Let’s review some of the foreclosure theories of today’s world.
BUNK #1 – Banks are holding back properties.
In San Diego’s North County Coastal region, there aren’t many REOs not on the open market. The video tours you’ve seen over the last few days covers almost all of the ones listed on foreclosureradar that are bank-owned, but not on the MLS, and two of them came on the MLS while filming.
BUNK #2 – Banks are delaying trustee sales on purpose.
Only those behind the scenes could verify, so I don’t know for sure. I think the reasons you see delays between the initial NOD and the eventual sale has more to do with the borrower – and in particular, their realtor. Between short sales and loan modification requests, the loan servicers have to be inundated, and it has to be easier to postpone a trustee sale another month, than to efficiently handle each file.
BUNK #3 – Banks don’t want to mark to market.
The name-brand banks like Countrywide/Bank of America don’t own these loans, they sold them years ago to MBS-buyers, and are now just administrating. The servicers earn transaction fees by facilitating the trustee sales – if they are delaying, it’s because the MBS-owners are so ticked off at them, and they don’t want to know or experience reality.
BUNK #4 – Foreclosures cause lower prices.
An old wives’ tale in today’s world. Bank-owned listings ARE the market, and are selling for retail. Why? Because the servicers have a duty to their MBS-owners; they get at least one appraisal done, and price them accordingly – if the list price is too low, buyers bid it up. As long as they hit the MLS, they sell for full market value, the massive internet exposure ensures it.
Regular sellers think that foreclosures undermine values, but that’s because sellers are addicted to their dreamy sky-high price from yesteryear. You regularly see REOs listed for $50,000 to $100,000 under other regular sellers, but guess who is right about price?
BUNK #5 – “Stealing one from the bank”.
Very unlikely, see above.
BUNK #6 – Foreclosures need work.
As more McMansions get foreclosed around North County, you’ll see less destruction of property – I think some of the newer ones will be in great shape, based on what I’ve seen so far. Why? I don’t think the homedebtor is that desperate, and the free rent helps. It’s a relief to not make those big monthly payments for months or years, and besides, have you ever tried to move a built-in fridge? McMansion owners won’t bother on their way out. Plan on a good coat of paint and new carpet, just like in all houses for sale.
BUNK #7 – The coming foreclosure tsunami will overwhelm the demand.
I’m not so sure of that – the foreclosure numbers have been fairly steady for the last 18 months, and the REOs have been gobbled up. It would take a lot more.
The local market has been able to withstand 3,000 to 4,000 NODs monthly, and they would have to get into the 5,000-and-up level, which I think is very possible. If there were 1,000 foreclosed McMansions that hit the open market in the same quarter in North County Coastal, and the demand wasn’t there, then price will fix it – once you get around $700,000 the available loan possibilities open up.
With the lack of well-priced inventory throughout the coastal region, buyers (and realtors) would welcome some good buys! Buyers have been VERY frustrated with this season’s offerings, and either the regular sellers need to get off their high horse, price-wise, or the buyers will gladly wait for the tsunami.
Any others?
Interesting. I still remember an REO we looked at in Poway in the 80s. There was concrete in the sewer lines, so I still worry about the problems an evicted homeowner might make on the way out.
Using your example of “taking the fridge” is the least of the problem. Fridges can be purchased and delivered pretty quickly and arguably are legal to take anyway. The bigger problem are things like tiles, sinks, stoves, etc. That’s real damage.
I’m not so sure about Bunk #4-foreclosures cause lower prices.
Do you really see no difference between a foreclosure and a regular home for sale? I think your McMansion observations are right, but, it seems that the typical foreclosure home tends to be intrinsically less desirable in most cases. Location, finishes, type, layout, etc.
I should also say the other observations you made are interesting and a little surprising.
“the foreclosure numbers have been fairly steady for the last 18 months”
Well, there was the moratorium so that’s a big asterisk. When you factor that in plus the modest nominal increase in foreclosures on top, there really is going to be a lot more foreclosures the next 6 months than the last 6 months. What we have is a giant freeway backup that is now being cleared and flowing freely.
