Last night I was the guest speaker at the 25th Annual Meeting of the Merrimack Valley Housing Partnership which was held at the Whistler House. It was a great night with fine food from La Boniche, poetry from Free Verse, and some impressive statistics on the many success stories of graduates of the Partnership’s first time home buyer training program. I spoke about several topics related to real estate and the registry of deeds. Following is what I had to say about the state of the real estate market in Lowell today. I’ll post the remainder of my remarks, in several parts, in the coming days.

Every week I read or hear a new report about the rapidly improving real estate market. From my seat at the registry of deeds, I just don’t see it. There are sales – the number of deeds recorded from January to April 2013 is up 17% over the number recorded during the same period in 2012 – but the overall volume of sales remains depressed. The type of sales that are occurring also provide evidence of a troubled market.

In April 2013, there were 78 properties sold in Lowell for full consideration (nearly half of all deeds recorded are transfers between related parties in which no money – “consideration” – changes hands). I was curious to discover how much the person selling the property had paid for it in the first place, but the more relevant query soon became the circumstances under which the seller first obtained the property. For instance, 36% of those selling in April had owned the property for more than 20 years. There were cases of longtime home owners essentially cashing in on the accumulated equity of their homes and either downsizing or moving elsewhere.

Another 22% of the April sales were by lenders who had obtained the property through foreclosure. Because a lender is in the business of lending and not owning real estate (the term REO comes from – “real estate owned” by a lender), these sales tend to be at a discount to facilitate faster sales. This is good for the buyer of the property but not good for other owners in the vicinity whose values might be driven down by such REO sales.
The remaining properties that sold in April – 42% of the total – had been purchased by the seller within the past 20 years. What was striking about this group was that in a slight majority of the cases, the April sales price was less than the amount borrowed on the outstanding mortgage on the property. Because so much of the early payments on a mortgage goes towards interest and not principal, it’s unlikely that many of these sellers had paid down their mortgage sufficiently to move the principal amount beneath the current sales price. Nor is it likely that the sellers had cash on hand to make up the difference at the time of sale. This leads to the conclusion that many of these were short sales.

In a typical sale, the lawyer for the buyer contacts the entity that holds the seller’s mortgage and ascertains how much money it will take to pay off that mortgage. At the closing, the buyer’s lawyer will send a check in that amount to the seller’s lender and the lender will send a discharge of mortgage which releases that lien on the property. Whatever money is left over after paying off the mortgage goes to the seller. When the amount to be obtained at the sale is insufficient to pay off the existing mortgage, the sale usually falls through. In some cases, however, when the lender becomes convinced that the fair market value of the property is less than the amount owed and that the current owner is on the road to foreclosure, the lender decides to cut its losses and agrees to release the mortgage upon payment of some amount less than the outstanding balance (the borrower/owner might still be on the hook for some or all of the balance, but at least the lien on the house is released). This is called a short sale and the evidence suggests that a good portion of our current arms-lengths sales do fall into this category.

It is undoubtedly a good time to sell. Because so many people remain underwater on their mortgages, many houses that could go on the market must remain on the sidelines. With interest rates so low, would-be buyers are anxious to purchase. This is why houses that do go up for sale move quickly, often for the asking price or more. But not enough houses are going on the market and too many would-be buyers are trapped in their current homes by existing mortgage balances. There is no quick fix to this predicament. The full recovery of the housing market will be a long slog that is largely dependent on the state of our overall economy. The better that does, the quicker the housing market will revive.