REO vs. Economic and Housing recovery in the US

Back in 2006, I was having discussions with a number of brokers about the the impending foreclosure wave that was on it's way, and many scoffed at the time saying I was a "negative nancy" when I predicted that withing a couple of years, at least 2/3 of all real estate sales would involve distressed (REO and Short Sale) properties.

Well as of mid 2009, that came to pass. Let take a look at the next two to three years.

Problem: Due to six years of inappropriate mortgage approvals, millions of home buyers bought WAY more than they could afford, which in turn drove up home prices in double digit annual increases. This can not continue if some 20 to 30 million jobs have been down sized and outsourced off shore. Buyers can't buy, and homeowners can't make monthly payment with no jobs. So in 2006, lenders realizing they had a HUGE problem, tighten the lending requirements back to where they really should have stayed to begin with, and suddenly, no more 125%, "0" down below market rate refi's. Homeowners suddenly had to make the newly adjusted payments and trouble began. In an effort to "SOLVE" the problem, the government suggested that the banks as a gesture of goodwill, conduct a "Holiday moratorium" for the sake of the poor American people starting in November of 2008 under the guise that foreclosures would resume come January. This did not happen. Meanwhile, back at the ranch, the banks were negotiating with the folks on Capitol Hill to secure a change in accounting rules which would allow them to use a "mark to market" system to lessen the impact of the foreclosure losses on their bottom line, which in turn would save their butts with the not so friendly people on Wall Street. So the moratoriums were extended first to Feb, them March and onward until the stream of REO inventory literally dried up. Home values plummeted, and all the folks who had refied or bought a home in the past six years were suddenly upside down on their mortgage. Short sales, long hidden from day to day view, began to arise and with the onslaught of continued job loses, REO's began to build.

Solution: Some two years later, despite the misguided efforts of those Capitol Hill with $800 billion bail outs, $8,000 tax credits for new home buyers, HAMP, HAFA and TARP. The real problem stems all the way back to JOBS. Fix the job situation and people can BUY houses, and home owner can MAKE their house payments. Those folks on Capitol Hill should have used the $800 billion dollars to create jobs, and offer $8,000 tax credit to business for each new permanent full time employee. Because everyone knows, you can get a mortgage without a job. Furthermore, if you want to speed up the economic recovery, you need to speed up the foreclosure proces to flush as many as possible out of the system.

What? Speed them up you say? Why that will further drive prices down.

The answer is 100% Correct. Prices are still 20 to 30% over valued from where they should be when looking a 100 year graph. Dump the houses fast. Get values in line with norm adn see what happens. Having sold houses for 20 years now, and having owned a few personally, the first thing I do when ai buy a new house is fix it up. I buy and install, new kitchens, bathrooms, paint, carpet, furniture, light fixtures, up grade plumbing, furnaces, air conditioners, etc. And the funny thing is, is that ALL of those items are made buy Americans in manufacturing jobs. So in essence, if we speed up the foreclosures, we actually put more Americans back to work? Yes, not only do we increase the number of manufacturing jobs, but also restart the local contractor trades, ost of whom are suffering since most home owners stopped updating their homes several years ago. Contractors pull permits, permit fees help fund municipalities, who in turn can hire more employees. All these newly hired people now can spend money and pay taxes, both of which, in turn, further assist the economic recovery. The longer the moratoriums continue, the longer (and I mean decades) until the recovery occurs.

Home prices are finding the bottom for now

Well after a two year free fall, home prices in some neighborhoods are finally starting to find a bottom. As values have plummeted to below $10,000 in many areas, competition between overseas, out of state and local buyers is causing multiple offer situations and actually pushing up sale prices. It is becoming the norm for multiple offers on almost every new listing, with some buyers paying almost double the initial list price.

The cause of this is easy to explain. First, many lenders including Fannie Mae, Freddie Mac and eight of the major banks have been on a foreclosure moratorium since Nov. 1st of 2008. This has reduced inventory levels by as much a 50% in some areas. This decline in the total number of listings, coupled with a major increase in cash purchasing from out of state and overseas buyers, along with increasing local buyer activity has created a bottom for many different areas in Southeast, MI. Local buyers, who have really been absent from buying activity for the past 12 months, are finally recognizing the excellent values in the local marketplace.

Older listing inventory, much of which is often in very poor condition, and usually priced way over market, is floundering on the market. These homes frequently are suffering from days on the market exceeding 365 days. In order to sell this aged inventory, banks will need to basically donate these to non-profits, bulk them in packages at a major discount, or sell them for $1.00.

