Daily Business Review
June 25,2010Economic Outlook: ‘Strategic default’ less viable for homeowners
South Florida homeowners who stop making mortgage payments often use the extra cash to cover other expenses. But this form of foreclosure-based spending power may be near a peak, especially if home prices stabilize.
Homeowners often generate substantial cash to pay other bills when they stop making mortgage payments due to a loss of equity, owing more than their homes are worth or after losing their jobs.
“In some cases, people end up getting another car,” said Weston attorney Roy Oppenheim, who counsels “underwater” homeowners whose mortgage debts exceed their home values. Many of his clients can afford to make their mortgage payments but choose to undergo so-called “strategic default” instead because they have little hope of attaining home equity anytime soon.
Oppenheim said clients who undergo strategic defaults can stay in their homes for up to two years while their foreclosure cases play out in court: “In addition, they may find that they want to buy another house, move out of the current house to another house that they buy at a foreclosure or a short sale … If you save enough money in the interim, you may be able to put down 50 percent.”
On Wednesday, government-sponsored mortgage purchaser Fannie Mae said it will ban homeowners who engage in a strategic default from getting new loans for seven years.
Of course, a turnaround in home prices could reduce mortgage borrowers’ incentive to enter foreclosure voluntarily through a strategic default. “If prices start going up, they wouldn’t be upside-down anymore,” Oppenheim said. But “I don’t see that happening for awhile.”
No sustained recovery has taken hold in the housing sector, to be sure. But some signs of stability have appeared.
The widely followed Case-Shiller index of home prices showed no change in Miami-area prices in March, compared with the February level, after falling in February by 0.3 percent from the January level.
The Florida Association of Realtors reported May data showing year-over-year increases in the median prices of single-family home sales ranging from 1 percent in both the Miami market and the West Palm Beach-Boca Raton market to 14 percent in the Fort Lauderdale market.
In addition, the initiation of mortgage foreclosures has slowed. Default Research of Mount Pleasant, Pennsylvania, reported that initial foreclosure filings in Broward, Miami-Dade and Palm Beach counties fell 51 percent in May, compared with April. The firm reported that initial foreclosure filings declined 13.6 percent in South Florida last year from the 2008 level after soaring 195 percent in 2008 and 177 percent in 2007.
Real estate brokerage Marcus & Millichap forecasts that industrial landlords in Miami and Fort Lauderdale will face slightly tougher business conditions this year than last year.
Owners of industrial buildings in the Miami and Fort Lauderdale metropolitan areas will experience higher vacancy rates and charge lower lease rates, compared with last year, the brokerage firm predicted.
Marcus & Millichap predicts that industrial vacancy rates this year will be 12.5 percent in the Miami area, up from 12.2 percent last year, and 13.8 percent in the Fort Lauderdale area, up from 13.4 percent last year.
Average asking rents per square foot this year will dip to $6.36 in Miami from $6.65 last year, down 4.4 percent, and to $6.17 in Fort Lauderdale from $6.47 last year, a drop of 4.6 percent.
But Marcus & Millichap also predicted that construction of industrial buildings for lease will plunge this year to 420,000 square feet of completions in the Miami market, from 838,000 square feet last year, and to 125,000 square feet in the Fort Lauderdale market from 740,000 square feet last year.
The brokerage also expects the markets for industrial real estate in Miami and Fort Lauderdale will rank among the top 20 in the nation this year. In its annual forecast, Marcus & Millichap said the Miami area will be the 16th-best industrial market this year (up from a comparable ranking of 21st a year ago) and that the Fort Lauderdale area will rank 20th (up from 25th a year ago). The metropolitan rankings are based on 2010 forecasts of such market metrics as industrial vacancy, employment and construction.
“Several secondary markets fell out of the Top 10 from last year,” Marcus & Millichap reported, citing Indianapolis, Salt Lake City, Washington, D.C., and Portland, Oregon. “While these local economies will likely outperform much of the country, greater transportation efficiency will result in demand trends that favor core distribution hubs in coming years.”
PricewaterhouseCoopers predicts that the ongoing growth of U.S. employers’ medical costs will slow a bit to 9 percent next year, in part because employees will pay more.
That is 0.5 percent slower than the 9.5 percent growth rate that PricewaterhouseCoopers expects this year.
The professional services firm said bigger employee contributions to medical insurance costs, through higher co-payments for doctor visits and the imposition of higher deductibles, for example, will help slow the growth of employer costs.
PricewaterhouseCoopers said in its annual “Behind the Numbers” report on health care that 42 percent of U.S. employers plan to make changes that will increase their employees’ contributions to medical insurance next year.
“For the first time [in 2011], the majority of the American workforce is expected to have a health insurance deductible of $400 or more,” PricewaterhouseCoopers predicted. “By requiring workers to spend more out-of-pocket at the point of care, employers believe they will rein in utilization of services and drugs.”
Health-care reform is expected to give a small boost to employers’ medical costs next year. The newly enacted federal Patient Protection and Affordable Health Care Act “delivers only minor impact to the underlying medical cost trends in 2011,” said Kelly A. Barnes, U.S. health industries leader at PricewaterhouseCoopers, in a prepared statement.
Another national survey showed similar results. Mercer, an international provider of employee benefits consulting, recently conducted a survey of nearly 800 U.S. companies and found that about two-thirds of them expected the federal health-care reform law to increase their medical insurance costs by 3 percent or less next year, compared with this year.
Over the longer term, however, the cost of complying with the new health-care law could become more burdensome for some employers. In 2014, for example, the law will require U.S. employers to offer medical insurance to part-time employees who work 30 hours or more per week. Among employers that offer no coverage to part-time employers, one-fifth said “they will strongly consider changing their strategy so that fewer employees work 30 or more hours a week,” Mercer reported.
