shoppingaround left such a great comment that we’ll call it a guest post:
So, the good news (for those looking to buy a “deal”) is that this law shouldn’t stop too many foreclosures if so many banks were given exemptions. The question is how well will the banks move this inventory out to market.
For a long time, I, too, was in the “there must be a huge shadow inventory” camp. I track a few areas (mostly Carlsbad, Encinitas and parts of Fallbrook & Bonsall) using (Jim’s recommended) “fidelityasap” site to see if distressed properties, which I know the homeowner didn’t sell, are scheduled for the courthouse sale. And if they are, I watch for when the bank takes possession. And if they do, I watch for their REO to come onto the market.
First observation…this process, starting with tracking distressed buyers unsuccessfully lowering their price, and ending with the bank finally listing the REO can be an incredibly long time.
Second: Once the clock starts on property A, somewhere you add in Property B, later C, etc. One day you see that “C” shows up in the REO listings before “A”. That gives you the immediate impression that A nd B are being held back as shadow inventory. But maybe bank C is just more aggressive, or efficient. Once you get to “H” or “Q” you are beginning to feel as if it’s a downright conspiracy!
Third: Having been watching potential REO properties since last October, I now believe the banks generally are not holding back property, per se. As of today, I can say that EVERY home I’ve been tracking (except some which were foreclosed mid-construction and may have structural issues) has eventually come onto the market or is still (re)scheduled for the courthouse steps. No, they do not come onto the market swiftly and not often at prices I’d hope for, but they all have appeared eventually (with noted exceptions above).
Fourth, I think the contrast of how the banks are handling mid-tier & up homes has been different; with the low-end, many times they were tossed onto the marketplace “as is,” as we’ve all seen in Jim’s videos. But they generally don’t seem to be doing that with more mid-range+ properties. They seem to be trying harder to get a better value out of these assets.
So, I’m beginning to believe, that as Jim implied in one of his previous posts, it could be just that “that one” we’re waiting for is the exception–maybe it needs too much done to it first, so they are working on it, etc.
Any similar or different experiences?
The banks are going to do what they can to maximize profits.If I were in their shoes I dont think I would to release all the properties at once.If they trickle them out that is their choice.
Jims comment:
Seen on Redfin:
This home is flagged as a short sale. We’re sorry, we don’t tour or write offers on short sales because of the slim chance that you’ll get the home.
Jim it seems ther is a lot of truth to this to me.They need to really work on the short sale process.Not many people want to wait around for months to see if their offer is accepted.
The banks like the friction, they think it discourages sellers from bailing out – I’ve heard that from more than one source.
I think it encourages defaulters, because 8-15 months of free rent sounds appealing to somebody who’s probably going out anyway.
Redfin’s refusal to show short sales is more about Redfin, than the buyer.
I think the contrast of how the banks are handling mid-tier & up homes has been different; with the low-end, many times they were tossed onto the marketplace “as is,”
I’ve got one of those next door. The previous owner was a nice guy, but a) took cheap to a whole new level b) was an idiot and greedy to boot. The house is two units on the lot, the back unit was rented out to a 20-year long term tenant. Over the bubble years, the owner refinanced every penny out of the house to fund their retirement property in the Philippines. They started to sell in 2005 but found out the wife still had to hang in for another two years before she could retire.
Fast forward to 2007, they try to sell again…only the market is crumbling. House stays on the market for a good 6 months, owner goes through two different realtors, before finally deciding to rent both units out and leave the country. The front unit gets rented to a nice, quiet couple. The back unit gets rented to every homeowners worst nightmare for neighbors. Constant fights, noise, screaming babies, trash everywhere…
In Dec 2008, a notice gets accidentally tacked to my front door about a trustee sale — for the house next door. We notify them the got the wrong house and they post it appropriately on the house next door. I don’t know at what point the owner stopped paying the mortgage, but I’d guess that those renters likely paid him for a year while he wasn’t paying the bank. The renters stopped paying rent in January 09, once they knew the house was going to trustee sale. Then they (the renters) just hung around rent free waiting for the eviction notices. The delightful people in the back unit threw a child’s toy through the front window and just hung a sheet over the window. They stopped cutting the lawn or taking any care of the property.
