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Wednesday, May 20, 2009
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94 comments:
Japan's GDP shrank at a 15.2% annual rate last quarter.
If we're the bright spot in the US economy we had better start going out there and buying more cars and electronics fast, the whole world is depending on us!
A friend of mine recently bought a SFH in Herndon. Buyer and Seller agreed on a price. The house did not appraise out. It came in $35K lower than the sale price. The Seller agreed to eat the loss.
Do you think this is going to start happening more often? Or are most appraisers advised to base their appraisal on the sale price to make sure the deal happens?
Former Bear turns Bullish on Residential Real Estate I don't expect kevin, TBW, or others bubble heads to comment on this.
MJC,
That's what happened on dgg's short-sale TH too. And the bank just ate the loss.
I wouldn't count on such a thing when making an offer, because it's going to be hit or miss, but some people definitely are going to luck out. Where I'm looking there are enough transactions occuring at or right near list that I don't think I'll be so lucky.
Given the new appraisal rules, if your contract is significantly above comps, I would definitely say situations like this will happen more often. But if you're at comparable sales already, the new rules shouldn't change anything.
from Robert's link:
"Paulson & Co. is in the early stages of raising money for the new fund. In a departure for the firm, which tends to be more focused on running hedge funds, the new venture will be a private equity fund.
Documents recently filed with the Securities and Exchange Commission will allow Paulson & Co. to begin talking to investors about the fund for the first time – with fundraising expected to begin shortly.
"
If you're going to catch the bottom, (1) you need to be willing to start buying a bit ahead of time (2) you need to get up and running ahead of that time. With no solid time frames in this article at all, it's hard to tell what this means precisely about when he thinks the bottom will commence, but I'd say he's right to get this ready to roll now, any later and he'd risk being behind the ball, which doesn't sell too well to those who want to be on the cutting edge risk-laden world of hedge-fund investing.
So at a guess, I'd say he's thinking some markets with significant upside potential will be bottoming this summer. Given the advanced stage of San Diego and PWC, I'd say he's right.
What that translate to for individual households looking to buy a single house to live in, is another beast.
How can someone find out what is owed on a particular house in Arlington? There is a house we are somewhat interested in for sale for 30% more than the owners paid in 2004. I don't know that they have done anything special in terms of updates.
I might be willing to make an offer, but not at asking. I was wondering if I could get an estimate of how much the current owner owed on the house to see what wouldn't be a short sale for them. That way I could make an accurate low-ball offer.
How can I find out what loans they have taken out? Is there some public record?
Robert,
Please, please. If you expect somebody here to postpone buying decision until prices in n.arl drop 90% and another 50% in pwc --- i do not think there are many bh of that magnitude.
I think most of the people who postpone buying currently simply can wait and do not believe that prices will go up much anywhere.
We also heard about quite a few cashflow positive properties in certain markets --- they look good to investors these days, unless the economy starts to get worse.
The only reason that prices stabilized somewhat this spring is that there is less fear around for buyers together with good interest rates. The distress for many sellers did not go anywhere.
A new credit-suisse recast/reset chart is out.
(go to Calculated Risk for more)
credit suisse recast+ reset chartSo the doozies are the option-Arms that actually recast not just reset. There's a small wave of these this summer early fall, but sep 2010 and all fall 2011 are much worse.
Around here, many of these owners may have already seen the writing on the wall and have sold, or at least listed. But given that this is an updated chart one would think it's for only those loans that are still on the books. On the other hand it is national not local, so use at your own discretion.
Liv,
I do not know what the process is in Arlington, but in PWC, you just go to the county courthouse Land Records office and use their database to look up the property. You can cross-reference by name, to check and see if the owner has obligations on other properties in the county. All of the actual loan documents are scanned in, so you can see each actual contract, HELOC, whatever. Perhaps someone from Arlington could direct you to the location of their Land Records office?
That reminds me of the zillion times I slogged to the PWC office with a baby on my back to scan through the sad, sad stories of various houses, which all began to look alike: on the second page of the mortgage document is an area where you can check off additional features, like "ARM" or "negative-amortization" or some such features. They all had numerous boxes checked. Then would come the home equity loans for outrageous interest rates. Then the foreclosure paperwork.
One guy had taken out over $400K, just cash, from seven different banks on his house over an 18-month period. Funny thing is, his house never assessed for anywhere near what it appraised when he cashed out all those times.
Yeah Robert, I'll comment, and don't know why you're saying I wouldn't. The man is a professional investor. He wins big on some, not so much on others. He can afford to make these bets. Joe sixpack cannot make a financial gamble like that. It is risking financial suicide. Have fun knife-catching. Don't blame anyone but yourself when you get cut.
The Onion's response to the cc reforms: The Onion: Loan Sharks vs CC companies.
Konstantine
Maybe you haven't been reading my posts, but exactly the opposite of what you thought I intended to say.
I do not think it is a good idea to postpone buying. I'm finding more and more smart money that believes the bottom is in.
Here's a guy, John Paulson, that profited from the decline in housing and now he's putting together a hedge fund to go long commercial and residential real estate. What you find on these message boards is bulls and bears and they rarely if ever change their opinions.
Me, I put my house on the market in March 2006. I was going to get out and rent. Idiotically, I was greedy and set my asking price too high. I kept lowering my price -- chasing the market down, and finally took my house off the market at the end of 2006. I was late. My home declined in value. Now, however, the numbers point to recovery. Not just one month, but a string of consecutive months of declining inventory and now we are seeing price increases. The momentum is higher, just like it was lower for 3 years straight. It went up 5 years straight, then down 3 years straight, and now going higher. This is I believe a long trend that will last a similar multi-year period. And then throw in all of the positive fundmentals reasons for DC Metro, and I'd say you are leaving some serious profits on the table it you wait to buy.
