in the summer. One must take some fraction of these sales and attribute them forward in an effort to annualize the data for a more accurate prediction of the coming months.

Closed Sales (Very Good, Inflated)
Just as with pending sales, the number of residential closings in Nashville has risen rather significantly. Since January, closings have more than doubled, increasing 208.52 percent. April’s total also represents a 16.9 percent increase over March. Compared to the same period in 2008, year over year closings have increased 35.49 percent when 1,516 properties closed. In addition, we have narrowed the gap over 2006 by another 6.11 percent during the past month. Again, let me caution you, these numbers have been inflated by the tax credit. Fascinatingly, April’s total closings are almost exactly the same as October 2009, the month prior to conclusion of the previous federal tax credit for first-time buyers. It is too early to compare the effect of each tax credit on Nashville sales, as the current tax credit concluded during a more advantageous time in our natural market cycle. Once an annualized analysis can be completed, I anticipate the ability to calculate the net effect of each tax credit.

Median Prices (Upward Trending, Stabilized)
April experienced the first month over month price increase since December 2009. Increasing 3.78 percent to $162,701, the median price in Nashville is now roughly equivalent to prices from a year ago. Compared to April 2009, the median price remained virtually identical, only falling 0.04 percent from $162,766. Furthermore, the current median price is only 0.0137 percent lower than the 12 month average median price for 2009. This evidence points towards a complete price stabilization in the Nashville market; however, it is still too early to tell whether the current tax credit has skewed the relative median price in a meaningful way or we have reached true stabilization.

months of real estate inventory nashvilleMonths of Inventory (Compressing)
Based on April’s closed sales, Nashville has 8.62 months of inventory currently on the market. Based on pending sales (contracts accepted but not closed yet) Nashville has only 7.07 months. The absorption rate has been significantly better over the past 3 months when there was 15.9 months of inventory based upon the same calculations – a 184.45 percent absorption rate increase. Do not let this rate increase fool you. Since 2003, the Nashville market has experienced a very similar 143.71 percent absorption increase over this same period annually.

Pragmatic Conclusions
As I begin to take seasonality into account, I am seeing that the first half of 2010 is shaping up to be quite similar to the second half of 2009. Yes, total closings and pending sales have risen sharply. Yes, the median price has increased, but the graph clearly indicates that the overall market levels are remarkably close to the same levels experienced towards the end of last year’s tax credit. The only appreciable difference is how quickly the 2010 numbers have risen. This dramatic rise is a simple combination of the Nashville housing market’s traditional seasonal gains plus some factor attributed to the conclusion of the current federal tax credit. Once adjusted, I anticipate being able to prove that the market has actually behaved in a slightly upward sloping linear manner. In other words, I should be able to mathematically prove that the Nashville real estate market has either begun to bottom out or has, in fact, bottomed out. Whether the market begins an appreciating cycle or is in for a double dip depends upon too many factors to list in this brief analysis.

Many publications and periodicals will sensationalize the increasing volume of bank foreclosures and conclude that this increasing volume will have a negative effect on prices. This does not appear to be an accurate conclusion. Studies have shown that foreclosures have more than tripled in the Nashville market over the past 24 months and yet, the median price has still stabilized. So, what is the true difference between a bank selling at a stabilized lower price and a distressed homeowner doing the same? Not a whole lot from the market’s perspective.

pending home sales in nashvilletotal real estate closingsmedian price nashville housing market

When to Reappraise a Home in a Flooded Neighborhood

Flooded homes in Bellevue

Flooded homes in BellevueI must admit that this is the first time I have fielded an emailed question having to do with such a widespread natural disaster. The question is a very good one and I thought it best to share the conversation on my blog as many of you in Nashville may be experiencing the same situation. I have changed the name of the actual customer with a fictional name in order to protect their identity.

Kim: I live in the Riverwalk subdivision in Bellevue. My home was NOT flooded. We currently have a 7 year fixed-rate mortgage that changes to an ARM in 2 years. We have been looking at refinance options recently, but it seemed like the appraisal would not be good compared to the original value of home. We have a 100% loan, so this is an issue. We had planned on waiting another year for the market to improve until this weekend’s flood. Not at all sure what to do now after all the flooding here. Do I rush for appraisal/refinance before impact hits or wait it out and see? Again, the ARM does not kick in until May 2012. Do you have any input here?

Grant: I am sorry to hear that Riverwalk has been hit as hard as it has. Could you estimate how many or what percentage of homes in Riverwalk have been affected by the water? At this point, I think that you have to wait since insurance adjusters are already here and readjusting values. Although, it would probably be best to talk with a local appraiser who is actively doing refinance appraisals. Have you ever spoken with Bill Cary? He and his father are local appraisers who usually have very up to date information.

Kim: About 150, or about 1 in 4 homes flooded in Riverwalk. Boone Trace had an equivalent number and pretty much all of Beautiful Valley flooded. No homes in Lexington Point did. These are the 4 subdivisions off Newsom Station at McCrory Lane. Thanks for responding and I will check with local appraisers such as one you mentioned.

