Distressed Sellers, Repos And Negative Equity

[Hip to be bear]

I am just throwing this out there for discussion, and would be happy to be proved wrong on this, but it seems likely to me that the following scenario could actually have an effect on slowing the decline of HP stats from the land treasury, Nationwide and Halifax.

We need a guinea pig (sheep?) who I am calling Shaun.

He bought a house in 2005 for £170,000, which reached £200,000 at the peak, and is now back at £170,000 ish. He has around £150,000 outstanding on his mortgage. He wants / needs to sell the house because he is moving to a new job, and at the moment he is happy to rent where he is moving to, as he knows that house prices are falling.

He puts it on the market at £180,000 (as he doesn't want to give it away, and the nice EA from Countrywide said it was worth that much, even in this market). AT THIS POINT HE IS AN OPTIMISTIC / UNREALISTIC VENDOR.

He doesn't get a quick sale, so he moves out and rents near his new job, and realises that he can't afford to do that for too long so he needs a quick sale. After 2 months he drops the price to £170,000. HE IS BECOMING A MOTIVATED VENDOR.

Unfortunately in those 2 months the house has fallen by £5,000 and he is chasing the market down. Nothing happens for another month and then he gets an offer of £162,000, but after another month, the buyer pulls out. HE IS BECOMING A DISTRESSED SELLER AS HIS SAVINGS ARE DISAPPEARING FAST PAYING RENT AND THE MORTGAGE.

At this point he might decide to rent it out as prices are bound to go back up aren't they????

The company he is working for is in trouble and cuts overtime that he was relying on. IF HE DOESN'T AGREE A SALE WITHIN A MONTH HE WILL BE UNABLE TO PAY THE MORTGAGE AND WILL SOON BE IN NEGATIVE EQUITY.

Shaun is now tearing his hair out as he has reduced the price to £155.000, but he is only getting offers of £125,000 and below from HPCers. He cannot afford to sell as he is in negative equity, so he rents it out eventually for less than he would have wanted, and less than his mortgage repayments, which have just gone up to the SVR as he didn't have much equity to allow him to remortgage.

A month later he is made redundant. He is already in arrears and reposession looms.

The point of this story is that if he had achieved a sale of £180K the stats would have shown a 10% drop.

At £162k a drop of 19%. At £150k a 25% drop. As soon as Shaun hit negative equity and decided that he could not afford to sell, his property is taken out of the loop as far as the statistics are concerned. If he gets reposessed, and the house sells at auction for £95k it does not hit the statistics. Once vendors hit negative equity they are most likely to hold an unrealistic price, or bury their heads in the sand until they are reposessed.

Given that the Telegraph reported recently that 3000 households are moving into negative equity every day, it seems to me that this will have a distorting effect on the figures.

Any thoughts or comments???

[XswampyX]

About sums it up, That's why the prices are 'Sticky' on the way down. It's happening here in Cornwall. You see the same old properties up for sale, reduced from 175,000 to 169,000 over the space of a year. Then taken off and put up for rent. Not rented for 600 PCM. Put back up for sale at 159,000 then sold at auction for f**knows.

It will come to pass when the new owner moves in, I'm sure they will delight in telling everyone on their street that they only paid 120,000 for it! So when number 42 down the road has to sell they will at least know the market price. It's going to take forever for all this to happen, and if the house is bought then rented out, then the real price may never be known. I think the last crash took 7 years to play out.......Tick Tock.

Nice post BTW.

[FreeDoc]

I am just throwing this out there for discussion, and would be happy to be proved wrong on this, but it seems likely to me that the following scenario could actually have an effect on slowing the decline of HP stats from the land treasury, Nationwide and Halifax.

We need a guinea pig (sheep?) who I am calling Shaun.

He bought a house in 2005 for £170,000, which reached £200,000 at the peak, and is now back at £170,000 ish. He has around £150,000 outstanding on his mortgage. He wants / needs to sell the house because he is moving to a new job, and at the moment he is happy to rent where he is moving to, as he knows that house prices are falling.

He puts it on the market at £180,000 (as he doesn't want to give it away, and the nice EA from Countrywide said it was worth that much, even in this market). AT THIS POINT HE IS AN OPTIMISTIC / UNREALISTIC VENDOR.

He doesn't get a quick sale, so he moves out and rents near his new job, and realises that he can't afford to do that for too long so he needs a quick sale. After 2 months he drops the price to £170,000. HE IS BECOMING A MOTIVATED VENDOR.

