What happens to homeowners when the market crashes? Well, that's an interesting idea and it's certainly a question that's being asked because it was a very popular topic being asked for on Google. So what do, what do people think? Do they think that when the interest rates go up, that people are going to be having their homes foreclosed on because the interest rates are up? It's an interesting quandary that people would think that because interest rates are going up, that people are going to start losing their homes. Let's go back in time and understand in the last couple years, the interest rates have been so good that so many homeowners refinanced their loans, I know I did. I refinanced my house and my rental. I would certainly be okay because of the terms I have now. This was not the case in the last housing downturn, people had adjustable loans that came due at exorbitant rates.

When market shifts happen, people get so excited. I had so many calls in 2020 during the pandemic and I couldn’t take them all because I was so busy helping people buy and sell real estate. And the calls that were coming in while I was doing this were saying the market's going to crash in the next year, so that would be 2021, and I want to get a deal. I want to buy a house for $400,000. We're talking Santa Cruz County here. How possible is that? I want to wait out. I want you to be my realtor and when the market crashes, I want you to find me a deal. And I said I don't think that's going to happen.

I think that the systems that have been put in place because of the last crash are going to make it more difficult to get those deals. First, we have investor groups that roam the United States, and I am aware of ones that roam, California, and I've talked about them before in my videos, they're just looking for homes that are pre foreclosure and then they watch them and then when they foreclose, they go grab them and they pay cash. It's all online. It's auction style. I don't think you go to the county courthouses anymore. They grab them up, throw them back on the market, and they do fine but it is very limited. There's not a lot of them. And what prompted this video was I saw a pre foreclosure property in South Santa Cruz County.

I'm not going to name the property, but it nice and a good size. It was listed under $700,000. I thought, wow, this could be a good opportunity, right? Because I'm looking at the market thinking, okay, are there going to be opportunities? The interest rates are going up, but if the prices go down, will there be some good opportunities there? I was reading into this property, I didn't call the agent, I didn't do a whole lot more than just look through the MLS on the reports on this property, but it said it was pre-foreclosure. My guess is they were in touch with the bank, so a buyer is really negotiating with the bank. I understand this from my experience of doing this before, if it's pre foreclosure, because the owner stopped making their payments.

But when I looked through their records, they had equity. So, what happened was, they stopped making their payments, I am guessing, from what I saw on the actual reports online. It also appeared they have a lot of equity. They had priced it very well, but not like super aggressively. So that seller was still going to walk away with money, but they just stopped making their payment. The bank probably said after a while, “Guys, you know, you got to make your payments, we got to move forward here. We want to get money on our investment. You are not making the payments we will come take the property back, but we don't really want the property back. We want our money.” So, here's what you're going to do. And this is what they tell them.

Go get a real estate agent, put that house on the market, we'll deal directly with them and tell them what terms we're going to need to settle all this out. But at the end of the day, that bank is going to get what they're owed plus a lot of fees. So be careful. If you decide that you do not want to make payments anymore and you want to let your house go into foreclosure, you're going to lose a lot to the bank in fees. They fee these homeowners to death. But if there's equity that equity's protected, the sellers do get that money back. The sellers are “okay, I don't want to make the payment anymore. I got to hang out for two years and not making the payment and made some money!”

This is what I'm guessing. And then the bank's going to close it out. Well, well here's what's interesting. I looked it up before I wrote this blog, and that property has been withdrawn. So something happened somewhere either the bank said, “Hey, let's not be so hasty, let's see what we can figure out.” Or the person said, “I got a job and I'm going to start making my payments again. Or a family member went, hey, I'll jump in and take this over. It wasn't even on the market for seven days. So that foreclosure more than likely is not going to happen. And that sale of a pre foreclosure property is not even going to happen. Now that doesn't mean it can't happen, and that doesn't mean that it's not going to happen in the future. It's just looking like this pre-foreclosure is not going to foreclose.