Cara, what do you mean, "what does it translate to." Of course it translates, exactly. If you had listened to John Paulson back in 2005, you'd have made a boatload of money. Now he's changed direction.
Robert, do you know anything about the housing bubble? Your ignorance is absolutely staggering.
BUBBLE BUBBLE TOIL AND TROUBLE
robert,
No, what it means is that Paulson thinks there's no more money to be made betting housing will go lower. Which is true. Everyone thinks housing will go lower, how on earth are you going to make money betting that? So he's positioning himself for the opposite trend. As he should. He's not a bear or a bull he's a directional trader.
For individuals it only means what you think it means IF and Only IF you're right that we get another bubble immediately. Only in the V-shaped housing recovery is this a uniquely good time to buy. Outside of that belief, it's perfectly fine to let your own financial timing determine your buying time-frame.
We're not bears, we're flat-worlders! (well, aside from contrarian and some people looking further in)
Robert,
I keep looking at the regional per-capita gdp vs. median home price chart and still see that the price is above the gdp level, while historically it was dead-on.
I do not believe in rates going up short-term and even if they do it will depress prices and increase foreclosures, no doubt about that. I do not think that incomes, number of jobs and confidence in the future will suddenly increase in this area short-term. But another year or two of the lean times will make sure that most of the people forget that real estate is an investment (for another 5-10 years). They will continue buying homes, but there'll be nothing like crazy bubble years appreciation around.
As far as following maverick investors --- i do not believe that they have very good forecasting ability, some of them are lucky and all good ones have risk management in place, so they do not let themselves get into some crappy deal headfirst.
Again, this area is not Detroit (thank God!) and it is ok to live here (I've seen better places) but I do not in general believe in any 'change in paradigm' explanations when there is no real change in fundamentals. Take NYC for example, they took away hell of a lot of high-paying jobs and their real-estate market is not exactly blossoming right now. Say half of the contractors making $100+ an hour leave arlington area, i can bet maryland and nova high-end housing will be hit real hard. And it seems that new administration is going to do exactly that.
Who knows. The Obama administration seems to really love spending anything and everything it doesn't have. Same with Congress. But be sure that if there are any cuts, it'll certainly be right there.
I've been out of town for a few days and came back to an inbox full of new listing alerts. Could the reo's be hitting already?
I emailed some agents and all the stuff I would have been interested in (under 150K) are under contract.
I am hoping to see a bunch more in my targeted area.
On another note; I am one of the ones that has always said "you make your money going in". I'd buy a home now in the mid-range, even if it was going to go sideways for a few (to many) years.
There are reasons to do this. First off, do you really need to catch a bottom (that won't be discernable until a year after it passed); rates can only go up at this point IMO; I'd rather own and be 6 yrs down the AM schedule than rent at the same cost; lastly, who in the world can predict job future, illness, divorce, etc. You will be waiting until you are dead.
VA_Investor:
"I've been out of town for a few days and came back to an inbox full of new listing alerts. Could the reo's be hitting already?"
I wish, but I'm not seeing it in the areas I'm looking at.
Va_investor,
Could they be coming out now? Maybe. Like coin flips, any given week of listings is independent of any other given week, but after a while you begin to suspect the coin is weighted...
Right now you need to be fast on REO listings all the way up to the $350k ones, so I'm not surprised that the $150k investor-specials are going even more quickly. Hopefully you didn't miss any in your favorite complex. But you've got an eye on which of those are bank owned already, right?
So, Cara, you are a flat-worlder? I don't think there are many like you on this board.
My prediction is a V-shaped price just off the bottom, but to only a 50% retracement of the bubble.
For example, say the peak price was $500k and the low this Winter and early Spring was $300k. I see a relatively quick, by early summer, jump to $400k and the 5% a year for the next 3-5 years.
Keep an eye on the inventory numbers. It ALWAYS follows that tight supply will lead to prices increasing. We are on a 12 month string of lower inventory figures. Prices didn't start moving until the last couple of months. Now, inventory is getting tight. The tighter the inventory the sharper the price increases. Supply and demand.
robert,
that would be months-of-inventory, not just inventory, to measure the relative forces of supply and demand.
Thank goodness they are going to do something about this eyesore:
Bromptons at Cherrydale
Robert,
I think the numbers you just posted probably place you as the most bullish person on these threads. I don't think many of us expect any significant price appreciation over the next few years.
Robert,
If you need that much of appreciation to make your purchase whole, I'm really sorry. No way that this will happen to anything in your price range.
Hey All!I have a theory I want to run past you.
I have been doing a ton of research and investigative reporting on whether or not there will be another flood of bank listings.
Here is what I came up with. Feel free to be brutal. Your comments might be used on my blog.
So we all know the bank moratorium was lifted. And yes, one day in the newspaper the foreclosure list was 3x longer than normal. However we just aren't seeing a flood of foreclosures anywhere on the MLS.
Inventory levels for bank properties on the MLS for sale have tanked. Places like PWC and Loudoun have dropped from 16 months of inventory to like 2. And bank deals are rarely in sight.
Yes foreclosure data from RealtyTrac is on the rise. How can that be?
Well I was talking to a Realtor friend in Loudoun, the land of the bank listings (at least previously). He talks to the insiders of banks directly.
Here is the result. You all heard of the new "Mark to Market" rules right? Has to do with how the banks report their portfolios. And if their stocks tank, they have to sell off more of their assets to keep up with accounting.
But to stop the short sellers, the government changed the M to M rules. What that also did was change how the banks account for stuff on their books. They no longer have to liquidate them as soon as possible.