On the sdlookup forum one person was asking about getting an FHA loan even though he could qualify for a conventional with 20% down. When pressed on why this would ever make sense, he said if his first FHA house declined in value he’d buy a 2nd house with the 20% down.
However, while saving the 20% down for a second house actually could make sense, it makes no sense that he’d buy if his first house declined. Unless this was really a buy-and-bail plan.
For example, say you bought an over-priced turkey (say in 2006) with little money down, and now (in 2009) see a house just like yours selling for 20%-40% less. You buy that cheaper house with good credit, and then default on your first and more expensive house. This lowers your mortgage and loan amount owed while drastically increasing your equity.
People have done this even with a 2nd mortgage, which can hold you liable but only if your second house is worth it. But with an FHA, you can perfect this fraud.
Nice article. I think you should never ever open the fridge in an REO though… Unless of course you are in full hazmat gear.
PS. We live in an era of disposable housing.
There are only two emotions in the market: greed and fear. SD real estate inspires greed right now, not fear.
When / if the economy dips again (ala Oct/Nov 08), greed will turn to fear and real estate will slide again.
Weak fundamentals (no job creation / job losses / inflation / lack of financing) hurt the chance that property will appreciate in the short-term (less than 3 yrs)
Related post on CR…
http://www.calculatedriskblog.com/2009/07/dataquick-california-mortgage-defaults.html
Lenders sent out a total of 124,562 default notices during the second quarter (April through June). That was down 8.0 percent from the prior quarter’s record 135,431 default notices, and up 2.4 percent from 121,673 in second quarter 2008, according to MDA DataQuick.
“There is a perception that the housing market is dragging along bottom, that it probably won’t get much worse, and that the lenders need to get serious about processing the backlog of delinquencies, either with work-outs or foreclosure. We’re hearing that some lenders and servicers are doing just that, hiring more people to do the necessary paperwork. That means the foreclosure numbers will probably shoot back up during the third quarter,” said John Walsh, DataQuick president.
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While most first quarter 2009 foreclosure activity was still concentrated in affordable inland communities, there were signs that the foreclosure problem was intensifying in more expensive areas. The state’s most affordable sub-markets, which represent 25 percent of the state’s housing stock, accounted for more than 52.0 percent of all default activity in 2008. In first quarter 2009 it fell to 47.5 percent, and last quarter it dipped to 45.0 percent.
I think as long as unemployment is increasing, furloughs continue occurring, and properties stay stagnant on the MLS at wishing prices. The likelihood of prices going up is slim.
Some of your reasons make sense though. It’s just hard to believe a realtor even when they appear to be honest. I just met too many “snake oil” salesmen with a real estate licenses.
Hang on, I didn’t say anything about prices going up.
Though I have a post ready…..want to hear the theme?
Just the right number of foreclosures coming on the market, listed at retail (about 10-20% below active list prices in CV) could cause a flurry of activity from the so-called ‘pent-up demand’ buyers.
The right number of REOs? One per day.
In past boom/bust/recover cycles, the “pent up demand” buyers have been accompanied in their wait for “the right time to buy” by mortgage lenders anxious to lend to them. I wonder to what extent “pent up demand” is going to be affected by the current situation with lenders either not lending or making the application process a total PITA.
I’m doubtful that there is enough pent-up demand for the amount of mid to high-end homes that will come down the distress/foreclosure pipeline. The lower end benefits from investors looking to cash flow through rentals, but it will be more difficult to cash flow the mid to high-end properties. Once the fence sitters and bubble waiters fulfill their demand, will there be enough demand left to eradicate all of the supply? Personally, I foresee rents continuing to decline, which will put more and more pressure on prices as they’ll have to drop to match owners equivalent rent.
Time will tell.
