Foreclosures
House Prices: The Impact of Supply and Demand
For some time now, we have attempted to shed light on the fact that pricing in today’s real estate market will be determined by the concept of ‘supply and demand’. If supply continues to increase and demand softens (or even remains constant) prices will continue to fall. Even the National Association of Realtors (NAR) has acknowledged this to be true.
The supply of inventory in the real estate industry is defined by the current months’ supply of homes that is available for sale. There are no steadfast rules that will apply to every category of housing. However, here is a great guideline by which to go:
- 1-4 months’ supply creates a sellers’ market where there are not enough homes to satisfy buyer demand. Appreciation is guaranteed.
- 5-6 months’ supply creates a balanced market where historically home values appreciate at a rate a little greater than inflation.
- 7-8 months’ supply creates a buyers’ market where the number of homes for sale exceeds the demand. Depreciation follows.
Where do we stand today?
According to NAR’s most recent Existing Sales Report, there is currently a 10.5 months’ supply of homes for sale. We can see, based on the guideline above, we are in a buyers’ market and that prices will continue to soften. The other statistic we must watch is the number of months’ of shadow inventory which will be coming to market.
CoreLogic just released their November report (which covers August). They estimate shadow inventory:
… by calculating the number of properties that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders and that are not currently listed on multiple listing services (MLSs). Shadow inventory is typically not included in the official metrics of unsold inventory.
The report showed that shadow inventory jumped more than 10% in the last year, pushing total unsold inventory to 2.1 million houses.
That represents another 8 months of supply.
The Wall Street Journal reported that some analysts have said CoreLogic estimates look rather low.
Laurie Goodman, senior managing director at Amherst Securities Group, has warned that as many as seven million homes could end up in banks hands unless more aggressive modification regimes are put in place.
Barclays estimates that another 3.76 million homes are either in the foreclosure process or are at least 90 days delinquent but not yet in foreclosure.
Bottom Line
Most industry experts are projecting just that – an additional fall in prices of between 5-20%. Mark Fleming, chief economist for CoreLogic commented:
“The weak demand for housing is significantly increasing the risk of further price declines in the housing market. This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”
Shadow Inventory & How It Effects Our Market
There appears to be some confusion regarding the amount of shadow inventory that currently exists and the impact it will continue to have on the real estate market. Today, we want to bring some clarity to both of these issues. First, let’s define shadow inventory because part of the confusion is in differing definitions. Originally, the term ‘shadow inventory’ was used by some to define a supposed ‘secret’ inventory; mysteriously hidden by banks from their investors and the general public. This definition caused banks to come forward and announce that they were not holding a ‘secret’ stash of foreclosures.
Those announcements were misinterpreted by some to mean there was no backlog of distressed properties. That is not what the banks said. There definitely are millions of distressed properties that have been and will continue to be placed on the market. The banks were just explaining that the number and process is totally transparent.
What actually is ‘shadow inventory’?
The most common definition of shadow inventory is given by Standard and Poor’s:
Outstanding properties that are (or were recently) 90 days or more delinquent on mortgage payments, in foreclosure, or real estate owned (REO)—that haven’t yet hit the market.
Let’s look at a graph from Calculated Risk showing that the inventory of foreclosures Fannie, Freddie and FHA currently hold is up 24% in the last quarter:
This does not include the inventories held in the private sector.
Also, there are millions of homeowners that have fallen behind on their mortgage payments. Currently, less than two percent of those who fall behind 90 days will ever make up the difference. Over 98% will become a distressed property in the future.
How long will it take to ‘clear’ this inventory?
The banks are being very cautious in the way they are releasing this inventory. If they release too many too quickly, it will have a major detrimental impact on existing home prices. If they release too few, it will retard the housing recovery which will not fully occur until this inventory is cleared.
The best analogy I have heard was from Buzz MacIntosh from MacIntosh Realtors in Maryland. He explained that the shadow inventory is like a lingering storm. If it rains too hard, there will be flooding. However, we must be willing to accept some rain or the clouds will never clear.
