Historic low interest rates that have led to a flood of mortgage refinancings in recent months have by accident exposed a marked trend of slumping property values on the Vineyard.
In roughly 75 per cent of June home reappraisals conducted on behalf of Martha’s Vineyard Savings Bank, the Island’s largest lender, properties were found to be below their assessed values.
According to bank president Chris Wells, it is an Islandwide, evolving trend.
“I think it’s just lack of sales finally catching up with the market,” he said this week.
Brad Egan, vice president of lending at the bank, said this month’s figures are reflective of a six-month uptick in houses valued under their previously assessed figure.
“It’s a steady evolution, over the past half year, that is suddenly apparent,” he said.
Ronald Mechur, a longtime Island appraiser and former Oak Bluffs assessor, confirmed the trend. He said that when interest rates reached an all-time low earlier this year it resulted in a so-called refi boom, producing as a byproduct evidence of an Island housing slump.
Home sales are used as a primary indicator of home values in an appraisal. Appraisers hired by the bank for a mortgage refinance have been confronted by a dearth of recent sales.
“There have been some foreclosures here, not as bad as elsewhere, but it’s mainly the limited amount of sales there are to go on,” Mr. Mechur said.
The news is good and bad in several ways. First off it is a bittersweet prospect for mortgage holders — the upside being payments will go down, particularly in light of the low interest rates. The downside is that many homeowners are learning that their house is worth less than previously thought.
For towns, it plainly means future financial trouble, initially in the form of long lines of homeowners looking for money back on their property taxes, predicts Mr. Mechur.
“Towns will likely be flooded with abatement requests,” he said.
And if total housing values go down substantially, towns will likely be forced to raise taxes to cover their budgets.
Edgartown town assessor Jo-Ann Resendes said it was too early to gauge the extent of the slump, since towns analyze values with a running delay of up to a year and a half, though she acknowledged there’s a general belief that values have declined.
“If, all of a sudden, hypothetically, the values crashed in the month of June it would be 12 to 18 months before it appeared in the town assessments,” she said.
Carolyn Stoeber of Edgartown National Bank reported a similar picture, more new mortgages and declining values. Though home values of 2009 mortgages averaged out at marginally more than the assessed values, the figure represents a marked decline on the previous three or four years when assessed values were at 85 per cent of actual value.
She pointed to a clear delineation of high, mid and low ends of the market, with seven-figure homes generally staying above assessed values. A house assessed at $1,348,000 was appraised this month at $2,100,000, she said. But at the other end of the scale an Oak Bluffs property with an assessed value of $520,900 was reappraised to $320,000, a 163 per cent markdown.
There is an additional, far gloomier prospect for some homeowners, that their house value may have declined so far that the accompanying bank loan goes down too, in a refinance.
“It’s a big problem,” said Mr. Mechur. “Obama stands up and says this is a wonderful opportunity to refinance your home. And I’m not surprised that there are those who want to cash out.”
But since banks offer the maximum home-to-value loan of 80 per cent, the owner of a house whose value has plummeted can have a gap.
In this scenario there a few options and the best might be to stick with the higher rate on a house worth less.
Banks are not going to absorb the risk on a declining asset, and terms of private mortgage insurance loans can be prohibitive.
“The box is not perfect,” said Mr. Mechur. “It’s leaking.”
Mr. Egan said that few customers at his bank are in this unhappy position. Many had their house for longer than the current housing slump and others have begun to pay down their mortgage or never borrowed the maximum amount.
“If not, they have to either live with the rate or find some other way to pay the markup,” he said.
The financial incentive to try and secure a second loan may not be there, he added.
“It might be a small amount and might not be worth it,” he said, “Except everything’s a lot of money these days.”
One group that is unequivocally making out from the extra business is the banks. Community banks are negotiating many more of the loans since, with the global credit crisis, the number of lenders on the Island has shrunk dramatically over the past twelve months — from 170 to around 75.
There are advantages for the homeowner, Mr. Egan said. He said his bank offers so-called quick refi’s to valued customers, an abbreviated version of the refinancing process that doesn’t have to involve an official appraisal. The customer and bank avoid the expense of a full reappraisal and the owner is not faced with a drop in home value.
And in all of this, the ultra-rich carry on regardless, said Mr. Mechur, who these days concentrates on specialty estate and trust appraisals.
In this bracket the standard considerations are out of the window.
“The sellers still win the negotiating game,” he said, referring to sales of homes which he calls emeralds. “[That market] operates in its own kingdom. We’d have to have the true Wall Street crash for them to be affected.”
The market is full of odd twists these days. For example there was just one recorded, arms-length sale in West Tisbury last month. And this week property assessed at $4.8 million in Chilmark went on the market for $19 million.
The ultra high end of market is still active, Mr. Mechur said, partly due to a different outlook.
“These people are very special in the way they think. They get up in the morning and find some piece of it that’s good. And that’s better for the country, it creates opportunity. They always see the reverse side of the hourglass.”