Thursday, October 11, 2007
By looking at down markets in the late '80s and early '90s, we can make some observations on past real estate declines.
Price declines are relatively shallow. During most downturns, prices tend to decline in the range of 3-6 percent annually with cumulative declines of less than 20 percent. Los Angeles was the exception in recent history, experiencing a cumulative decline of more than 27 percent. Compare this with the NASDAQ index, which was over 5,000 at the height of the dot-com boom in 2000 and is still at only 2,791 seven years later. Of course, because houses are a highly leveraged purchase, a percentage decline even in the teens can eliminate your equity entirely if you bought too close to the market peak.
Down markets can be lengthy. Market observers frequently say that the market will turn up "next year." This is often wishful thinking. Past downturns have persisted for a number of years, not just one or two. Real estate markets are often characterized as "sticky downwards." That is, when home sellers don't get the price they want, they opt to take their properties off the market and wait. While this behavior may cushion the downturn in prices short term, it tends to extend the duration of a market correction.
The big picture matters. Most downturns are a manifestation of larger economic conditions. Generally a national or local recession with substantial job losses drives real estate corrections. The current downturn in Detroit has been the most severe of any major market because of auto industry-related job losses. Many real estate markets declined during the national recession of the first Bush presidency in the early '90s. In the case of the Los Angeles market decline, the downturn was extended and deepened by an earthquake and race riots.
So what does this mean for real estate professionals in the current downturn? Be prepared for the weak market to last a fairly long time.
In our view, prices are likely to continue to decline by low- to mid-single-digit percentages annually for the several years in the high-cost markets that had the greatest run-up. The wildcard is a recession. If that happens, we will take another downward lurch before we gradually settle to a bottom and begin the upcycle again.
CLICK ON LINK ABOVE TO SEE CHART
2006 - 1,286 closings
2007 - 684 closings
Wednesday, October 10, 2007
1. The Federal Reserve has created a storm through interest rate manipulation: The Fed artificially manipulated the housing market to drive-up home prices thus creating a financial storm and volatile market for existing and wanna-be homeowners. First the FED first began lowering interest rates to 40-year lows in 2002 thus creating and artificial demand for housing as an investment. Then the FED started raising rates.
2. Those interest-only and ARM mortgages are now resetting. Payments for millions of homeowners are shooting upward due to exotic mortgages coming due. Some bubble markets have been upheld by such exotic mortgages over the past few years with use of "creative financing" accounting for up to 75% of loans in recent years, in many areas. In 2007 America will see over 1 trillion dollars worth of adjustable loans reset. Many believe that in late 2007, we will see the largest and fastest home price crash of ALL-TIME!
3. Rents haven’t kept up with house prices or mortgage payments. New landlords cannot charge enough rent to cover costs of owning a bubble home due to higher taxes, insurance, and interest payments. Increasingly, people are better off renting than buying. It all adds up to less demand.
4. The investors are running for the exits Investors and flippers are now seeing negative returns and many markets!. Hundreds of markets are seeing prices fall. Its hard to make money flipping houses when prices are dropping.
5. Inventory is rising with a fury. Too many sellers chasing too few buyers means falling prices. Investors are starting to panic while holding costs and higher taxes are taking a toll on many homeowners. Inventories in most major metropolitan have begun to race upwards and some areas are now sitting atop all-time high inventories of homes for sale!
6. Lending standards are getting tougher. It used to be that anyone with a heartbeat could get a loan. After the sub-prime bust and foreclosure storm began to hit, many lenders tightened their standards thus locking millions of lower credit profile borrowers out of the market. The result is even slower sales, inventories rising faster, and prices sinking lower.
7. When the economy sinks, home prices sink. Construction, furniture, and other home dependant industries will start laying-off workers now that the housing market is starting to drop. It has been estimated that 30% - 40% of all jobs created in the past few years have been housing related. The slowing and lay-offs will have a snowball effect on housing and the economy to push it over the edge!