So they are either
a) Just not foreclosing on the homeowner, even though they could
b) Holding the foreclosure indefinitely and just selling a few at a time, so as not to tank the marketplace.
This Realtor saw one community with a dozen of bank owns that are just sitting their vacant. The bank told them they have no interest and need to liquidate them.
So this is good on the one hand. THe banks might stop dumping properties and destroying neighborhoods, but yes it also is building possibly another bubble. On the one hand, if they stop flooding the market, then values will go up, but then it might be a damn that bursts in 2-5 years.
But in the near 3-9 month horizon, it seems like a good thing for prices (if prices going up is good for you). But it leads to uncertainty about the backlog.
Hope that helps.
Frank
Broker FranklyRealty.com
Owner FranklyMLS.com
Robert is an uber housing bull. He thinks the fundamentals are such that there was no housing bubble, and prices are just going to bounce back up.
SEE. THIS. PLEASE.Most of the truly delusional had a wake-up period over a year ago. I guess someone has been hibernating.
frank,
So what you're saying is banks actually have a greater ability to hold back inventory now than they did before the moratorium started in November.
That's not good, not good at all. I have no problem with them selling them in bulk to investors, but ...
Thanks, Frank. That's pretty much what I was fearing would be the case. It's like De Beers has taken over the housing market. I'm starting to think my prospects of owning at all in the next 5 years are nil. Not until I can affordably buy a house and not be paying a heavy premium because the market is temporarily manipulated.
Robert - in my estimation a slight V is possible, (as per your example if the peak was 500, and the low 300, a v shaped spike to 315-330K is possible, followed by a long flat period, but beyond that, I deem it unlikely.
I think what you are missing about the months of inventory (MOI) metric is that it may be artificial thanks to shadow (bank owned) inventory. Suppose MLS shows 100 homes available, and 25 sell in a given month. At 4 MOI, yes prices should rise.
However, suppose that the banks hold 1,000 additional homes off the MLS, but the instant anything sells, they will just push more and more out of the shadows and onto the market. In this case, the "true" MOI is not really 4 but closer to 40 (1,000 held for sale/25 sold).
Now its true, if they can keep the ratio at 4, prices should not fall further. However, til all that REO clears, I just dont see much of a bounce.
These are just examples, but I think thats why we arent going to see much of a V so long as bank owned REOs are out there and are weighing down the market from the shadows.
I will say, if we do see a v it would be an indication to me that the shadow REO is not as big as we think - but again, I will wait til I see rising prices before I postulate on what is causing it.
Cara, it's worse than just not good. They are squeezing the buyers, making them slaves to unnecessarily high amounts of long term debt and interest. So much for free market. I got out of owning a couple years ago thinking that after renting for ~1 year, I'd jump back in. The way things look right now, I'm ready to just ignore housing and find a new hobby.
so frank,
have you made the "solds" searchable yet?
On your blog you talk about how one can search for bank-owned using the property records themselves, any indication from that on the size of the inventory?
Using just your engine I showed the other day that in terms of REOs, currently their selling at a good clip, which leads me to believe that while banks may have the ability to hold back inventory, they are also seeing sales enough to continue to list "new" ones. Sell one, list one, ad infinitum. Which is okay for us buyers but sucks big-time for the shadow inventory of would-be sellers who are waiting until the REOs abate before trying to compete.
All I did was FX* bank (1369) and FX* bank active (434). This will miss some and have some false positives but I'm guessing those cancel. Given that ratio of >3:1 under contract to active, I'd say now's the time for banks to bring out that inventory if they have it.
kevin
sadly there's no emoticon for wide-eyed terror to go with my head-shaking "not good, not good"
robert said: "Keep an eye on the inventory numbers. It ALWAYS follows that tight supply will lead to prices increasing."
Inventory was at its tightest point ever at the apex of the bubble. What happened to prices following that?
Frank - I think your line of reasoning is good with a few modifications:
"So we all know the bank moratorium was lifted. And yes, one day in the newspaper the foreclosure list was 3x longer than normal. However we just aren't seeing a flood of foreclosures anywhere on the MLS."
I think a greater portion are going outside of the MLS. Case in point, I negotiated a bulk sale of 120+ foreclosed homes in multiple counties to a private investor group for 6MM. All the homes were REO, yet none (to my knowledge) were on the MLS. Also since there was no realtor involved (im an attorney), the sales didnt show up on MLS either. I have no idea how many sales like this are going on, but I am sure I am not the only one.
Second, I have heard, but cannot confirm that investors are coming back to the courthouse steps. This means a house can go NOD and NTS, but will be gone before it gets to REO, or to MLS inventory (most of these guys are unrepresented). In theory Realtytrac could post large numbers going in, but few will ever come out, via MLS.
Finally, I think (but have no knowledge of this whatsoever) that banks are finally stepping up and doing loan mods in earnest. I can tell you that sometimes (in commercial real estate), we will file a NOD against a borrower, only to "get their attention" and let them know we are serious, yet once we have a NOD against them, we work very hard to enter into a forebearance agreement or other modification - the rationale being is that even if my client (the bank) loses money, its still cheaper than going through foreclosure.
"On the one hand, if they stop flooding the market, then values will go up, but then it might be a damn that bursts in 2-5 years."
I dont necessarily agree with it being a bursting dam. As I see it, the banks will dispense them as the market can handle them - no faster - no slower. If they can do this successfully now, I see no reason why they cant do it indefinitely.
As we all know, you cant beat the fundamentals. Many assume that means banks will keep dumping and prices will keep dropping til they are in line with fundamentals. The other possibility is banks establish a artificial price floor and then wait til the fundamentals catch up. As kevin noted, DeBeers has been successfully putting in a floor on diamond prices for over 25 years. Whose to say the banks, cant do it as long as necessary as well?