4 weeks ago, the eviction notices finally showed and both renters are now gone. The property is now on the market (potential buyers have been by all weekend.) The bank did come by and cut the lawn and boarded over the broken window after I complained to our City Code Enforcement dept. So, potential buyers are being shown this disaster property with a leaking roof and boarded over window in back. Original sale price in 2007 – $560k. Buy it today for $206k. “PROPERTY SOLD AS IS WITHOUT REPAIR OR WARRANTY. ”
The stupid part is that the previous owner refused to budge off his price in 2007, even after the realtor suggested he drop his price. He was determined to pull another 60K out of the sale. If he had bothered to spend 5k worth of improvements (paint, carpet, landscaping, fix the back roof, etc…) he probably could have gotten it sold in 2007.
We figure he probably got $20k from rents over the year he wasn’t paying the bank.
Alternative Title: David Lereah: Even More Full of Shit Than Previously Believed
Of all the various parties who contributed to the boom and bust in housing and credit, none have escaped more unscathed than the National Association of Realtors, and their former Baghdad-Bob-in-Chief, David Lereah.
The NAR turned a blind eye to fraud amongst realtors in terms of referrals to corrupt appraisers and mortgage brokers. They constantly cheerleaded prices, despite evidence to the contrary. For 3 years, they have been forecasting 2nd half price recoveries, dissuading realism amongst home sellers. They continually spun data, presented misleading commentary, and otherwise engaged in behavior that could only be characterized as sleazy.
I find EVERYTHING out of the NAR to be suspect, tainted and generally worthless. The NAR Housing Affordability Index is essentially worthless; from 1989 – 2009, the NAR showed housing as “Unaffordable” for just one month.
If you have any doubts as to whether or not the NAR are a bunch of shameless, lying hucksters who deserve to have glass catheters inserted in their Urethras then shattered, consider this:
The following question & answer segment below with David Lereah appeared in the January 2009 issue of Money magazine.
Working for realtors, David Lereah was famously optimistic. Not anymore.
By Donna Rosato
Money Magazine
January 2009 – Issue
As chief economist for the National Association of Realtors, David Lereah was famously optimistic. Now a private consultant, he’s abandoned what he calls the “positive spin.”
Q: Were you wrong to be so bullish?
A: I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right inline with most forecasts. The difference was that I put a positive spin on it It was easy to do during boom times, harder when times weren’t good. I never thought the whole national real estate market would burst.
Q: The NAR’s latest forecast calls for a slight increase in home prices next year. Thoughts?
A: My views are quite different now. I’m pretty bearish and have been for the past year and a half. Home prices will continue to drop. I think we’ll see a very modest recovery in sales activity in 2009. But we’ve still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more. It’ll take a long time to get back
to the peak prices we saw in many markets.
Q: Any regrets?
A: I would not have done anything different. But I was a public spokesman writing about
housing having a good future. I was wrong. I have to take responsibility for that.
-DONNA ROSATO – Fri Dec 19 2008, 11:14
If I were in their shoes I dont think I would to release all the properties at once.
Ever hear the phrase “Don’t panic, but if you are going to panic, panic first”? The banks, just like homeowners that refuse to lower their price, assume incorrectly that the market will eventually “recover” to bubble levels. The truth is that prices will continue to decline and carrying costs will continue to accumulate. Their actions (like those of the government) simply prolong the pain.
“The banks, just like homeowners that refuse to lower their price, assume incorrectly that the market will eventually “recover” to bubble levels.”
Incorrect assessment.
What is the most important thing to any company? Survival. I assure you board members at banks are not discussing how to maximize gains in an upcoming housing recovery. They’re discussing how to keep their doors open tomorrow. While they’d like to avoid further price declines, they can’t afford to realize all losses now. So they buy time to ensure their survival.
Similar concept to the underwater seller who instead rents his house at a net monthly loss. He’s taking on more losses, but buying time. It’s his only option to avoid foreclosure and survive. He can’t cover a $200k loss today, but he can lose $400/mo for now and recover.
“Their actions (like those of the government) simply prolong the pain.”
Unfortunately for those of us waiting to buy at a reasonable price, yes.
I was doing some work in Chula Vista a couple weeks ago and the brown lawns are scattered like a checkerboard out in East Lake. No for sale signs on most of them so I don’t believe for one second there is no shadow inventory. They may all eventually get to the market but there sure were a lot of them.
I agree tj that NAR is a disaster. We Realtors pay a significant yearly sum to support their efforts to lobby congress on behalf of the real estate industry. If these idiots had their heads screwed on, the $8000 homebuyers credit would have applied to all buyers thereby encouraging the move-up market as well as first time buyers.