8. Home values have started to drop all across the country. It's difficult to keep up with all of the news about falling home prices. Literally hundreds of markets are seeing price declines now. When the general public finally realizes that home values are falling, all sane buyers will be scared away and then the crash will really begin!
9. The Public is becoming aware of the Real Estate Bubble Crash to come. Bubble blogs and news pages like http://www.homepricebubble.com/ are waking people up and cutting through the realtor hype and controlled media propaganda!! This awareness should alert more people not to mortgage their futures away because some realtor says it's a good time to buy (and a good time to make commissions off of your indebt-ness!!)
10. Foreclosure are on the rise.When home values begin to stall and fall people can no longer borrow against the equity in their homes. Owning an expensive home also increases other costs such as insurance, property taxes, and more. When homes can no longer be used as ATM machines, foreclosures start to increase. Foreclosures are increasing in most areas now and in some areas they are doubling and tripling from last year!
This guy had it right; the book was written a few years ago.
are you MISSING the Boom? I am really missing it; wish it were still here.
By Mary Umberger Tribune staff reporter
October 5, 2007
Foreclosures class comes to order -- in the bustling public aisles of a records room in the Cook County Circuit Court clerk's office.Mary Richardson hands three rapt students their "textbook," a 35-page printout, and starts the day's lecture on how to make money out of the labyrinthine process of real estate foreclosure.It's a hands-on tutorial that costs $249 and opens the door on a hunch many people harbor: Is there a whiff of opportunity to be found amid the gloomy news about America's rising tide of home foreclosures?
Bargain-hunting investors and real estate agents looking to turn a six-year high of mortgage delinquencies into profits are spurring demand for "foreclosure schools," which are designed to shed light on the jargon-filled and sometimes bewildering world of preforeclosures, REOs and auctions.These are not the get-rich-quick, sales rally-type gatherings hosted by the likes of Donald Trump. They are small seminars that focus on the gritty process of combing public records and running the numbers.As the daylong seminar progresses, Richardson's three students will attend two auctions and be assigned the task of untangling title and tax encumbrances for a given property at the Cook County Circuit Court's Chancery Division.
It's a taste of the laborious homework that almost invariably goes with the process.Richardson, an investor based in Park Ridge, is hardly the only foreclosures professor in town. A handful of investor veterans are her competitors, each catering to the growing demand from aspiring entrepreneurs and real estate agents."My classes have been full; I'm getting calls all the time," said Marki Lemons, a Chicago real estate agent who for several years has conducted periodic, daylong classroom sessions on foreclosures at her Keller-Williams Realty office on the South Side and for members of the Chicago Association of Realtors.
Lately, she said, demand is so strong for the two dozen or so seats at each association seminar that the trade group has decided to open the classes, at $135 each, to the public.Depending on who's doing the teaching, the format at Foreclosure U can vary. There are full-day, sit-down lecture sessions such as the one Lemons conducts, and then there are hands-on, walk-through, sort-out-the-paperwork tutorials, the bread and butter of Richardson and others.
Those tend to be small, kept to one to four students, to navigate the crowded public areas of government offices where real estate records are kept, the teachers say.T.J. McKinney owns Illinois Foreclosure Listing Service, which sells lists of such properties to subscribers. He began teaching occasional classes about a year ago and has had about 70 students. He said that as the rate of filings goes up, so do the inquiries."There's more interest, absolutely," McKinney said. "Everybody is talking about foreclosures."The topic is hard to miss.
As the real estate market sags and the mortgage industry reels from weeks of revelations about slapdash lending practices, headlines are filled with mounting foreclosure stats."There were 28,000 foreclosure filings in all of last year, and now we've already had 28,000 in Cook County through the third quarter of this year," Richardson said.It's a call to action for bargain hunters, though a taste of reality can be sobering, the teachers say."I give them a realistic picture, that they're not going to get a house for 40 cents on the dollar," said McKinney. "If you can get a house in the preforeclosure process [before the home is auctioned], the reality is maybe you're looking at a 15 percent discount" from retail.