Here’s a not-so-rosy outlook for the next couple of years in CA.
http://www.latimes.com/business/la-fi-cal-econ22-2009jul22,0,2160299.story
Unemployment in California and Los Angeles County will increase well into 2010, continuing to exceed the highest levels since at least the end of World War II, according to a local economist whose projections for the Southland economy are among the most negative to date.
Continued sluggishness in key industries such as construction, retail, international trade and hospitality will keep the state from a full recovery until 2011, said the report, released by the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp.
Personal income will drop 2% in the state this year, the report said, the first annual decline since 1938.
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Kyser did not agree that the budget fix would help matters. Losses in revenue will continue to dog municipalities throughout the state, he said, potentially even pushing some into bankruptcy. Budget cuts will make it even more difficult to create jobs.
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Some of the key drivers are in danger of shrinking permanently, Kyser said. Aerospace could shrivel if the Defense Department cuts funding for Boeing’s C-17 cargo aircraft program and commercial air travel continues to lag. As international trade stays slow, ports in Canada and Texas and on the East Coast will try to lure business from Los Angeles. Production in the motion picture industry is increasingly taking place out of state, and cutbacks in advertising are hurting the broadcast TV industry.
Re #5: You CAN steal one from the bank, although it’s rare. For you to be able to do so, there has to be some sort of issue with the property. I’ll give some examples:
1. A fixer in a bad nieghborhood. There’s a lot of these out there still, at least in my neck of the woods (Riverside-might be different in San Deigo County). If you don’t mind a fixer in a bad neighborhood, you can buy one for the price of a new car out here (I saw one that sold for $285k at the peak of the bubble sell for $40k after a dozen price reductions).
2. The stars align. I personally stole one from the bank-but I also realize that I got really, really lucky. I got a house for about $85 a sq ft in Riverside, which was about thirty dollars a sq ft too low for the condition and location of the house. The house was not a fixer, and not in a bad neighborhood. However:
A. There is an issue with the tax rolls. For some reason, the last addition, which added 700 sq ft or so to the house, never made it to the tax assessor’s office-they still have the square footage from before the addition. I confirmed that the addition was permitted properly by the city at the time, so I don’t know what the heck happened.
B. Because of A, the MLS listing showed the square footage as being much smaller than it actually is (1,060 instead of the real world square footage of approximately 1,760). So, the list price appeared to be too HIGH for the size, not too low. The listing agent also didn’t do enough to point out the issue (there was only one photo, for example). A properly designed listing could have at least showed pictures of the added 15 ft x 30 ft family room and new master bedroom. Heck, if the listing agent was really doing her job, she might have contacted the tax people herself and got the thing straightened out so she could have listed it at the proper square footage. That type of service is worth 6%, IMHO. But it was merely a REO listing, so she didn’t care. So, people looking for small houses skipped the listing because it was apparently overpriced, and people looking for larger houses skipped the listing because it was apparently too small. I was looking at pretty much everything, so I found it and snatched it up at list ($150k).
C. The kitchen sucked. I had more cabinet space in the kitchen in my one bedroom apartment than this place had when I bought it. This is a big turnoff to many buyers, especially women. I’m not much of a cook, so it didn’t matter to me much-plus five grand worth of work made it perfectly acceptable.
The moral of my story is, when shopping for a house, take the time to look at houses with poorly done listings (one or no photos, misspellings, ALL CAPS, short descriptions, etc.), as well as ones that seem overpriced or too small at first glance. In fact, I would encourage you to concentrate on them, since there will be less competition.
On one hand, foreclosures will entice pent up buyer demand in the lower to mid end. On the high end, foreclosures are problematic. In the vast majority of traditional home sales, the seller buys another home. When a bank sells, there is an imbalance which must be taken up by either a first time buyer or investor. While that is definitely the case for the low end, it isn’t the case for the high end which depends a lot more on move up buyers. This is especially the case with historically low levels of equity for buyers to trade up into said homes. Bottom line, a flood of foreclosures in the high end would not be absorbed as well as the flood of foreclosures in the low end.