Sorry tj, I meant to agree with Nathan. TJ, you are an extreme bear. Somewhere in between the bear doo and the bull s**t is reality. The reality, at least here in the the Coachella Valley, is that there are ssome unbelievably great deals for those who wish to buy doo doo and wear body armor when they walk outside. REO’s and short pays in the mid to upper ranges in desirable neighborhoods are drying up. Price declines/reductions seem to be leveling off too. Not everyone wants to buy a dump, even if it is the buy of the century.
Well, I’m flattered! Can I add “Guest Blog Poster” to my resume? “Real Estate Investment Consultant”? LOL
Completely agree with Jim’s Redfin comment, (#3), as they are a low-cost provider–they cannot afford to waste their time with your unlikely short sale. Also completely agree with Blur (#7).
While tj’s point is the first sales out can make more $ in a declining market, that’s only if you don’t have many to sell and the others are still trying to hold back.
But in this case, I think there’s just so much property that if any one bank dumped all theirs on the market to get out, it would panic everyone (buyers and other banks included) and no one (who is holding properties) would win because buyers would think, “things are declining so fast, there must be more to go” and stop buying and other banks would start dumping their properties, too, for fear of being left behind in the downward spiral.
Panic is the the biggest fear in an economic crisis. The banks are, I believe, smart enough to know this.
And I’m not sure that there isn’t some advantage to them carrying “valuable” assets on their books at the moment, since the market-to-market rules were changed–but I hate accounting and don’t understand it, so that’s just my opinion.
mybleachhouse,
I can’t argue with what you’re seeing in Chula Vista–I don’t track it.
Maybe –after the intial round of subprime homes–the banks decided to prioritize more “in-demand” areas while prices are not yet at the bottom. You didn’t say whether these were in more desirable parts of Chula Vista, but I suspect taking 20% off a house in C’bad now, is worth several at 40% off in parts of Chula Vista later on. So it could well be there are some areas of more substantional shadow inventory.
Is Chula Vista as hot as Oceanside, where perceived bargains are getting bid up? If so, that blows my theory.
No these were in the newer area around Eastlake near the 125 olympic parkway. The guy who’s house I was working on bought it recently for 260k 3br 2bth new in 2004 maybe 1600sf. He was replacing everything inside the home due to the stink the former tenants left behind. It was a fairly nice neighborhood from what I could tell. From his front porch I could spot 4 houses that were clearly empty with no for sale signs on them. I’m sure the bidding is crazy where ever people think they’re getting a home for half off all over San Diego. Just hope they don’t stupidly bid it up to unaffordable levels again.
TJ, you are an extreme bear.
I continue to be bearish on housing prices, but just because I’m among the most bearish posters doesn’t make me extreme. All I’m saying is that prices will (at best) return to pre-bubble levels. What’s so extreme about that?
Sure, the desert’s a wasteland right now. I (among others) predicted that outcome 4 years ago on HBB. You think I’m extreme now; you should’ve heard the criticism then.
The Blur,
I agree with you about the banks just wanting to survive. With the subprime debacle, they had a boatload of inventory that piled up fast and no way to keep the buyers in them. However, with the mid to upper tiers, they have some flexibility now. First, many of the Option-Arms are still affordable, and those that aren’t seem to be getting reworked enough to keep the buyers in them. The rate resets have been low, but I don’t know if the banks have been able to delay the recasts or not. The banks aren’t doing principal reductions, so the payments will either rise significantly at some point in the future, or the loan will be stretched into a 40 or 50-year mortgage.
If housing prices don’t recover the bubble levels for quite a while, these ‘owners’ will simply be renters who can’t sell at a price to either break even or move up. It’s sort of like the opposite of shadow inventory. There will be zombie home owners with negative equity, simply waiting for the market prices to come back to the level at which they bought or refinanced and pulled out their equity.
The question I have is, what happens if we get runaway inflation? Will home prices rise along with it, or will they stay low or drop because the cost of living is eating away money that might otherwise go to housing? Is it possible to get low interest rates and a sort of hyper-inflation at the same time? As a hypothetical example, if you purchased a home today for $200k and inflation raised its fair market value to $400k in 5 years, it wouldn’t be like making $200k profit, because that $400k would only buy you as much as $200k would buy today. Right?
I’m definitely bearish on the mid to upper end, right now, but I feel that there’s some piece of information I’m missing that will give me a clearer picture of where we might be headed and when. I think it’s due to all of the government interventions making everything hard to read.