Frank,
from what i know that is not what most bank reo departments are doing. Mark-to-market accounting changes definitely help the balance sheet, but it does not stop the maintenance costs of the reo property adding up, does not decrease the leverage of the bank, does not decrease the severity of the bonds defaults. i would say that if you have an average property you are losing about 1% of the value per month while you are holding it when it is non-performing, adding it to the losses that already occurred while property was in different default stages --- that's pretty hard to withstand and hope to recoup with price appreciation.
I would think that lack of processing power/expertise is still a reason for many banks to be behind on foreclosure/reo processing.
CRT,
For the DeBeers analogy: diamonds do not require maintenance, they are not taxed (for the holding period), you are not borrowing money to produce excess diamonds, just waiting for supply to clear and get some more out of the mine.
You still spend ridiculous amounts of money on suppressing competition and marketing, but this is another story.
CRT: "As we all know, you cant beat the fundamentals. Many assume that means banks will keep dumping and prices will keep dropping til they are in line with fundamentals. The other possibility is banks establish a artificial price floor and then wait til the fundamentals catch up. As kevin noted, DeBeers has been successfully putting in a floor on diamond prices for over 25 years. Whose to say the banks, cant do it as long as necessary as well?"
Precisely. Without this manipulation, prices might have overshot the fundamentals downwards. My feeling is that after almost a decade of overinflated prices, it would be a nice gift to the people graduating college or moving to a new area to have the opportunity to buy at a real "discount". Instead, the banks will bleed them out slowly, probably creating something akin to the Japan-style downturn. They don't care if they are spreading the pain to future homeowners, thereby hurting more people than necessary. It is so depressing.
frank said:
"The bank told them they have no interest and need to liquidate them.
So this is good on the one hand. THe banks might stop dumping properties and destroying neighborhoods.."
I thought vacant homes were bad for hoods, apparently leaving the homes vacant in order to not further downward pressure on prices is better?
Robert said:
"Me, I put my house on the market in March 2006. I was going to get out and rent. Idiotically, I was greedy and set my asking price too high."
lol out loud out loud
so basically you're not selling 'til you get your march 06 price.
kevin give up on this guy please, and your moratorium talk, specially after frank's remarks. i dont have time to read the 100+ comments/day here.
Konstantin said...
"CRT,
For the DeBeers analogy: diamonds do not require maintenance, they are not taxed (for the holding period), you are not borrowing money to produce excess diamonds, just waiting for supply to clear and get some more out of the mine."
I don't disagree, but if what Frank says is in fact what's going on, the banks have decided that's the route they'll pursue regardless. Believe me, I hope more than anything that it isn't true, and that the banks would make it priority #1 to sell their assets to the public. But it isn't shaping up that way. So far.
GT: "lol out loud out loud
so basically you're not selling 'til you get your march 06 price."
Probably more like 2006 + 20% appreciation per year.
GT: "kevin give up on this guy please, and your moratorium talk, specially after frank's remarks. i dont have time to read the 100+ comments/day here."
It's been mentioned four times today. None by me, once by you. Quit your bitching and skip my posts if you deem it unimportant. CRT and I had some good talks the past couple days about the past and current trends and how the moratorium could or could not be influencing the market.
Regarding supply and demand.
The assumption here seems to be that excess supply will swamp the market and force prices to tumble further.
This assumption is incorrect. People have to live somewhere. I certainly have seen no stats that suggest any net migration of this region's population.
The bottom line is that the people being foreclosed upon are returning to the rental market. There is no new construction and won't be for years.
Until investors run out of cash and other new buyers stop buying, inventory (as in "supply and demand") will not be an issue.
I don't know of anyone (absent complete destitution) who would move their kids back home with gramma and grampa. Rents are much less than their former mortgage payments.
I've recently leased out 4 properties; each, in a matter of days.
here's another line of thought.
If I were an REO manager for a large regional or national bank, which listings would I be putting the time/effort into turning around most quickly? Zip codes and price ranges that are having a good spring. Especially any zips that have seen an uptick in closing prices indicating an underfed supply. If 1 weekend sales sells the place, then those REOs will require the least work. Paint it, re-carpet, mow the lawn once and you're done.
So, if you're not seeing REOs coming out where you're looking maybe that's at least in part a function of the speed of sales there? Ironically this means areas with the biggest seller-buyer standoff are least likely to get more REOs to help create the price discovery needed to facilitate transactions.
Obviously this is just a train of thought with no empirical backing, aside from what's going on in Burke (so I only know banks are indeed putting stuff on the market in the hotbeds of activity, not the converse).
But in slow markets a few REOs can be just as effective in drawing down prices. Why? Because each one gets listed $5-10k lower than the last one. (except at the emotional plataue levels every $50k.) A series of 10 purchases each 10k lower than the last drags down prices just as effectively as one big chunk (perhaps moreso because it indicates a pattern that appraisers can't ignore).
WOW-
so the Banks are going to trickle the REO's out-
I hope they are smart enough to leave the electricity on in them-
I've seen 2 REO's so far covered in Black mold (literally hanging from the ceilings)'cause the sumps had backed up & flooded the basements
(one was in swanky Balmoral in Clifton, no less!)
VA_Investor,
You need a supply of cashflow positive properties for investors to be active, right? I have nothing against buying something like this for myself. Just none of them are where i want them (geography and pricewise). So let's take investors out of this equation if we talk relatively high-end market.
Yeah, renting out is ok and it is difficult to forecast how the rents will behave in the future (I believe they will stabilize now, while prices will continue dropping, then rents will start increasing with inflation, while home prices will be stagnant).