Pent up Demand -v- Pent up Desire. I think these two items should clarified. Desire is a subset of Demand.
Demand has a lot of components, two of the most overlooked are wealth and income. While there is no shortage of cash purchases in NCC, it is clear based on NCC MOI that people are not Demanding homes for $1MM. It can be argued they are waiting for foreclosure, but I think the reality is Pent-up Demand is not there because income and wealth are not there. Pent up Desire is very high.
There was a survey done recently where potential home buyers were asked about their expected down payment. I think it was close to 50% said less than 5%. In other words this group may all “Desire” homes but they cannot “Demand” homes.
One of the only games in town for less than 5% down mortgages is FHA. How many FHA applicants can afford (Demand) a $600K= NCC home?
It all depends on how many of those NODs turn into NOTs. Were they so low the last six or so months because of the various moratoriums (some by law, some by lender choice) or because the NODs are being resolved? If we start hitting 2000+ NOTs per month for the next 6 months then we’ll have a much different buying situation than we have now.
LV Renter,
Don’t you mean that Desire is a superset of Demand? That’s basically your argument, IIRC, and I totally agree.
i didn’t steal one from the bank, but i did get a decent deal ($180/sq ft) by moving quickly on a short sale that had just fallen through, had only 1 pic, and was incorrectly listed as a 3 bdrm when it was actually 4. Not in bad shape either, just working on cosmetic stuff now.
TJ, Desire is one of the variables in the demand function (income, wealth, tastes, etc are others), that is what I mean by subset.
SDBri
I could not believe that person on SD Lookup. It did not make sense to put 20% down in a declining market but it did make sense to buy? Help me with that.
The person was also hoping to become a mogul with a $300K townhome rental in Chula. What is the best rental potential, $2,000/month. The mortgage would be $2,000 plus $600 for HOA and taxes. Smart, right?
Everytime I read something like that makes me realize how much further the market has to fall. If the market falls as they fear once they realize the rental income is not there how long till they decide to walk away?
LV Renter,
Ah, okay, get you now. I’d suggest the word “component”, i.e., desire is a component of demand.
Otherwise, as you say, only a fraction of those that desire something can actually demand it (hence my superset argument).
Regarding that saving the 20 to buy another… looks like that person wants to DCA (dollar cost average) into their RRE “investments”. 😉
That was the word I mean, thanks. BTW available credit is also a component. When there were no underwriting criteria (ie NINJA) it increased demand.
Jim,
What about 313 S. Rios in Solana Beach?
That place was a long, dragged-out foreclosure and apparently went back to bank quite a while ago but hasn’t been listed.
W.C.
I had that one on the 1st REO Shadow tour, and am watching. Looks like a family is occupying?
Former owner paid $959,000 in 2005, but when foreclosed the loans totalled $1.4 million.
It’s 2,216sf on a 9,300sf lot but down in the hole. Under $950,000 would probably be a good buy if in good shape. No view?
B of A foreclosed in March.
I wonder what next spring will bring?
You guys are thinking “real estate market” only but that’s a small subset of “global financial markets.”
I see a house purchase as a form of bond with some inflation adjuster on the cash flow. If one is looking a a wave of inflation coming down the tubes, then that inflation adjuster is a mightly fine thing.
Like a bond purchase, a house can decline in market value. A bond has a cash flow associated with it, usually some fixed rate. A house rent will periodically adjust to the current market. True, rents will fluctuate but if the value of the dollar crashes, rents will somewhat track incomes. People will work and people will pay market for rentals.
Here in Silicon Valley, I’m shopping for a basic 3/2 house with decent schools. Every open house I go to is crowded with Asians, many not speaking English. I suspect that family back in China are bringing their dollars to America to park them prior to a big devaluation.
I’m preparing to sell my home in China (currently in an up-market frenzy) and buy Calfornia, again. Upon the announcement of my intensions, I have had 3 Chinese friends approach me so far to also buy a house for them in the US…with cash.
“Give us your poor, your tired, your huddled masses longing to be free…and your cash”