Foreclosure filings are up about 30 percent in Cook County, he said. "While there's more quantity now, there's less quality."He and other instructors say many of these foreclosed homes are born of mortgages based on shaky appraisals or may not be worth the face value of their loans. Unraveling the property taxes that may be owed and getting a clear title, a firm grasp on who owns a property, can be difficult, they warn."There's a big 'buyer beware' sign on the foreclosures market," said Richardson, whose Park Ridge firm, Personal Investment Corp., also sells foreclosure data. "There are so many misconceptions with beginners coming into this, it's frightening."
Doug Crowe, whose Lombard firm, Springboard Group, teaches multiweek classes on real estate investing, said the days of "flipping" -- buying a home, fixing it up and reselling quickly for profit -- are mostly gone because the overall market is so soft."I talk to students and say, 'OK, if you can get a good deal at a foreclosure, who are you going to sell it to?'" said Crowe, whose classes tend to focus, instead, on finding homeowners in preforeclosure who want to sell, then finding tenants for the properties.He discourages neophytes from foreclosure auctions, a process he said can be full of land mines for the uninitiated.
Joe Varan is a Woodridge broker and investor who says he has bought more than 1,400 homes at auction since 2002. The bargains are no longer plentiful but still can be found, he said."Let's say you bought a property for about $100,000, and you might sell it for $150,000. With transaction costs, the costs to fix it up, broker commissions, etc., you might net about $10,000," Varan said."Every once in a while, you make a killing, buying for $100,000 and selling for $200,000. But then every once in a while you get a property that you lose your shirt on."He agreed that foreclosure auctions can be fraught with legal complexities, and each sale requires significant research."I learn, every day, some new twist or angle," Varan said.
Another alternative, Crowe said, is to cultivate relationships with lenders who have foreclosed on properties, known in the industry as real estate owned, or REO. However, he said, the competition is stiff, and lenders generally aren't unloading the homes at a significant discount.The teachers say that as the flippers wane, their places in class are increasingly being filled by real estate agents."They don't know the back end of the market," said Doris Villegas, whose company, ForeclosureOp.com, teaches half-day seminars on title searches.
Ruthie McPhee-Gribb, a Century 21 agent, took Richardson's class Monday. She said she is hearing from homeowners who are behind in their mortgages and looking to sell before they are buried any deeper."The more I know about the process, the more I can help them," she firstname.lastname@example.org
Most people think of their home as an investment – not merely a shelter from the cold. But that is merely an illusion. As more homeowners with subprime mortgages and adjustable-rate mortgages enter into foreclosure and lose their homes, we are beginning to see how these unfortunate circumstances affect all homeowners. In his recent Elliott Wave Theorist, Bob Prechter describes what happens when banks decide to sell foreclosed home for cents on the dollar.
Excerpted from The Elliott Wave Theorist by Bob Prechter, September 2007
Now ask yourself again, would the Fed want to own mortgages on homes it would likely have to re-possess and then refurbish, re-sell or rent out? No way. Of course, the headaches [of holding foreclosed properties] lead banks to contemplate rapid sales to clean the books. Such decisions have implications for the entire market, even to the point of devastating the poor schlubs who can afford their mortgages:
“Dumping foreclosed properties back out on the market in a desperate manner actually worsens the situation because all your other borrowers, the ones who are paying their mortgages on time, are going to see their equity disappear as the fire-sale prices drag down everyone’s values,” HSH’s Gumbinger said.
Can you see in these words the seeds of another aspect to the downward spiral? As house prices fall, financially sound mortgage payers will find that their mortgage payments constitute a higher and higher percentage of the value of the house, becoming ridiculously high. Then when the economy contracts, even these conscientious payers may find themselves out of a job and unable to continue the mortgage payments, even if most of the house is paid for. They were responsible people (within their limits of knowledge), but they will lose their homes anyway.