Housing Wire, real situations of mild distressVa_investor, anyone coming to you for a rental, is by definition someone who prefers to rent, and probably has the means to do so. So there's a serious selection bias to your sampling.
This article may interest you about an "un-biases" survey of what people really are doing:
Fueling increased anxiety over potential job loss, one in four — or 24% of — homeowners don’t have any money in savings to cover living expenses should they lose their income, according to a Wells Fargo & Company (WFC: 24.36 -4.28%) quarterly survey.
...
Feeling the pinch, people continue to make lifestyle changes — in some cases drastic ones — in order to reduce expenses. Since last year, the survey found an astonishing one-third of homeowners now have family or friends living with them. 42% of homeowners are spending less on their children and 39% are budgeting more, while 41% are buying only necessities.
"
That's the reality. People really will help each other out in times of need, by taking them into their homes. No mention here on the breakdown for how many added family/friends help contribute to the household balance sheet.
Cara, very true. The whole "won't move in with family" argument is baseless. In fact, particularly during recessions, it's much more often the case.
Konstantin,
Re: High-end.
Completely different numbers regarding equity and financial security leads to MUCH lower rate of "distress" sales. Yes, there will be some (always have been), but it won't be on or near the scale of the low end stuff.
I am talking mainly close-in areas. The outlying areas are where we saw huge new subdivisions whose sales timed perfectly with liar loans and 100% financing. Hence, large numbers of foreclosures are bringing down entire subdivisions.
This is not happening in my neighborhood. 6 sales in 7 yrs. I would suggest that you look at the level of "turnover" from 2003-2007 to gauge future reo's.
tbw -
Got any comparison to 2004 on the new construction? Lenders are not making construction loans. Houses will be built only as sold. No spec. Wait a few years for the shortage.
Cara,
Do you suppose this "one-third" living with friends or family is a permanent thing? Or a short-term solution to an reo or job loss?
"since last year....."
va_investor,
Yes the "since last year" part was vague, such that we don't know whether this 1/3 was in addition to how many were living there last year or what the fraction was last year at all.
I would indeed assume it's mostly temporary, and thus indicative of a good future supply of renters once the jobs picture turns around. But since jobs are generally a trailing economic indicator this combined housing phenomenon may be with us for a couple of years.
"I don't disagree, but if what Frank says is in fact what's going on, the banks have decided that's the route they'll pursue regardless. Believe me, I hope more than anything that it isn't true, and that the banks would make it priority #1 to sell their assets to the public. But it isn't shaping up that way. So far."
Konstantin - ditto what Kevin said above. Im not saying that its the smartest choice, or one without cost, im just saying it looks like the most likely choice.
The other thing I have heard of is the bank takes a place back REO, but keeps the homeowner in place on a short term lease based on what the occupant can afford. This is appealing to the occupant in that their credit is now trashed, they are going to have to lease somewhere, and it might as well be where the live now.
Banks like this too in that it keeps the home off the market while eusuring the home doesnt fall into serious disrepair. This also generates enough cash to keeping up with insurance & property taxes, and generating a little cash for the bank til its time to kick the tenant out and put the home on the market. I have no idea how widespread this is, but given the way banks are scrambling these days, nothing they do surprises me anymore.
Wow a ton of comments:
Cara: Sold searching should be up tonight. We are starting with MLS listed sold properties in the last 3 months. This is much faster than waiting for the tax records.
CRT: I didn't know about bulk sales like the ones you talk about. Can you email me offline, I might know investors that want in on that. But won't those investors likely sell them on the MLS? I guess the good part is that because profit is involved (vs a bank manager that doesn't care) they might actually get closer to market for the homes (ie stage, and clean up the homes first).
As for courthouse steps, I did a video recently on that. At least in Arlington 98% of stuff is NOT being sold to the consumer on the steps.
CRT: That is something that I left off my first post. The banks are shifting their efforts over to more loan modifications and short sale negotiations. They find that they can save money by avoiding foreclosure and carrying costs.
As for carrying costs at 1% a month. I don't see that. For a $500,000 home it shouldn't cost 5,000 a month to hold it. Sure taxes might be $500/mo and then another $1,000. So $1,500 a month is better than just eating another $50,000 or $100,000 loss if they think they can wait.
Frank,
When i'm talking about carrying costs you also have to remember, that it is not exactly very good predicament when you lend somebody 500k, he defaults, you get the collateral, but no cashflow. I would say that the cost of locking 500k without any interest is quite high for the bank. It is an economic loss.
"So they are either
a) Just not foreclosing on the homeowner, even though they could"
It seems like the Edmund Andrews case is an example of this happening.
Very interesting ... it sounds like the "we're just too overwhelmed / understaffed to keep up with the foreclosure proceedings" is an excuse.
Konstantin -
Yes there is opportunity costs. And previously for every $1M they could dump, they could lend out $10M.
I could be wrong (and somebody will let me know if I am), but I think the Mark to Market rule change does effect this somehow. It not longer is a crucial to unload that house to free up cash to lend.
So the big question is is this a new house of cards that could fail? All you need is a bank to get overextended, hoping prices will go up, and run out of cash, go out of business and the buyer floods the market with their inventory.
Or is it a smart approach? The drying up of bank properties IS increasing prices in my opinion. And I'm talking typical house vs typical house. I don't look at median home sales because all you need is 2x the volume in the $100k price range and wipes out the value of a $1M home (averages are just as bad).
If you stop flooding the market, home prices rise. Home prices rise and less people need to foreclose. Rinse and repeat.
Bottom line, it seems VERY risky. Whatever happens in 3-5 years... we will look back and it will be "obvious."
Frank
Anon412,
It is not an excuse.