Estimates of how long it will take for this storm to clear range from 40 to 44 months. Housing Wire recently reported:
The shadow inventory of delinquent loans, foreclosures, and REOs stands at 7 million homes, which would take the market more than 40 months to clear, more than three years, according to Fitch Ratings.
What impact will it have in 2011?
Moody’s Anaytics, in an article by Andres Carbacho-Burgos, reported:
While U.S. housing fundamentals have certainly improved since 2008, the shadow of rising foreclosures still looms over the market and is the strongest reason why house prices will fall again in 2011. More than 2 million homes remain in some stage of foreclosure, according to RealtyTrac, and although this number has declined in the last three months, it is likely to rise again in 2011. The annual total of foreclosures, short sales, and deeds in lieu is forecast to peak at 2 million in the next year as well.
Standard & Poor’s analysts think home prices will drop between 7% and 10% in 2011. According to Housing Wire, S&P credit analyst Erkan Erturk said;
Prices will continue to be pressed down as long as the market works through a backlog of distressed properties that remains elevated.
Conclusion
A ‘shadow inventory’ does in fact exist and it will have an impact on the housing market for some time to come. The banks must clear this inventory but are trying to do it systematically so as to have the least negative effect on home prices. Check with a local real estate expert to learn how this may impact your values.
Current Bank Owned Properties In Our Area-Central VA MLS
As of November 18, 2010
October 2010 : 5 States Account For Half Of The Nation’s Foreclosure Activity
According to October data from foreclosure-tracking firm RealtyTrac, foreclosure filings topped 300,000 for the 20th straight month last month as 1 in every 389 U.S. homes received a foreclosure filing.
The generic term “foreclosure filing” is defined to include default notices, scheduled auctions, and bank repossessions. Versus the month prior, filings fell 4 percent, and as compared to October 2009, filings were essentially the same.
As usual, foreclosure density varied by region last month, with just 5 states accounting for close to half of the nation’s repossessed homes.
- California : 14.8 percent of all bank repossessions
- Florida : 14.4 percent of all bank repossessions
- Michigan : 7.3 percent of all bank repossessions
- Texas : 6.6 percent of all bank repossessions
- Arizona : 6.0 percent of all bank repossessions
The other 45 states accounted for the remaining half.
It reminds us that, like everything else in real estate, foreclosures are local.
For today’s Chester home buyers, though, foreclosures represent an interesting opportunity.
Homes bought in various stages of foreclosure are often less expensive than other, non-foreclosure homes and it’s one of the reasons why distressed home sales now represent 35 percent of all home resales. But don’t confuse less expensive for less costly. Foreclosed homes may also be in various stages of disrepair. Getting them into living condition can be expensive.
Your best real estate “deal”, therefore, may be that non-distressed home that’s in sound, move-in ready condition.
If you’re buying foreclosures — or even just thinking about it — make sure you talk with a real estate agent first. Buying distressed property is different from the “typical” home purchase. You’ll want somebody experienced in your corner.
Will Your House Be Worth More This Spring 2011
- Price must be compelling in Chesterfield VA
I was once told a good decision is only as good as the facts. I open this BLOG post with a question for every homeowner who is thinking about selling their home this upcoming spring…if you were to be honest…do you think property values will be higher this spring? This is a question anyone thinking about selling must ask. Should they sell now or should they wait for the spring? Most years that would be an interesting question. There is a belief that many buyers come out in the spring and, with that increase in demand for housing, prices may appreciate. This year is unlike any year in recent memory. Most experts believe there will be continuing depreciation of home values throughout the next 18 months.As I posted on recent BLOG post, there may be a window of opportunity throughout the rest of 2010 as the banks try to straighten out the paperwork on thousands of foreclosures. Once that paperwork is corrected, the flow of distressed properties coming to the market at discounted prices will begin again.
