You have to be a real mortgage-market fan to know this term: cure rate. It has popped up in news stories this week reporting on the declining percentage of borrowers who are catching up on payments after falling behind.
It’s an important figure, because it shows that, despite some recent good news, the home market still has lots of problems.
From 2000 through 2006, about 45% of homeowners who fell behind on payments for ordinary “prime” mortgages eventually got caught up, according to Fitch Ratings Ltd., the credit-rating firm. That figure has recently dropped to 6.6%. Cure rates for Alt-A loans, which are slightly riskier, have fallen from 30.2% to 4.3%. On risky subprime loans the figure has dropped from 19.4% to 5.3%.
This suggests that the foreclosure crisis is far from over, and a flood of foreclosures thrown onto the market at fire-sale prices will make it harder for home prices to rebound.
Buying in this market is obviously risky. While there are lots of bargains, a further drop in prices means you have to stay in the house longer to break even, which requires recouping your purchase price plus the sales commission and other costs of buying and later selling a home.
The problem is that the broad national figures obscure a lot of local variation. You ought to ask your real estate agent how many foreclosures are on the market in the neighborhoods you look at. Keep in mind, though, that agents only make money when sales are final, and thus can be reluctant to share discouraging information.
Fortunately, a number of firms now offer foreclosure information online, gleaned from legal filings and other sources. One of the best-known firms, RealtyTrac, offers lists of homes in pre-foreclosure, ones that have been taken over by lenders or the government, and others being put up for auction, which is another sign of trouble. A basic search is free and displays homes with a map that is detailed enough for you to find them. Complete information requires a $49.95-per-month subscription.
A prospective buyer zeroing in on a home typically looks at “comps,” or comparable homes that have recently sold in the neighborhood. But a study of foreclosures and other troubled properties in the area should be broader, covering bigger and more expensive homes as well as ones that are smaller and cheaper, as distressed sales can undermine prices of all homes in the area.
Of course, buyers should continue the long-standing practice of studying prices of homes that really are comparable. But they should be extra diligent, making sure the homes they see are really like the ones they want to buy. Rely only on sales data from just the past few months, as older prices may be higher than today’s.
Don’t take the real estate agent’s list of comps at face value, as an unscrupulous agent might show only the ones that would encourage you to buy. Find your own comps on sites like Realtor.com, Zillow.com, Bank of America (Stock Quote: BAC) and JPMorgan Chase (Stock Quote: JPM). (Zillow also has foreclosure listings.)
Of course, the best way to insure against losing money on a home is to plan on keeping it for a long time, allowing appreciation to reverse any short-term drop in price.
And remember that cost of ownership involves mortgage interest and other loan fees, not just purchase price. Use the BankingMyWay.com search tool to find the best deal. With the Mortgage Loan Calculator, you can see what a given loan will cost over the time you expect to be in the home. The calculator also shows how much equity you will build up over a given period.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.