If you look at the REO properties, you will see that they are concentrated in the hands of very few major banks/GSEs, that this portfolio behavior can decide the fate of these banks and they never had expectations that they will need to manage such a huge portfolio of real properties.
They do not want more fraud and losses because of mismanagement, so they are attacking this problem cautiously, they definitely do not want to take a maximum loss, they do not want to create a steep drop in prices, because this can increase the size of their reo portfolio considerably in the long run, etc. but they do not hold sales from happening on purpose in most areas, it is just lack of people who can facilitate it. reo has to be sold, for a reasonable price with appropriate controls in place. actually look up the jobs in different banks' reo centers, they are hiring like crazy.
For Liv Sining: If the house in Arlington was sold through the MLS in 2004, a real estate agent can find the listing for the house in the MLS and learn the amount of any first or second trusts on the property at the time of settlement. The homeowners may have added more debt through equity lines or paid down the loans quickly, but it will at least give you an idea of where they were in 2004. You can also go to the courthouse and retrieve the data -- this is just a little faster.
Frank,
mark-to-market changes basically say that you do not have to recognise unrealized losses at fair value, this can help a bank to avoid a writedown on the bond in some situations, relax some capital requirements (and thus let the bank be more active in their lending operations). But it does not help the bank to avoid a loss --- they got the money from the customer, they pay certain interest on that deposit, they do not receive any money on their loan while holding reo. this is not opportunity cost, that's a loss.
Fontain -
Look at the inventory numbers. Peak or trough inventory was in March or April 2005.
If you can't see the relationship between inventory and price increases/decreases I don't think I can help you.
Wow, bad news really gets eaten up here.
There is no bank conspiracy to hold inventory off the market. They compete against each other, and besides, it would be illegal if they collude in such an operation. They have enough things to worry about rather than timing the DC Metro real estate market. REO are going to the market as soon as they can be processed.
I do see Metro DC as the best market for as long as Obama is the President and the Dems control Congress. And, no, not every city is like Detroit. WHAT OTHER METRO AREA IS GOING TO OUTPERFORM DC IN THE NEXT 3 YEARS?
My point about trying to sell my house was to show that I'm not an uber-bull. I was bullish until Fall of 2005. By that time, inventory was increasing rapidly and prices started to stagnate. I was bearish until early this year and I started growing more bullish.
kevin, it is obvious that you will be a renter for the rest of your life. That's okay. You won't be poor, but you'll be working a lot longer that most of us homeowners. Enjoy.
Robert,
Glad that you are not in a situation of financial distress.
Did not realize that SAIC stock bonuses were that good.
Konstantin, they're not. At least not for me. I guess back in the day they were much better.
Robert, I'll remain a renter so long as this market is manipulated in such a way that the only house I can buy that isn't a crap hole is an hour commute from my job (not buying a condo either; been there, done that). It's completely unacceptable to me that despite my decent salary, there aren't any affordable homes to buy around here. Funny though, take my salary adjusted for inflation and I could have bought a nice SFH in Arlington ten years ago. I don't think I'm being too picky by not wanting to live in Loudoun or PW County.
kevin,
i'm roughly in the same boat, but for me it is mostly about cashflow --- i do not want to be cashpoor again, was in grad school, enough of that. my income is likely to increase in next couple of years based on my circumstances but as we all know sometimes it is the market, not individual who is deciding these things, so it makes me a little bit more indecisive than usual. it seems that if i want to live in an attractive location it is much more prudent for me to wait.
and i'm definitely not suffering from being a renter, i actually enjoy it now. just have some financial incentives to buy that keep me on this blog.
SAIC stock was up 2000% in the time I worked there from 1991 - 2004.
Robert,
That's exactly the reason I would like to work for a start-up for a while.
Great Falls definitely is nice place to be, at least you have some land/privacy for this 1m+ houses. My friend, who is also Robert by the way, bought there at the peak for about 1.8 million, I do not think his house lost much in value. But him being finance professor and concentrating so much of his wealth in real estate was kinda funny.
Frank - will do on the email. Just promise me you will keep it confidential.
TBW,
You've described my situation exactly. On the bright side I think we might stand to benefit from some further declines, though that's hardly a guarantee. I think stagnation is equally likely.
Konstantin,
I've worked for several start-ups, and work for one now. It's the exception not the norm to make money via stock at these places :)
SAIC isn't exactly a startup though, and didn't go public until a few years ago as far as I know. I've never quite understood the valuation of privately held stock in those cases, 2000% is certainly an impressive run-up. I'd guess most of the profits came through ESOP purchases of shares.
This is Tony. I am the agent that spoke to Frank about the situation in Loudoun. I used to work for Chemical Bank back during the previous market downturn so I have some insight into what the banks are currently doing to manipulate inventory levels and why they are doing it.
The most obvious manipulation was the government moratorium on foreclosures for six months. Several banks followed suit (the govt might have told them to do so). This caused the drought in foreclosure filings during the first part of 2009.
And more recently the banks have also held off on listing a lot of the houses they now have in their possession because of the impact selling these houses will have on their balance sheets. Right now these properties exist as securities that have been moved off their balance sheets because they sold them off to investors.
The problem is the investors can give them back to the bank if the underlying loans (mortgages) default at a certain rate. So now the bank has to bring the securities back onto their balance sheets. Now if the banks are forced to bring them back onto their balance sheets they do it at the value of the loan, not the current value of the underlying property.
They do not have to mark it to market with the change in the accounting rules. So they can keep it on the books and not realize the loss until they actually sell the house. Once they sell it they have to take the loss on the balance sheets. So if they have a lot of losses they could run into capital requirement issues and they will need to raise money to meet federal banking standards. Because of this they are trying to systematically control the number of houses they sell in a given quarter so that they don't become insolvent and get shut down by the government.