This was mentioned in the latest Home Price Expectation Survey. Robert Shiller, MacroMarkets co-founder and chief economist said this:
“Over the past month, the average projection for 2010 nationwide home price performance improved slightly among our experts, but for each year thereafter it deteriorated. One plausible explanation for this month’s more negative overall sentiment is recent news concerning foreclosure processing questions and the related possibility of extending the supply pipeline.”
Other experts are also reporting that prices will soften next year
In October’s RPX Monthly Housing Market Report, CEO Michael Feder commented:
“We are at a flex point in housing valuation. With record supply, already paltry demand and systemic threats to a possible correction, we remain terribly concerned about forward home prices.”
The very next day, in a special release, Clear Capital reported a “sudden and dramatic” drop in U.S. home prices:
Most recent data shows a two-month 5.9% price decline representing a magnitude and speed of decline not seen since March 2009; similar declines for September and October expected to appear in other industry indices in coming months.
Bottom Line
If you plan to sell within the next year, you shouldn’t wait for the spring market. Price the home at a compelling price to make sure it sells in the next sixty days. I would welcome the opportunity to chat with you about your homes market value.
Foreclosure Activity By Metro Area, Q3 2010
Foreclosures are a big part of the housing market, with distressed properties accounting for 35 percent of all home resales last month, according to the National Association of REALTORS®.
But for as common as foreclosures can be, they remain a localized concern. Data from foreclosure-tracking firm RealtyTrac shows that more than half of last quarter’s foreclosures came from just 19 metropolitan areas, with the Miami-Fort Lauderdale are accountable for the largest number of filings.
A “foreclosure filing” is defined as a default notice, scheduled auction, or bank repossession.
On a per-household basis last quarter, the Las Vegas area was hardest hit. 1 in every 25 households received some form of foreclosure notice.
The RealtyTrac report features other interesting figures, too:
- California, Florida, Arizona and Nevada account for the top 10, and19 of the top 20 metro areas for foreclosures
- Compared to Q3 2009, foreclosure activity dropped in 72 metro areas, including No. 2 Cape Coral/Fort Myers, FL
- Foreclosure activity dropped 1 percent from Q3 2009 in the nation’s 20 most-populated cities
And, despite a 27 percent increase in foreclosures from the second quarter, Utica/Rome, NY posted the lowest foreclosure rate in the nation — 1 for every 8,003 households. The next closest city, Charleston, WV, posted 1 for every 2,600 households, by comparison.
Foreclosures, like everything in real estate, are local. And buying them is “different” from buying a typical home resale. If you’re planning to buy a foreclosed home, speak with a real estate agent with specific experience with homes in foreclosure. Professional advice is helpful.
Now Is The Best Time To Sell And/Or Buy?
Every now and then and seems more like now…I’m asked the question…how can you tell the buyer in the afternoon that this is a great time to buy a home and in the evening tell the homeowner that they have to lower their price in order to sell their home. Wait a minute. How can it be a great time to buy if prices are falling? Am I just saying this to make a sale? Actually, in both circumstances I am 100% correct. Perhaps for the first time in American real estate history, you must buy now and you must sell now. How can this be? Because what is important to the buyer is different than what is important to the seller. Let me explain.
The most important thing to the seller: PRICE
Just about every seller is most concerned with trying to get the best price possible for their home. In order to do that, they must sell now. Banks repossessed the highest number of foreclosed homes in history last month. These houses will come to market at dramatically discounted prices. This is the main reason analysts are calling for another dip in prices over the next eighteen months. The best advice a seller can receive is to sell their home now before these foreclosures come to market.
The most important thing to the buyer: COST
Price plays a part in the buyer’s decision. However, the most important thing to most buyers is the cost – the mortgage payment they must pay every month. That payment is determined by the price of the home AND THE INTEREST RATE ON THE MORTGAGE. Rates are artificially low because of government intervention. That will not last forever.
