Since the real estate downturn began four years ago this month, I have often wondered what the bottom would look like, and if we would recognize it when it came. Like any macro-economic occurrence, we may only recognize the shift in hindsight. I am convinced that while the worst may be over, unemployment alone will result in more distressed home sales over the next couple of years.
Here is why I think we still have a way to go:
- Interest rates are ticking up and new fees are being charged.
- The HVCC or Home Valuation Code of Conduct is kicking in.
- Prime fixed-rate mortgage default rates are trending up.
- Re-defaults are rising after workout plans fail.
- Foreclosure moratoriums expired in March.
- Case-Shiller Home Price Index continues to show a decline in home values.
Some signs we are closer to the bottom than we were 30 days ago:
- The Obama Administration is coming out with a standardized short sale process.
- High end home sales continue to crash and refinancing jumbo mortgages is next to impossible.
- The $8,000 first time buyer tax credit is working – and may be increased by the end of the year.
On the interest rate front we were seeing sub 5% 30 year fixed rates for most of this year. Rates are as high as 5.75% now. In addition Fannie and Freddie are adding on some new fees to their mix(s). According to the Los Angeles Times in an April 18, 2009 article, “borrowers are being hit with extra fees of 3% to 5% because of the type of property they want to buy or refinance, their credit scores, or the size of their down payment.”
Some major lenders who sell loans to Freddie and Fannie are tightening their underwriting standards beyond what Freddie and Fannie require. New credit score minimums and down payment requirements are going up. Financing condominiums is getting both harder and more expensive across the board further depressing markets like south Florida.
On the appraisal front, Fannie and Freddie are now requiring a ‘market condition’ report adding $45 to $50 to the cost of an appraisal. The Home Valuation Code of Conduct is posing new hurdles as well. Mortgage brokers can no longer order appraisals directly but must utilize third party appraisal management companies. While there are clearly good reasons for this approach, the net result is added cost. There is also the issue of appraisers now working in markets they are unfamiliar with affecting the accuracy of evaluations.
Diana Olick of CNBC.com ‘Realty Check’ reported on May 28th that prime mortgages have “finally leapfrogged those nasty subprimes to take the lead in the race to foreclosure.” Almost half of the increase in foreclosures in the first quarter of 2009 were due to prime mortgages. Many of these borrowers are educated professionals adversely impacted by the current job market. However, others simply were living beyond their means and exhausted their savings and maxed out their credit cards. Loan modifications will not help these people ultimately bringing new inventory to market.
What about the highly publicized work out plans sponsored by Hope Now and others? Many borrowers are defaulting on loans that have already been modified. For many if not most, loan modifications and the foreclosure moratoriums instituted in late 2008 that expired in March 2009, simply delayed the inevitable. In addition, it is estimated that 40% of homes in foreclosure are already vacant with no hope of a loan modification changing the outcome. Many borrowers who are upside down on their mortgages continue to walk away.
Finally, and strictly by the numbers, the housing bust continues. According to the latest Case-Shiller numbers, home prices are off 36% from their peak in 2006. (Where we are in Ohio, our peak was June 2005.) Regionally of course there are disparities. The boom areas like Florida, Nevada and California are way off compared to Texas for instance.
Signs of a Bottom?
All of the above in my opinion mean extended opportunities for real estate investors – but for how long? Here are three points that may signal that we are approaching a floor on what we can buy houses for, but a real upswing in what we will be able to sell them for going forward.
On May 14th the Obama administration announced incentives and standardized procedures for short sale under the Foreclosure Alternatives Program. Why is this news and why does it point to a bottom? To date, banks have been unwilling or unable to complete short sales in a timely manner resulting in more REO inventory hitting the market. This could tighten up inventory over time resulting in higher prices for distressed property.
In addition, the Making Home Affordable plan announced in April includes provisions for including second mortgages in loan modification programs. While, the default rates on previously modified loans are running as high as 46%, this common sense approach to helping people who want to stay in their homes do so, makes sense to me. Again, this could reduce the number of distressed properties coming on the market over time.
High end home sale deterioration means greater demand for lower to mid-priced housing stock where most investors we work with specialize. It is unclear where the demand will come from in the future for these ‘McMansion’ type properties, located well beyond urban centers of commerce – especially if they cannot be financed. Regardless of what happens to these neighborhoods, some of these property owners will walk away voluntarily or be forced through foreclosure to find more affordable housing closer to where they work.
Finally, the first time buyer tax credit is working and lobbyists from many corners are pushing to extend the credit beyond the December 2009 deadline. In addition, there are calls to double the size of the credit and make it available to all buyers. Two stats should be of note to investors. One, close to 70% of all homes sales this year have involved distressed properties. Two, fully 50% of all purchases in the last 90 days have been made by first time home buyers. This trend will continue in my opinion into 2010. This type of demand will ultimately absorb existing inventory and improve the supply and demand ratio.
So short term, six to nine months we will see a tsunami of new REO inventory based on 2008 / 2009 foreclosure moratorium expirations, and the effect of job losses on prime borrowers. Simultaneously however, we will see demand for affordable housing rise, and government policies stimulate the housing market. We should see values begin to rise in 2010 and 2011 as demand begins to out pace supply.
Obviously, there is enough turmoil in the market to ensure opportunities for investors will remain for the foreseeable future. On the other hand, there is reason to believe wholesale and REO prices will begin to moderate sooner rather than later. If you have been waiting on the sidelines for the market to bottom, it may be time to go back to work.
What are you seeing where you are? What are your predictions for your market or the country as a whole? We want to hear from you at www.MyRealEstateLifeOnline.com.