“The question I have is, what happens if we get runaway inflation?”
I’m wondering the same thing, RM. It could be what saves housing prices. Like you, I’m bearish on mid-high end, but willing to acknowledge other forces involved. I like the way you think.
The Blur,
I think this is where we could turn Japanese. If many of the home owners who put down a significant (for them) down payment and bit off more than they could chew using a pay-option-arm or something similar get modified into longer term loans, they may be like zombie consumers. They will be stretched to their limits financially, trying to keep up with their housing payments, while nervous about potential job loss or some other financial difficulty. They will tend to save any extra income rather than spend it. Our consumer driven economy could take a hit for a long time. A lost decade perhaps?
That, I think, is a more realistic prophecy than any sort of housing price recovery.
I’m certainly no expert, but I was predicting the DOW would fall to around 6500-6700, which it did. However, I was quite shocked to see it bounce back up so far, so fast. I’m wondering if that is sustainable, or if we’re in for some sort of double dip. If some of the losses that have been predicted for Alt-A and Option-ARM come to fruition, it seems likely that the markets could take another leg back down. Then, what will people be thinking after they got burned twice? It seems there are a lot of jittery investors with itchy trigger fingers looking for any sort of bargain pricing, and when the price of anything is compared to just a year or two ago, nearly everything seems like a bargain.
Incorrect assessment.
The Blur,
Yeah, you’re right. Realizing losses is a much bigger factor for banks. Screwy, upside world that accounting gives us, isn’t it?
The Blur,
After reading this article in the NY Times, it put my mind more at ease over the potential for runaway inflation.
Here are some excerpts from it…
http://www.nytimes.com/2009/06/21/business/economy/21view.html?_r=1&em
In normal times, banks don’t want excess reserves, which yield them no profit. So they quickly lend out any idle funds they receive. Under such conditions, Fed expansions of bank reserves lead to expansions of credit and the money supply and, if there is too much of that, to higher inflation.
In abnormal times like these, however, providing frightened banks with the reserves they demand will fuel neither money nor credit growth — and is therefore not inflationary.
Rather, it’s more like a grand version of what the Fed does every Christmas season. The Fed always puts more currency into circulation during this prime shopping period because people demand it, and then withdraws the “excess” currency in January.
The possibilities for error are two-sided. Yes, the Fed might err by withdrawing bank reserves too slowly, thereby leading to higher inflation. But it also might err by withdrawing reserves too quickly, thereby stunting the recovery and leading to deflation. I fail to see why advocates of price stability should worry about one sort of error but not the other.
The Fed is well aware of the exit problem. It is planning for it, is competent enough to carry out its responsibilities and has committed itself to an inflation target of just under 2 percent. Of course, none of that assures us that the Fed will hit the bull’s-eye. It might miss and produce, say, inflation of 3 percent or 4 percent at the end of the crisis — but not 8 or 10 percent.
The Fed will start the exit process when the economy is still below full employment and inflation is below target. So some modest rise in inflation will be welcome. The Fed won’t have to clamp down hard.
SKEPTICAL? Then let’s see what the bond market vigilantes really think.
The market’s implied forecast of future inflation is indicated by the difference between the nominal interest rates on regular Treasury debt and the corresponding real interest rates on Treasury Inflation Protected Securities, or TIPS. These estimates change daily. But on Friday, the five-year expected inflation rate was about 1.6 percent and the 10-year expected rate was about 1.9 percent. Notice that the latter matches the Fed’s inflation target. I don’t think that’s a coincidence.
My conclusion? The markets’ extraordinarily low expected inflation in January was both aberrant and worrisome — not today’s. As long as expected inflation doesn’t rise much further, you should find something else to worry about. Unfortunately, choices abound.
I’ve been told by a head of a large mortgage division of a large bank that he’ll look to start punting properties in numbers by Aug. He said the only reason things look better for now is because the government hit the “pause button.”
Now that they can resume foreclosures, it’s a race to get the properties off the books as long as they can get gov. funds on the other side to shore up their losses. He said the cost of upkeep and the growing lawsuits for abandoned houses is growing everyday. The greatest issue he faces now is the Prime and Alt-A mkt delinquencies mostly due to job loss.
It’s best to take the hit as soon as possible and take the proceeds along with gov. help to prepare for the CRE problems and credit card charge offs. Don’t take this to be fact as situations change daily but I know this…when the head of a major mortgage division at one of our largest banks says things are very grim, I know there’s a big hit still to come.