Unfortunately in those 2 months the house has fallen by £5,000 and he is chasing the market down. Nothing happens for another month and then he gets an offer of £162,000, but after another month, the buyer pulls out. HE IS BECOMING A DISTRESSED SELLER AS HIS SAVINGS ARE DISAPPEARING FAST PAYING RENT AND THE MORTGAGE.

At this point he might decide to rent it out as prices are bound to go back up aren't they????

The company he is working for is in trouble and cuts overtime that he was relying on. IF HE DOESN'T AGREE A SALE WITHIN A MONTH HE WILL BE UNABLE TO PAY THE MORTGAGE AND WILL SOON BE IN NEGATIVE EQUITY.

Shaun is now tearing his hair out as he has reduced the price to £155.000, but he is only getting offers of £125,000 and below from HPCers. He cannot afford to sell as he is in negative equity, so he rents it out eventually for less than he would have wanted, and less than his mortgage repayments, which have just gone up to the SVR as he didn't have much equity to allow him to remortgage.

A month later he is made redundant. He is already in arrears and reposession looms.

The point of this story is that if he had achieved a sale of £180K the stats would have shown a 10% drop.

At £162k a drop of 19%. At £150k a 25% drop. As soon as Shaun hit negative equity and decided that he could not afford to sell, his property is taken out of the loop as far as the statistics are concerned. If he gets reposessed, and the house sells at auction for £95k it does not hit the statistics. Once vendors hit negative equity they are most likely to hold an unrealistic price, or bury their heads in the sand until they are reposessed.

Given that the Telegraph reported recently that 3000 households are moving into negative equity every day, it seems to me that this will have a distorting effect on the figures.

Any thoughts or comments???

I agree with you and posted similar observations in another thread. I also think you will find that due to the large interest rate cuts, many people are finding that their SVRs are less than their original fixed rates e.g. Nationwide's SVR is 4.00%. I guess this has made it affordable for many people to rent out the properties without any serious cash flow implications.

You will find the SVRs charged by most lenders here.

[appletizzy]

Maybe what is happening here?

http://www.rightmove.co.uk/property-for-sa...0&minBeds=3

(If I were the tenant, I'd be looking to move ASAP...)

[huw]

This illustrates why it is corrupt of the land registry to exclude distressed sales from their figures.

[Hip to be bear]

I agree with you and posted similar observations in another thread. I also think you will find that due to the large interest rate cuts, many people are finding that their SVRs are less than their original fixed rates e.g. Nationwide's SVR is 4.00%. I guess this has made it affordable for many people to rent out the properties without any serious cash flow implications.

You will find the SVRs charged by most lenders here.

To be honest I was not aware that the SVRs had come down so much.

It probably does make renting more viable....for now... The scary bit comes when rates go back up to counter the inflation caused by the pound tanking against the Euro and the dollar. This could prove to be a major tipping point for owners in negative equity and suckers who jump back into the market too soon.

[grizzly bear]

and if the house is bought then rented out, then the real price may never be known. I think the last crash took 7 years to play out.......Tick Tock.

Does that mean if bought as repo not on the "our property" figures?

I agree about the timeframes though.

My parents are "trying to sell". They have no mortgage, bought in the 1970s but are not in a rush so "will not sell unless they get a good price". My Dad reads the VI stuff in the papers and says no point in selling now may as well wait a few years for things to pick up. Thats another reason why it takes ages and ages to play out.

[deflation]

This illustrates why it is corrupt of the land registry to exclude distressed sales from their figures.

I'm not so sure its unreasonable. For instance, the 'basket' of goods so commonly used for inflation stats includes food doesn't it? Now, tell me you've never bought short-dated food, i.e. a curry reduced from £3 to £1.50 but needs to be eaten today or tomorrow. Same goes for many other products. These wouldn't be used because they would distort the actual prices that the vast majority of shoppers pay, i.e. the'list' price.

I doubt the TVs hugely reduced 'cos they have no box, or are the demo models, are used either.

As far as houses go therefore, I'm not so sure including 'distressed' sales (repos) would reflect the market correctly, but then maybe they should publish 2 figures. One including all sales and one 'adjusted' but that may prove confusing.