A home may seem to have some investment advantages, but all of them are artificial, having been created by government: (1) you get a tax break, and (2) prices tend to rise through inflation. But any purchase or investment that the government supports artificially will eventually hurt the intended beneficiaries. Thanks to government subsidies and inflation, the housing market grew disproportionately, and now too many people are stuck in homes they cannot afford. Thanks to government subsidies, too many people own gas-guzzling SUVs weighing over 6,000 pounds, the size above which the government offered tax breaks, and now they are stuck with exorbitant gasoline costs. Thanks to government subsidies, some people are now investing in corn to make ethanol. Do you think that gambit will end any better?
by Alan Hall
Is the party winding down for the American economy? If empty condo towers, leveraged loan auctions, vacant strip malls, steeper declines in home sales and vapid political discourse are indicators, then maybe it is. But wait… vapid political discourse is a constant, right?
A few snapshots:
One: Today's CNN headline says, " Existing home sales expected to drop 10.8%." The National Association of Realtors made their eighth consecutive lower forecast for existing home sales and says new home sales should finish 2007 at a ten-year low. The article begins with bad news and ends with a rosy description of selected markets and an upbeat forecast, much like I once described my homework to my mom.
Two: Good news first on this item -- Wall Street banks happily sold $30 billion of the highest quality portions of leveraged buyout loans, even though they lost money. Now, they merely have to figure out how to quickly dispose of the remaining 90% of the LBO loans in the pipeline. If they don't sell fast, banks could get stuck with hundreds of billions in loans for months, risking a fire sale and major losses.
Three: All bad news on this one -- People are walking away from $80,000 and $130,000 deposits on condos in Miami and Las Vegas. Others who placed deposits -- believing they could flip the properties before closing -- are hiring lawyers to extricate them from deals. “In this market downturn, even the most successful developers with the best projects and the best geographic locations are going to take hits.” (New York Times)
Four: Bad news first again -- U.S. strip-mall vacancies hit a 5 1/2-year high as consumers cut back and renters vacate. The arteries of suburban America are a little shabbier, lonelier and quieter. At the end comes the good news, the CFO of an Ohio strip-mall developer says, "...we are still cautiously optimistic." (WSJ)
Meanwhile, the two political parties generate record funding to run on the same old stories they've used for decades. One party espouses low taxes, fiscal discipline, less regulation, free trade and government as the problem. The other offers populism and government as the solution. The environment has changed but the responses have not. Both seem ready for war-as-usual.
Speaking of war, that other albatross of bear market psychology, the U.S. Army is considering several names for its modernization effort, the $200 billion Future Combat Systems. Wired.com asked its readers for suggestions, and when the votes were tallied, the three-to-one favorite was Battle-Oriented Optical Networking Data Operations Ground-Geared Linkage Elements, or BOONDOGGLE.
Like the real estate bust, leveraged debt and political somnolence, the boondoggle acronym might be funny if it weren't so serious. To write or read about the above topics is one thing, to be subject to them is quite another.
I wanted to use this as a forum to share information regarding the foreclosure real estate market. I think we all have thoughts and ideas about what is happening in our industry but we share them on an ad-hoc basis. This blog may help unravel some of the market's mystery. It will bring out some trends that you may not otherwise see.
I invite you to share your thoughts, ideas, experiences and insights...
- Why a "buck over" blog?
- Interesting Article: America After the Party?
- Interesting Article: How Foreclosures Can Affect Y...
- When will the market turn?
- What is a property worth?
- Class open on foreclosures
- How To Buy 200 Houses A Year: By Peter G. Miller
- Interesting Links
- Interesting Blog Post I found: Ten reasons why the...
- Housing Stats
- Change in same month previous year. The market ch...
- Foreclosure Sales Scheduled
- Market Stats for the last 7 days as compared to pr...
- A Look At Past Downturns
- ▼ October (15)