Grant: I spoke with Bill Cary this afternoon and he recommended either doing the appraisal now rather than waiting the full 2 years. He argued that appraisers would only be allowed to use the most recent comps in determining the value and fears that the prices will begin to come down because of the flooding. However, Bill also pointed out that appraisers typically do not use distressed sales when comping a property for value purposes, but he also admitted that each appraiser takes into account slightly different factors than another. He fears, as I do, that the natural human reaction to driving into a devastated neighborhood would subconsciously cause an appraiser to simply err on the conservative side. I do think that it’s possible for Riverwalk, Boone Trace and Beautiful Valley to fully reconstruct within the next 24 months, but I’m not sure that people will want to do so. If you were moving to Nashville, would you buy a home in a neighborhood that was so recently flooded? I don’t believe that most people would knowingly do so. That is, until more time goes by.

Nashville Flood Assistance

Those who suffered losses may apply for assistance online at or over the phone by calling 800-621-3362. Those who wish to volunteer or donate may visit Hands On Nashville at or the Community Foundation of Middle Tennessee at

What Happens to the Nashville Market Post Flood?

Bellevue homes flooded

Bellevue homes floodedIf the flooding caused by Hurricane Katrina in New Orleans was any indication, Nashville real estate prices will rise in the coming months. I realize that this statement may appear counterintuitive in the wake of such devastation, but the underlying fundamentals of a capital market remain unaffected, the simple laws of supply and demand dictate a housing shortage on the horizon.

According to the Brookings Institute’s One-Year Review after Hurricane Katrina, “Housing is less affordable as rent prices in the region have increased by 39 percent over the year and home sale prices have spiked in suburban parishes.” Specifically, the Brookings Institution concluded that, “Home prices, measured by their purchase price, have increased in East St. Tammany and West Jefferson, by 6 percent and 23 percent, respectively since last August. Coupled with the healthy pace of home buying, it is evident that these suburban areas have become the favored quarter for households. Home prices have not increased in the most damaged parts of the metro area…rents have also increased for the region as a whole since last August. A two-bedroom apartment now rents for an average of $940 a month, an increase of 39 percent since last year. Rents for all other apartment sizes have risen at the same pace.”

It is difficult to correlate the above statement directly with Nashville, but if recent history is any lesson, I would expect home prices to fall significantly in the most affected areas of Nashville like the Pennington Bend area near Opryland and the River Plantation and Riverwalk areas of Bellevue. However, there are several large rental complexes very near those areas that may allow displaced residents to temporarily remain close to home. This is an important fact, since the further loss of consumer spending in those specific areas would magnify the loss in real estate prices through population attrition.

Which Areas of Nashville will Benefit

If I had to make an educated guess, I would say that the slightly more affordable areas just outside of Bellevue, but on the Nashville side of town will benefit from the flood. West Meade, Northwestern Brentwood and Northern Franklin may see a marked increase in housing purchase demand while Eastern Bellevue, Green Hills, Hillwood and West End may see an increase in rental demand. Unquestionably, downtown Nashville itself as well as the Cool Springs area will experience higher than usual demand as displaced persons attempt to secure a rental or permanent residence closer to where they work.

According to the Wall Street Journal, another interesting phenomenon post Hurricane Katrina, was the insurgence of interest from real estate speculators. In doing research for this story, there actually appears to be a pattern of real estate investing by professionals in areas that have suffered significant housing loss. If one can secure an undamaged property for some percentage less than just prior to the weather event, there is almost certain profit through a resale or long term rental strategy.

Differences Between Katrina and the Nashville Flood

There are a few major differences of note between Hurricane Katrina and what is becoming known as “the great 500 year flood of Nashville”. The most obvious is that Katrina caused a much larger population displacement, the hurricane actually pushed hundreds of thousands of New Orleans residents out of the State of Louisiana. This is a very important difference. New Orleans lost all benefit of those residents’ consumer spending. This is not the case in Nashville where displaced persons are finding places to stay within the greater Nashville area.

Hurricane Katrina was a wind event as well as a flood event whereas the Nashville flood is a simple flood event. This is another important distinction as we have not experienced a proportionate number of power lines down, roofs ripped off or general destruction that is associated with wind events. This will lead to the faster restoration of public utilities and allow reconstruction to begin much, much faster.

Nashville Real Estate Outlook

It is true that Nashville is in the beginning stages of scratching and clawing its way out of the national economic downtown. It is also true that jobs and general optimism had also begun to return to this area. For the supporting reasons above, I am predicting that the resulting economic impact from the flood will cause the Nashville real estate market to recover faster than if the flood had not occurred. The storm has caused the total inventory of homes to decrease more than the resulting demand. While this affect many only last 6-12 months, it may seamlessly blend into a recovering national economy.

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