[Hip to be bear]

I'm not so sure its unreasonable. For instance, the 'basket' of goods so commonly used for inflation stats includes food doesn't it? Now, tell me you've never bought short-dated food, i.e. a curry reduced from £3 to £1.50 but needs to be eaten today or tomorrow. Same goes for many other products. These wouldn't be used because they would distort the actual prices that the vast majority of shoppers pay, i.e. the'list' price.

I doubt the TVs hugely reduced 'cos they have no box, or are the demo models, are used either.

As far as houses go therefore, I'm not so sure including 'distressed' sales (repos) would reflect the market correctly, but then maybe they should publish 2 figures. One including all sales and one 'adjusted' but that may prove confusing.

The food analogy does not hold up in my opinion. Food is discounted because it is perishable and must be sold by a certain date or it loses all its value. In a housing market, a house is worth what someone is willing to pay for it on a given day. Watching reruns of Homes Under the Hammer recently I watched incredulously as developers back in the old days...2007....paid way over the odds for properties at auction just to get in on the action. I guess that the auctions these days are less frenzied, more sombre (more like watching vultures picking over a carcass). THe market is made in the fairest of ways.......competing bidders bidding up to a point when they are not willing to go any higher. Surely that is a truer reflection of the value of a property than what an Estate Agent tells you it is worth, or what Mrs Jones up the road sold for last year. If there aren't more buyers at the auction bidding to push up the prices...too bad!

You use the inflation figures to demonstrate. The biggest travesty is that house prices have not been included in inflation during the bubble, thus artificially low inflation meant low interest rates and a credit binge of epic proportions.

14 years ago a restaurant I know in Hampshire charged £12 for a steak, paid their assistant manager £12k and a 3 bed semi in the town was £60k

Now the steak is £18, the assistant manager probably gets £18K and in Aug 2007 the 3 bed semi would have sold for £280k

[Soldup&movedBKK]

Am dabbling with getting a U.K. property for rent and the kids to use for holidays. House that was valued at 299,000 peak 2007 and similar were sold for that has gradually come down, now on the market for 220,000....an offer of 175,000 has been accepted by the vendors, providing survey etc is OK am good to go......point is that is a decrease of around 40%........

[puppee]

I am just throwing this out there for discussion, and would be happy to be proved wrong on this, but it seems likely to me that the following scenario could actually have an effect on slowing the decline of HP stats from the land treasury, Nationwide and Halifax.

We need a guinea pig (sheep?) who I am calling Shaun.

He bought a house in 2005 for £170,000, which reached £200,000 at the peak, and is now back at £170,000 ish. He has around £150,000 outstanding on his mortgage. He wants / needs to sell the house because he is moving to a new job, and at the moment he is happy to rent where he is moving to, as he knows that house prices are falling.

He puts it on the market at £180,000 (as he doesn't want to give it away, and the nice EA from Countrywide said it was worth that much, even in this market). AT THIS POINT HE IS AN OPTIMISTIC / UNREALISTIC VENDOR.

He doesn't get a quick sale, so he moves out and rents near his new job, and realises that he can't afford to do that for too long so he needs a quick sale. After 2 months he drops the price to £170,000. HE IS BECOMING A MOTIVATED VENDOR.

Unfortunately in those 2 months the house has fallen by £5,000 and he is chasing the market down. Nothing happens for another month and then he gets an offer of £162,000, but after another month, the buyer pulls out. HE IS BECOMING A DISTRESSED SELLER AS HIS SAVINGS ARE DISAPPEARING FAST PAYING RENT AND THE MORTGAGE.

At this point he might decide to rent it out as prices are bound to go back up aren't they????

The company he is working for is in trouble and cuts overtime that he was relying on. IF HE DOESN'T AGREE A SALE WITHIN A MONTH HE WILL BE UNABLE TO PAY THE MORTGAGE AND WILL SOON BE IN NEGATIVE EQUITY.

Shaun is now tearing his hair out as he has reduced the price to £155.000, but he is only getting offers of £125,000 and below from HPCers. He cannot afford to sell as he is in negative equity, so he rents it out eventually for less than he would have wanted, and less than his mortgage repayments, which have just gone up to the SVR as he didn't have much equity to allow him to remortgage.

A month later he is made redundant. He is already in arrears and reposession looms.

The point of this story is that if he had achieved a sale of £180K the stats would have shown a 10% drop.