I don't see this big slide coming that we've had before. There are people out there with very low interest rate loans on their houses. They don't have adjustable mortgages coming in with the adjustable coming anytime soon causing their payment to jump to the point where they can't make the payment anymore. The other thing about all this is there is so low inventory. There's not much to buy. That keeps the prices kind of elevated because there is just not enough for people to buy. There is an article on Bloomberg on how weird things are getting in the housing market.

It is linked below it is really an interesting article because I think this is one of the few times that the media has gotten something right. It reflects what I'm seeing in the market because I read the articles that the market's going to go down by 20%, or the market is going to go down by 10%.  What's going to happen to Santa Cruz is we're going at the rate of negative 7.5%, according to Zillow which okay, great, does that mean we're going to get deals? Well, not really, because if you've got properties that are starting to hit a median of 1.7 to almost 2 million, what is 10% going to do for you in terms of affordability? This will probably not help a lot. And then if there's only three of those properties and you know, you're getting aced out by people who are paying cash or paying 50% down, at this point I am not seeing a large crash. Nor I am seeing homeowners losing their homes.

Doesn't mean it won't happen, of course, but this is one of the things that I love Bloomberg states a lot of the statistics that we use to forecast things like housing activity, home sales, housing starts, or all that we haven't seen before, or if we've seen them, we haven't seen them in decades, so they, they really can't forecast it because the type of shift that we're looking at doesn't have the same conditions that we've seen before. We have a lot of homeowners that have equity, they have low interest rate loans. Sellers who don't need to to sell are just going to sit tight and wait for things to calm down before they sell. So, you have a whole pool of sellers probably just sitting on the sidelines thinking I'm going to wait this one out.

And buyers are still out there, and I want to buy there's not much out there. So would 10% help a buyer? Would it make that big of a difference I do not think so. But maybe, maybe if they go down as much as 20%, that would make a difference. But remember, our prices have gotten so high and the low inventory kind of just keeps nudging them up there. I do not see a crash and think we have to get a much higher price drop to help with the higher interest rates to make a difference for buyers to see value.

We might see a little bit of a thud. I think it's going to be a little bumpy or it's kind of going to be like when you fly into Las Vegas, you ever done that. Up and down and then safely lands, we know it's getting weird. We, we know that there's going to be some people losing their jobs and they stop making their housing payments, but there may be more flexibility with the bank to keep them in there based on the equity they have, and they may recast their loan. So I've done that before. I've gone in and I actually gave the bank extra money and asked to recast my loan. Not my terms of course, but I'm going to add some money in, so my balance goes down. For sellers in arrears, they can actually put some of the payments to the back of the loan and then they reformulate it. Maybe the owner I got a job, but it doesn't pay as much, and they ask the bank to work with them. Once the bank sees the equity they will probably work with people.

So the market is weird. And what happens to homeowners and a market crash at this point? If homeowners just sit tight? I don't think a whole lot. And I think even if you are a bit underwater, I think the banks are going to work with you.

I think that after the last crash the banks took a lot of those houses back. Now, I think they really decided they didn't want to be in the real estate business. In 2008 we were being told by our brokers don’t worry the banks need you. They want you to sell their houses for them because they don't want real estate on their books. But the number of banks that foreclosed and how fast they were foreclosing was so crazy, I didn't actually really believe that for about a year and a half. But I believe it now. I think the banks have decided they definitely don't want to be in the, the real estate business. So I don't think anybody really has a lot to worry about. There might just be a lot of sitting on the sidelines for everybody, buyers and sellers just waiting this out to see what happens. Of course, we might have another interest rate go up, depends on what happens. But for right now, I don't really see a whole lot happening. I mean, it's a little quiet. If you are thinking of buying a selling, of course give me a call. But if you are also having trouble making your payments and you want to just talk a little bit about what that looks like, I have experience with that because I was there before and I would be happy to help you or even get on a call with you and your bank to go over it with you.

Posted by Michele Replogle on


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