An article written by Orlando Realtor® Judy Chapman on her “Orlando For Sale” blog caught my eye the other day. The article, which had a follow-on, described in the context of realistic appreciation expectations, how long a homeowner may expect it to take for their home’s value to return to the height of the market values. In the case of Orlando property, she projects that it could take more than 10 years for values to return to their high point from 2007. So, being curious, I performed the same little analysis on Orange County, California home values. Using data from DataQuick, and assuming a three percent annual increase (Mrs. Chapman used 5.5% annual appreciation), it will be April of 2023 before Orange County home values return to their high point which was April 2006 ($694,833). Assuming at five and one-half percent annual increase, as Mrs. Chapman did, we can expect home values to return to their April 2006 high in December of 2016. These assumptions, quite obviously, assume straight-line appreciation, which almost never occurs. But, it does put things into perspective. With 125,000 new foreclosures started in the first quarter of this year in California, the current inventory of homes available for sale having climbed steadily over the past many months, it becomes clearer that the recovery is going to take a while, at least as it relates to residential real estate. It also becomes clearer that holding on to that home that is over-encumbered, in light of other financial pressures, may not be the logical decision it once seemed to be.
|The Recovery at 5.5% Annual Appreciation||The Recovery at 3% Annual Appreciation|
The point of Mrs. Chapman’s article, which I found interesting, is that for many who bought at or near the height of the market, those homeowners are now in essence “trapped.” By trapped, Mrs. Chapman indicates that if you must refinance, sell (for a variety of reasons, including work-related move, retirement, downsizing, divorce, marriage), or otherwise do anything but stay in your home and pay your mortgage, you are “trapped.”
This rang an bell for me, especially as it relates to our bankruptcy practice. I have a huge number of clients who insist that they retain their home while going through bankruptcy. Presently, without action from Congress (who leave for their August recess here in a few days), or short of paying down your mortgage, there is no effective means of reducing the debt one has on their house. The exception to that statement is in a Chapter 13, where the second mortgage is wholly unsecured the Chapter 13 plan can strip the second mortgage and treat it as an unsecured debt. Absent that scenario, a bankruptcy debtor’s options are limited to retaining debt on a home that is severely over-encumbered, or walking away with a truly fresh start. People’s emotional attachment to their homes often chains them to a pile of wood, concrete, stucco and drywall that in reality has become the worst financial decision they have ever made. In bankruptcy, these debtors are given the chance to walk way truly free, however, many make poor decisions and end up keeping the very home that dragged them down in the first place. I urge every client with a home and a mortgage to review very carefully their post-petition budget — can they really afford to continue paying for a house that is, essentially, worthless to them. Although it is counter-intuitive, I am forced daily to remind people that an emotional attachment to your home can be a very bad thing — one must always temper that emotion with common sense, and truly determine what is best for them in the long run.
David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.