The argument that it is because of resources is not correct. They were processing 8 times as many foreclosure listings a year ago. The problem is liquidity and capital requirements. If the banks had to realize their losses as the loans went into default every bank in the country would be insolvent. By last count $15Trillion has been lost in real estate values since the summer of 2005 and each month it gets worse.
And the banks will keep taking small losses on carrying costs instead of having to take 40%, 50% and sometimes 95% losses on the loans they have off their balance sheets but they are going to eventually be responsible for.
Hopefully this makes sense. If you have any questions let me know.
Tony,
What percentage of potential/probable reo's have come to market? How much longer will it take the banks to unload the rest in an "orderly" fashion?
Do you see differences in the different price tiers? More or fewer defaults? High-end, mid, low-end?
Wells Fargo and JP Morgan:
A bank spokesperson said Wells Fargo hires a property management firm to handle its REOs, makes sure that vacant homes are secured, and tries to put foreclosed homes back on the market as soon as possible.
Tom Kelly, a spokesperson for JPMorgan Chase, said the bank continues “to work hard on loan modifications,” which reduce foreclosures and the number of REOs. The bank’s interest, he said, is in getting the (foreclosed) home sold as quickly as possible.” Chase uses local real estate agents to sell REOs, and lists the properties on its website.
No conspiracy here. But, I admit, it is more fun to concoct various scenarios about evil corporate bank managers trying to manipulate the market.
Robert, If you believe bank spokesmen than I have some land to sell you. What did you expect them to say - Our inventory of non-performing loans is so massive that we can't sell them all or we will become insolvent. It is not a conspiracy, it is a survival tactic. Believe me when I say, they will never tell you how bad it is. Go back and listen to the CEOs of Lehman Brothers and Bear Stearns just days before they went under. I am not sure how many times they would have to do the same thing before some people start to doubt what they have to say.
Tony,
Most likely, if they had to lie, they wouldn't say ANYTHING. They're on the hook legally, you, on the other hand, aren't.
Tony,
These are different scenarios when loan is securitized or on the balance sheet of the bank.
If securitized loan goes to REO it is in the interest of both the investor and servicer of the loan to get the REO sold as soon as possible, if loan does not cashflow it is a loss to the bond, servicers have certain obligations in terms of delivering money to the trust, etc. I would be surprised if investors in these bonds won't get crazy if the servicer delayed the usually lengthy process of principal recovery (about 12 months normally) even more. There'll be lawsuits. Also, most of the banks you are talking about have large holdings of mortgage securities themselves, so it makes it more complex.
If the loan is not securitized, i.e. already on the balance sheet and it moves from performing status to non-performing it triggers completely different accounting for it and the provision
for credit losses that you put in the financials certainly can be bogus, while realized losses from reo sales will be actuals. Still, most of the loans were securitized and it is not a normal situation that the security can be returned to the originator, unless there is a guarantee, like fannie/freddie.
"Robert said...
Tony,
Most likely, if they had to lie, they wouldn't say ANYTHING."
You sure about that Robert? A guy from bloomberg is interviewing a bank CEO. The CEO answers 4 or 5 questions in a responsive manner, then, when asked, "what are you doing with your REO", the CEO is just going to sit there silent? Umm yeah, im sure that would go over well.
If I was the ceo's counsel, I would tell them to say "were doing it as quickly as possible" - the unstated truth being if we did it any quicker we'd be insolvent.
Bottom line is it shoudnt matter to you Robert - manipulation or not, the end result will be the same, REO wont be flooding the market, prices wont be going down.
Tony - thanks alot for providing this explanation - that sounds pretty plausible to me. Ive seen your other blog and I find you to be credible in your postings (take note Contrarian).
I do want to follow up on what VA investor asked. Do you have any idea how big the current surplus of unlisted REO's is? Also, is it more of the same (mostly low priced junky stuff in hard hit areas) or is it newer stuff the market hasnt seen before?
Jeff B,
I understand that it is not like every start-up makes it, but it is kinda more exciting anyway.
For the privately held companies you can have profit sharing based on the amount of ownership, i think there is no problem with that, many partnerships work like it. Unless you are buying into Arthur Anderson circa Enron collapse it is ok.
To answer the question about the backlog of properties that are not yet listed there are several ways of analyzing it. According to court foreclosure filings there are about 4 foreclosure filings for every REO listing in Loudoun County. But there are a bunch of houses that have filings but are on the market as short sales. That is about 1.5 of the remain 3. So there are 1.5 times as many REO properties either already foreclosed on and being held off as listed or the foreclosure is being postponed, delayed etc. A quick walk around Sterling Park will uncover many vacant properties that show no signs of activity by the bank or servicer or any real estate agent.
The majority of the "shadow inventory" is located in the already hard hit areas in the lower price ranges. The upper price ranges are seeing much more short sale activity than foreclosures.
The current foreclosure filings are starting to move up the price ranges and that would explain the short sale inventory increase. These homeowners are trying to salvage what little they can instead of just abandoning the homes.
I am thinking this orderly liquidation of non-performing assets will probably last another 2 years at the current rate.
I am all for the controlled unwinding of the inventory because it prevented a complete disintegration of prices (think 80%) but it will keep prices in check for many years to come with the higher end of the market being the last to recover because the baby-boomer generation will be downsizing and the next generation of move up buyers is much smaller in size.
Tony said, "According to court foreclosure filings there are about 4 foreclosure filings for every REO listing in Loudoun County."
That's because the other REO's listed in Loudoun have been bought and removed from the MLS. How can current listings of REO's have any relationship to filings? When an REO is bought it is REMOVED from the MLS. You could have zero REO listings.