At £162k a drop of 19%. At £150k a 25% drop. As soon as Shaun hit negative equity and decided that he could not afford to sell, his property is taken out of the loop as far as the statistics are concerned. If he gets reposessed, and the house sells at auction for £95k it does not hit the statistics. Once vendors hit negative equity they are most likely to hold an unrealistic price, or bury their heads in the sand until they are reposessed.

Given that the Telegraph reported recently that 3000 households are moving into negative equity every day, it seems to me that this will have a distorting effect on the figures.

Any thoughts or comments???

yes but any savvy buyers are watching the auction prices and if vendors don't drop their prices to match auction prices they won't sell and as prices continue to fall a lot more will get in to trouble too , meaning more repo's going to auction that means a lot of conventional ea will go bust its a continual downward spiral until ea agents and vendors lower prices to reflect the real market price

[puppee]

Does that mean if bought as repo not on the "our property" figures?

I agree about the timeframes though.

My parents are "trying to sell". They have no mortgage, bought in the 1970s but are not in a rush so "will not sell unless they get a good price". My Dad reads the VI stuff in the papers and says no point in selling now may as well wait a few years for things to pick up. Thats another reason why it takes ages and ages to play out.

it will take more then a few years to sort out this mess,

[Leonard Hatred]

He cannot afford to sell as he is in negative equity, so he rents it out eventually for less than he would have wanted, and less than his mortgage repayments, which have just gone up to the SVR as he didn't have much equity to allow him to remortgage.

The problem here is not so much the SVR, but because he bought quite late in the cycle, he is competing with other landlords (and other refusenik sellers) who bought years ago.

[dances with sheeple]

Smart buyers know to wait, thick buyers can`t get mortgages, neighbours tittle tattle, and know who`s been repo`d, anyone can access auction stats? The VI`s and their indices are irrelevant now. Nothing can slow this crash. Nothing.

[huw]

I'm not so sure its unreasonable. For instance, the 'basket' of goods so commonly used for inflation stats includes food doesn't it? Now, tell me you've never bought short-dated food, i.e. a curry reduced from £3 to £1.50 but needs to be eaten today or tomorrow. Same goes for many other products. These wouldn't be used because they would distort the actual prices that the vast majority of shoppers pay, i.e. the'list' price.

To the extent (i.e. appropriately weighted) that people purchase food in that way, then it should be used. Otherwise you're measuring something other than actual transactions; what that might be I do not know, but it's not real-world food prices.

As far as houses go therefore, I'm not so sure including 'distressed' sales (repos) would reflect the market correctly, but then maybe they should publish 2 figures. One including all sales and one 'adjusted' but that may prove confusing.

Including all sales is the only way to reflect the market correctly, primarily from the point of view of logic and transparency, but also because repo/auction properties are more likely to be bought with cash, i.e. that is the most honest sector of the market because it cannot be inflated by fraudulent/unrepayable debt.

If you're a cash buyer, it's grotesque and immoral that you should be misled by inflated numbers from the debt-funded marketplaces. It's only fairly recently that this has come to light, so people will certainly have been making judgements based on the rigged land-registry data. In effect they are victims of fraud.

Edited January 4, 2009 by huw

[Sibley]

We need a guinea pig (sheep?) who I am calling Shaun.

He bought a house in 2005 for £170,000, which reached £200,000 at the peak, and is now back at £170,000 ish. He has around £150,000 outstanding on his mortgage. He wants / needs to sell the house because he is moving to a new job, and at the moment he is happy to rent where he is moving to, as he knows that house prices are falling.

He puts it on the market at £180,000 (as he doesn't want to give it away, and the nice EA from Countrywide said it was worth that much, even in this market). AT THIS POINT HE IS AN OPTIMISTIC / UNREALISTIC VENDOR.

He doesn't get a quick sale, so he moves out and rents near his new job, and realises that he can't afford to do that for too long so he needs a quick sale. After 2 months he drops the price to £170,000. HE IS BECOMING A MOTIVATED VENDOR.

Unfortunately in those 2 months the house has fallen by £5,000 and he is chasing the market down. Nothing happens for another month and then he gets an offer of £162,000, but after another month, the buyer pulls out. HE IS BECOMING A DISTRESSED SELLER AS HIS SAVINGS ARE DISAPPEARING FAST PAYING RENT AND THE MORTGAGE.

At this point he might decide to rent it out as prices are bound to go back up aren't they????