The National Association of Realtors (NAR) has projected that rates will rise over the next seven quarters. What will that do to the cost? Here are NAR’s projections and what impact it will have on a $100,000 mortgage:
As we can see, the interest rate has a major impact on the COST of the home. Even if prices continue to fall, the cost may not go down if interest rates increase.
Bottom Line
I’m trying to give the best advice I can to every family and/or individual I work with – even if that advice seems to be counter intuitive.
Will Falling Housing Prices Create A Wave Of Defaults?
Strategic default: when a borrower defaults on their mortgage even though they have the financial ability to repay it.
Strategic defaults lead to foreclosures. It is important to realize that an increase in the number of foreclosures will dramatically impact any possible housing recovery. A loss of income or an increase in negative equity (where the house is worth less than the mortgage on the house) are the two main reasons that will cause a homeowner to strategically default.
The Wall Street Journal reported on the impact of negative equity on strategic default:
Most defaults are typically driven by a combination of income shock and negative equity, or what’s known as the “double-trigger” hypothesis. While borrowers who lose their jobs but have equity in their homes can sell and avoid default, those without any equity are left with fewer options.
Are strategic defaults about to skyrocket?
This week, Clear Capital sent out a special release where they reported:
This special Clear Capital Home Data Index (HDI) alert shows that national home prices have declined 5.9% in just two months … This significant drop in prices, in advance of the typical winter housing market slowdowns, paints an ominous picture.
The reason this caught our attention is that the 5.9% equated with a number we recently read on strategic defaults. CoreLogic in their most recent Negative Equity Report stated:
11 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the second quarter of 2010 … An additional 2.4 million borrowers had less than five percent equity.
Almost two and a half million homes were within 5% of negative equity and prices just fell over 5%. Strategic defaults may soar! The CoreLogic report quotes Mark Fleming, their chief economist:
“Negative equity continues to both drive foreclosures and impede the housing market recovery. With nearly 5 million borrowers currently in severe negative equity, defaults will remain at a high level for an extended period of time.”
What about the ethical responsibility to pay our debts?
As the housing crisis has savaged more and more families, there seems to be a growing number of people who now see strategic default as acceptable. According to a recent Pew Research Center survey:
More than a third (36%) say the practice of “walking away” from a home mortgage is acceptable, at least under certain circumstances … two-in-ten (19%) say it’s acceptable and an additional 17% volunteer that it depends on the circumstances.
Bottom Line:
There will be more strategic defaults as prices fall. That will mean more foreclosures which will cause prices to fall leading to more homes in negative equity. An increase in negative equity will create more strategic defaults which will cause…
That is the vicious cycle we must break.
by The KCM Crew
Bank Reposessions Top 100,000 In A Month For The First Time Ever
The number of foreclosure filings rose 3 percent in September, according to foreclosure-tracking firm RealtyTrac. The term “foreclosure filing” is a catch-all word for housing, comprising default notices, scheduled auctions, and bank repossessions.
September marked the 19th straight month that the number of filings topped 300,000, and the first month in which 100,000 repossessions were logged.
As usual, a small number of states dominated the national foreclosure figures, accounting for more than half of all repossessions.
- California : 17% of all repossessions
- Florida : 13% of all repossessions
- Michigan : 7% of all repossessions
- Arizona : 7% of all repossessions
- Texas : 5% of all repossessions
- Georgia : 5% of all repossessions
Thankfully for home sellers, mortgage servicers appear to be metering the pace at these newly bank-owned homes are made available to the public. RealtyTrac notes that, in doing so, servicers prevent “the further erosion of home prices”.
That said, distressed properties still sell at a steep discount.
In the second quarter of 2010, the average sale price of homes in the foreclosure process was 26 percent lower than the average sale price of homes not in the foreclosure process. It’s no surprise, therefore, that, based on RealtyTrac’s preliminary data, 31 percent of all homes sold in September were “distressed”.
There’s lot of good deals out there, in other words, but they come with certain risks.
Buying a foreclosed home is not the same as buying a non-foreclosed home. Specifically, you’re buying from a corporation and not from a “person”. Contracts may vary, and so may terms.