As 70% of last years foreclosures have still not yet hit the MLS, I expect when that when a fresh wave of foreclosures is finally released when the moratorium is lifted, values will again begin the march downward towards $1. Per releases by the MBA, 48% of all subprime mortgages are in default or foreclosure, and with the ALT A loans about to come due, a whole new wave of foreclosures is about to wash across the US landscape. Most ALT A loans are in higher value areas, and those areas have been under assault by drastic price declines, so as many as 75% of existing home owners in these areas are going to be severly under water. This will further exacerbate the foreclosure trend as they won't be able to refinance or sell win time.

And don't forget, commerical foreclosures are close behind, and they loans will be high dollar. Continued declines in consumer spending is forcing many retailers to shut their doors, pulling up stakes and abandoning strip malls and other commercial locations that were having hard times even before the market started to fall out.

More foreclosures mean great deals to come

Because of the ongoing decline in the economy and resulting job losses, you can expect to see home prices in the mid to upper prices ranges plummet e.g. $2.5 million dollar house two years ago, will go for $800,000 today, and $700,000 house will now sell for $350,000. The $350,000 houses will sell for $175,000 to $200,000. And $250,000 houses will sell for $100,000 to $125,000. Excellent bargains for those with solid jobs, and who pay their bills on time.

The low end houses, from $5, 000 to $65,000 will actually stabilize from the increasing competition growing between investors, first time buyers and those people displaced by downsizing out of the short sales and foreclosures. These low end prices will become the norm for the next two years, and once again, you can expect to see excellent bargains, many of which will require just minimum fix up.

You can expect that home values overall will continue to decline with the job market. You see, unemployed people don't buy new cars, new furniture, clothes, or spend a lot of money repairing and decorating homes that they don't own. This will further exacerbate the economic downturn and reduce production as consumers scale back spending money they don't have. Since their credit is now severely tainted, they won't be getting much in the way of new credit to spend with either.

As the average income drops with each new round of layoffs and downsizing continues to haunt the landscape for at least two more years, the average wage will drop to below $13.00 per hour which qualifies a buyer for about $65,000 sale price. That means a two income family will qualify for about $130,000 home. Since the average sale price has fallen from $241,000 to $181,000, we have about 24 months more to go before the majority of two income home buyers will qualify.

At that point, which I expect should come right around the middle of 2011, you should expect to see homes sales stabilize and the markets recover. When the average house price falls below $130,000, purchases will begin to increase, which will then create a demand for jobs as industries hire to fill the demand for consumer goods.

Fannie Mae/Freddie Mac Lose Billions in last QTR, and much heavier losses are expected by both. Oops, looks like someone bought some bad loans...And they claim that the current housing market decline is at the mid-point with at least two more years to go...but at the same time we are still in the early stages of mortgage defaults...so will home price really drop another 25 to 35% before bottoming out mid 2010???

Fannie Mae
http://www.reuters.com/article/businessNews/idUSN0835945220080808

Freddie Mac
http://www.reuters.com/article/topNews/idUSWNAB525920080806

The Foreclosure Guy

Fed to bar shady home loans

That is good in itself, but barring shady home loans won't bar uneducated people from trying to get loans or from pulling out all of their home equity to spend it on trips, or frivolous purchases, or paying off credit card balances and then charging up the cards again. Shady loans are only a part of the current mortgage mess. Many people are just plain idiots when it comes to handling finances. Lack of financial education in school is the number one failure of the k-12 system. Sure everyone knows who George Washington is, but no one can balance a checkbook, or calculate simple interest, or even judge the risk factor of an adjustable rate loan that will reset in 3 years.

Gov't Says "Housing Slump may linger until fall"

Really? No! Say it can't be so. Gov't analysts say that it appears that the housing slump may linger until fall, with slow recovery over the next year. Try again, housing demise extends through 2009, mid 2010, and recovery starts somewhere around 2012. That is unless the recession turns into a depression and then it will be somewhere around 2016 before the recovery begins.

Home values continue decline until 2012

With the continued downturn in automotive industry, additional layoffs, downsizing and general decline of the local economy, I am expecting property values to decline an additional 25 to 40% over the next two years. My best guess at this point, is the bottom should fall out somewhere around 2010 to 2011 and home values should begin to trend back up by mid 2012. This is assuming that the recession ends and economic recovery takes place. Should the recession linger, hampered by inflation, or world market factors, the recovery of home prices may be delayed until 2016 or later.