The company he is working for is in trouble and cuts overtime that he was relying on. IF HE DOESN'T AGREE A SALE WITHIN A MONTH HE WILL BE UNABLE TO PAY THE MORTGAGE AND WILL SOON BE IN NEGATIVE EQUITY.

Shaun is now tearing his hair out as he has reduced the price to £155.000, but he is only getting offers of £125,000 and below from HPCers. He cannot afford to sell as he is in negative equity, so he rents it out eventually for less than he would have wanted, and less than his mortgage repayments, which have just gone up to the SVR as he didn't have much equity to allow him to remortgage.

A month later he is made redundant. He is already in arrears and reposession looms.

The point of this story is that if he had achieved a sale of £180K the stats would have shown a 10% drop.

At £162k a drop of 19%. At £150k a 25% drop. As soon as Shaun hit negative equity and decided that he could not afford to sell, his property is taken out of the loop as far as the statistics are concerned. If he gets reposessed, and the house sells at auction for £95k it does not hit the statistics. Once vendors hit negative equity they are most likely to hold an unrealistic price, or bury their heads in the sand until they are reposessed.

Given that the Telegraph reported recently that 3000 households are moving into negative equity every day, it seems to me that this will have a distorting effect on the figures.

Any thoughts or comments???

Yes I have some thoughts.

How about this one.

Shaun doesn't put his house on the market as he understands nothing is selling and all he would get is stupid offers from people who can't afford his house.

He lets it privately and gets nearly all the money back to cover his mortgage.

His job goes well and he can easily cover the difference and pay his rent on his new place.

He waits a year or so then houses in his area start to sell. He gives his tenant notice then puts his house up for £170,000. It sells in the first week as it is under the stamp duty threshold and he gets full asking price.

Mortgage paid off, 20k in his hand and Shauns happy.

Buyer who bought his house at £170,00 had a bargain really and only has to sit back a few years then can MEW and buy a BMW.

Shaun and buyer can both go to dinner parties and give it the biggun to anyone renting about how much they made in the property market.

And they all lived happily ever after.

[Bloo Loo]

Does that mean if bought as repo not on the "our property" figures?

I agree about the timeframes though.

My parents are "trying to sell". They have no mortgage, bought in the 1970s but are not in a rush so "will not sell unless they get a good price". My Dad reads the VI stuff in the papers and says no point in selling now may as well wait a few years for things to pick up. Thats another reason why it takes ages and ages to play out.

why is he trying to sell?

is selling houses a pastime for old people?

[Driver]

This illustrates why it is corrupt of the land registry to exclude distressed sales from their figures.

Distressed sales they include, it's repossessions that are excluded (though God only knows why)

<snip>

As far as houses go therefore, I'm not so sure including 'distressed' sales (repos) would reflect the market correctly, but then maybe they should publish 2 figures. One including all sales and one 'adjusted' but that may prove confusing.

Oddly they do keep two sets of figures. The repossessions are shown on the Register and are visible for all to see and are held on the Registry database. They just don't pass them on to the company that produces the HPI.

I have one question outstanding with HMLR:-

When a property that was last sold as a repossession is sold on again, what price does the full sale get compared to for the purposes of the HPI?

[ShedDweller]

Yes I have some thoughts.

How about this one.

Shaun doesn't put his house on the market as he understands nothing is selling and all he would get is stupid offers from people who can't afford his house.

He lets it privately and gets nearly all the money back to cover his mortgage.

His job goes well and he can easily cover the difference and pay his rent on his new place.

He waits a year or so then houses in his area start to sell. He gives his tenant notice then puts his house up for £170,000. It sells in the first week as it is under the stamp duty threshold and he gets full asking price.

Mortgage paid off, 20k in his hand and Shauns happy.

Buyer who bought his house at £170,00 had a bargain really and only has to sit back a few years then can MEW and buy a BMW.

Shaun and buyer can both go to dinner parties and give it the biggun to anyone renting about how much they made in the property market.

And they all lived happily ever after.

On Mars possibly .. this is the planet earth we are talking about ..

[Damik]

This illustrates why it is corrupt of the land registry to exclude distressed sales from their figures.

i think they exclude repos from the statistics, but not from the main data

so the bank valuators will see the new value; otherwise they would see a change of the ownership, but no new value; what would be quite silly ... and hopefully the bank's valuators are not a complete idiots ...