Therefore, Chesterfield home buyers — even experienced ones — should talk with a real estate agent before making an offer. It’s important to understand the foreclosure-buying process.
Foreclosure Moratorium: Latest in the Debate
About half a dozen articles and editorials have come out in the last two days cautioning against the federal government imposing a national moratorium on foreclosures while banks review their processes. They’re summarized here for informational purposes only.
The Politics of Foreclosure, Wall Street Journal, Oct. 10, 2010. The foreclosure problem isn’t about whether some home owners had their homes wrongly foreclosed upon (there’s been no evidence of that to date) but to what extent banks were taking short cuts on foreclosure procedures in states requiring judicial foreclosures. Banks need to conduct their reviews and correct their processing mistakes, but talk in Congress about imposing a national foreclosure moratorium would unnecessarily disrupt the housing market at a time when it needs to find its bottom and move on.
SIFMA: U.S.-Wide Foreclosure Moratorium Would Be a ‘Catastrophe’, Dow Jones Newswires, Oct. 10, 2010. The Securities Industry and Financial Markets Association (SIFMA) says cases of incorrect foreclosure processing must be identified and addressed on a case-by-case basis but imposing a national moratorium while banks sort things out could be “catastrophic” for the housing market and the economy.
Senior White House Official: Not Sure About a National Foreclosure Moratorium, Washington Post, Oct. 10, 2010. White House Senior Advisor David Axelrod says there are valid foreclosures that would get caught up in a national moratorium, throwing the housing market into turmoil. Meanwhile, congressional leaders are ramping up talk about imposing a national moratorium.
Obama Administration Does Not Support U.S. Moratorium on Foreclosures, Washington Post, Oct. 11, 2010. FHA Commissioner David Steven says it’s crucial to protect households from being foreclosed upon in error but the government must be careful not to overreach and apply a remedy that will make the problem of foreclosures worse, which is what a national moratorium could do.
Foreclosure Freeze Could Undermine Housing Market, Associated Press, Oct. 11, 2010. Widely watched housing economists Karl Case of Wellesey and Mark Zandi of Moody’s Analytics were starting to become relatively upbeat about the housing market before the foreclosure processing problems came to light. Now both of them are concerned that the problem, and the effort to fix it, could set back the recovery. “Anything that slows the foreclosure process is a bad thing,” says Case. Banks say the issue isn’t whether the mortgages should have been foreclosed upon but about the procedures they used, because most people who were foreclosed upon were behind on their payments.
By Robert Freedman, Senior Editor, REALTOR® Magazine
Home Defaults Dropped For The 7th Month In A Row In August
According to foreclosure-tracking firm RealtyTrac, the number of foreclosure filings climbed 4 percent in August from the month prior. A foreclosure filing is defined as default notice, scheduled auction, or bank repossession.
Despite the number of filings surpassing 300,000 for the 18th straight month, RealtyTrac’s report shows some bright spots for housing.
- The number of default notices served per month fell for the 7th time this year
- Foreclosure activity in Nevada, the nation’s leading foreclosure state, is down 25% from last August
- Foreclosure activity has not materially increased since early-2009, pointing to a stabilization
In addition, each of the 10 leading metro areas for foreclosures posted year-over-year declines for the second month in a row.
But, perhaps, most important, is that mortgage lenders and servicers appear to be managing their REO more effectively, making properties available for sale at a measured pace as opposed to flooding markets with new homes. As noted by RealtyTrac, the probable reason is “to prevent further erosion of home prices”.
For home sellers, it’s a welcome development.
Foreclosures have had a hand in falling home values in Virginia and across the country. And, although it’s self-serving for banks to meter the release of homes under ownership, everyday homeowners benefit, too. Fewer homes on the market helps to provide a floor for Fort Lee housing values.
If you have an interest in buying foreclosed homes, be sure to talk with a real estate agent first. The process of buying a home from a bank is different from buying from “a person”. Having the help of a professional should work to your benefit.