Tony said, "I am thinking this orderly liquidation of non-performing assets will probably last another 2 years at the current rate."
Again, with the "orderly" liquidation. Ridiculous. It doesn't make business sense and you imply that there is collusion of all the banks to make this happen.
I am thinking that banks will dump their REO's on the market as soon as they process them. Imagine that. No Zionist plot, just normal business practice. They been doing the same thing for decades.
Anonymous -
So, the bank spokesmen and CEO's are lying about holding REO inventory. Man, dude, don't they have a lot of other things to worry about.
Do they have some kind of secret formula they use to put an REO up for sale? No, they don't. They just put them up for sale as soon as possible.
But you sound like a real conspiracy buff. I'd be curious of your take on the events of September 11th, so we can all see what you're really about.
Robert, I will explain it a little bit better so hopefully you get it. This is my last shot. In order for an REO to be sold it has to be listed somewhere for sale. That is called a listing. In a calendar month, a certain number of REO properties are listed in the MLS. In Loudoun County, almost all of the REO properties are listed in the MLS. Now, during the same calendar month, there are filings with the courthouse regarding foreclosures. During the past 9 months, there has been 4 foreclosure recordings for every REO listing. Hopefully, that was simple enough for you to understand.
And just for the record, the only one who mentioned a conspiracy was you. But if the Treasury can round up 19 CEOs of banks and make them all take TARP money even if they didn't want it, don't you think they can tell them to hold off on foreclosures for 6 months? And during that 6 months the government just so happened to change the accounting rules in favor of the banks. Imagine that.
Robert, it must be nice living in your little fantasy world where everyone plays nice and nobody is bad.
Actually, Tony, that does makes sense. But, you said, "REO listings" as in the present tense, not listed as in the past tense. But you can brush up on that. Strunk and White. It'll do you some good.
The problem with your theory of the banks "orderly" liquidating is that it isn't public knowledge. You reference TARP allocation, but that was disclosed in every newspaper the next morning.
Of course, the government could be doing it without our knowledge, but highly unlikely. But maybe you are smarter than every business reporter at the Wall Street Journal, IBD, and Barron's. Who knows?
Tony,
By "filings" at the Courthouse are you talking about recordation of Substitute Trustee or are you simply talking newspaper ads? Or, are you saying completed sales filed with the Commissioner of Revenue.
There is a great variance in numbers for the above three.
Robert, I got a lot of bones to pick with what you just posted, but lets go back to what I asked, but you didnt answer.
As our new friend Tony stated, if they sold all REO asap, they would be insolvent and taken over. Assuming for the moment this is true, you said, instead of lying, they just wouldnt say anything.
I then pointed out, imagine some guy like Dick Fuld on CNN Money. After 3 or 4 questions on his operations, he is asked "what are you doing with your REO"? Does he
(a) take your suggestion and sit there silently.
OR
(b) state "we are selling it as quickly as we can"
OR
(c) state "we arent selling it as quickly as we can because if we did we would be insolvent"
Now the language does not have to be exactly as posited in A B or C above, but clearly you understand where I am going with this. So let me ask you, again, which of the 3 is most likely to be their position?
Tony - thanks again for your response.
Tony, You suck! Just kidding. I warned you about getting into the fray here. ;-)
Thanks for chiming in.
CRT, Your secret is safe with me. No plans to post your email for the world to see. Heck I own RealtorSpam.org to fight spammers.
Tony,
Thanks so much for the insights. That was very clear and illustrative. (Don't worry about Robert, he has his own ax to grind.)
My take-away from this is not to worry that the REO deals that are around now are going to suddenly dry up. If an area has significant short-sales and REOs now, it will probably continue to do so for at least a year maybe longer. Given that the area I'm looking in is already within spitting distance (10-20%) of prices that I think are sustainable by local incomes, I'm perfectly okay with a constant slow trickle of listings for me to sit back and be picky about actually jumping on, waiting until the spring demand surge slows down, or a house that's too good to pass up comes along. I'm sorry for the many people on this blog who are looking in areas where prices don't reasonably line up with incomes and rents. More patience will be required, but your time will come. (easy for me to say)
Anonymous -
Answer: b - he will say they are selling as quickly as they can. Which is the truth. He wouldn't flinch.
You are the one that has to prove he is lying. Give me a credible source that says they are holding inventory for "orderly" liquidation, like Tony said.
If there is a plot for this "orderly" liquidation, wouldn't that imply that there is collusion with all of the major banks to execute such an operation? That would be illegal.
Sure, it's possible, but what's likely happening is that they are following their business practices of processing REO and putting them on the market as soon as possible. The banks have always done REO's, it's just a glut of them now.
And then think about these bank managers that are holding REO inventory waiting for the right moment to list them. Do you really think they are trying to "time" the real estate market. If they are, then what criteria are they using to dump REO's? Highly unlikely, but again possible and illegal.
TBW: "If I had a crystal ball and it said home prices will remain at current levels for the next five years (or increase) I'd be ecstatic and go out and buy something. It's with a lot of annoyance that it appears I'll probably have to wait until Fall 2010 instead of Fall 2009 to buy. Or maybe even 2011."
Same here. I am just really really pessimistic about the long term outlook. I see this market manipulation as doing nothing but providing short term "relief". In other words, trapping new buyers into the same pit that bubble buyers are in.
Tony, I really appreciate your insight. I don't think it's a conspiracy theory at all, and it makes sense from several perspectives (of course, as a potential buyer, certainly not mine!). Regarding Robert, you're just wasting your time. He accused me of being a conspiracy theorist for saying there was a several-month long moratorium on foreclosures. How one can get any real information through a skull that thick is beyond any current medical capabilities. Please keep us updated, your views are invaluable.
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