Foreclosures for sale: Big supply, low prices

NEW YORK (CNNMoney) — There’s a three-year inventory of homes in foreclosure for sale, and that’s devastating home prices.

Las Vegas has so many foreclosures that 53% of all the homes sold in Nevada are in some stage of foreclosure, according to a report from RealtyTrac, the online marketer of foreclosed properties.

Foreclosures represent 45% of sales in California and Arizona, and 28% of all existing home sales during the first three months of 2011.

“This is very bad for the economy,” said Rick Sharga, a spokesman for RealtyTrac.

What’s more, the homes are selling at steep discounts, especially so-called REOs, bank-owned homes that have been taken in foreclosure procedures.

The average REO cost on average about 35% less than comparable properties, according to RealtyTrac.

But in some areas, the discounts were ever greater: In New York State, the discount for REOs was 53% during the first quarter. And it was nearly 50% in Illinois, Ohio, and Wisconsin.

10 dirt cheap housingmarkets

Also weighing on market prices are “short sales,” homes where the selling price is less than what is owed by the borrowers. These sales sold at an average 9% discount.

Including both REOs and short sales, Ohio had the biggest discount of any state, at 41%.

There were 158,000 deals involving distressed properties nationwide during the first quarter, less than half the nearly 350,000 during the same period two years earlier.

With the slowed sales pace, it will take three years to burn through the inventory of 1.9 million distressed properties, according to Sharga.

“Even if you look at REOs alone, it will take 24 months to clear them and that’s without any new foreclosures at all coming into the system,” said Sharga.

Advertisements

74.6 percent of homes affordable to median-income households, trade group finds

Housing affordability hit a new high in the first quarter, surpassing the previous high set in fourth-quarter 2010, according to the National Association of Home Builders and Wells Fargo.

The Housing Opportunity Index found that 74.6 percent of new and existing homes sold in the first quarter were affordable to families earning the national median income of $64,400. That’s up from 73.9 percent in the fourth quarter of 2010, and it’s the highest level in the more than 20 years the index has been measured.

“With interest rates remaining at historically low levels, today’s report indicates that homeownership is within reach of more households than it has been for more than two decades,” Bob Nielsen, chairman of the National Association of Home Builders (NAHB), said after the index was issued last week.

“While this is good news for consumers, homebuyers and builders continue to confront extremely tight credit conditions, and this remains a significant obstacle to many potential home sales.”

The Seattle metropolitan area also became more affordable with 67.5 percent of homes within reach of those earning the median income of $85,600. That number is the highest recorded since the index started in the first quarter of 1999.

Before 2009, the national index rarely topped 65 percent, the association said. Last quarter was the ninth straight quarter the index was above 70 percent.

Indiana, Ohio and Michigan dominated among the most affordable metro areas. Among metro areas with populations under 500,000, Kokomo, Ind., was the most affordable area, with 98.6 percent of homes affordable to households making a median income of $61,400. The median sales price in the area was $88,000 in the first quarter.

California dominated among the least affordable metro areas. San Luis Obispo-Paso Robles, Calif., was the least affordable among the smaller metro areas with 47.6 percent of homes affordable to households making the median income of $72,500. The median sales price in the area was $320,000 in the first quarter.

Among metro areas with populations of 500,000 or more, Syracuse, N.Y., was the most affordable to households making the median income of $64,300. The median sales price in the area was $80,000 in the first quarter.

Another New York market, New York-White Plains-Wayne, N.Y.-N.J, was the least affordable among both the larger metros.

Less than a quarter of homes, 24.1 percent, were affordable to families making the median income of $65,600 in the first quarter. The median sales price was $425,000.

In other cities in Washington state, Spokane was the most affordable with 82.2 percent of homes within reach of those earning the median income of $60,300. Olympia recorded 81.8 percent; Tacoma, 78.5 percent; Bremerton-Silverdale, 70.1 percent; Bellingham, 69.7 percent; and Mount Vernon-Anacortes, 60.5 percent.

Source: By Inman News

Commercial Real Estate Slowly Turning Around

Sales and leasing volumes in commercial real estate have turned a corner and are heading up, but because the past few years have been so difficult, the upturn barely feels like one. However, the sector is expected to strengthen more over the next couple of years, NAR Chief Economist Lawrence Yun told commercial real estate practitioners on Thursday at the 2011 REALTORS® Midyear Legislative Meetings & Trade Expo in Washington.

Financing remains a major stumbling block, with little commercial mortgage backed security activity happening, but banks — particularly regional banks — are stepping in with portfolio loans, said Yun.

That’s a bit surprising, because the big-four national banks — Wells Fargo, Citibank, Chase, and Bank of America — are in a far better position to make loans. Not only are they sitting on piles of money, but because they’ve grown to the point where they’re too big to fail, they have a de facto implicit federal guarantee, Yun said.

A big concern looming is inflation. It remains low, about 2.9 percent (excluding energy and other volatile components to the economy), but inflation could rise and hit 5 percent by the end of the year and 6 percent in the early part of 2012, Yun predicted. If that happens, interest rate costs would also rise. For the federal government, a 2 percent increase in rates could wipe out a lot of any deficit reduction steps the government might take between now and the end of the year, because in some analyses, that could translate into $2 trillion in increased debt service payments for the government.

In the individual commercial sectors, multifamily housing has been the standout over the last year. Vacancies hit historically normal levels last year at about 5-6 percent with solid rental rate growth. Look for 4 percent higher rents nationally by the end of this year. That figure could be considerably higher in some first-tier markets like Washington, D.C., where rental rates have been rising at almost a double-digit clip.

Those gains might ease in the next year or two, though, as residential home sales improve. The high rental rate increases could tip the scale for some renters to consider home ownership. Yun has said on other occasions that almost 40 percent of the renter population today has the financial ability to become home owners, but for now are choosing to rent.

In the office market, vacancy rates are expected to decline steadily, from 16.5 percent in the first quarter of this year to 16 percent at the end of the year. Rental rate increases could turn positive for the first time in a while, too, to maybe 5 percent from a negative 2 percent. Offices are benefitting from recent job gains in professional service-type jobs like accountants and lawyers.

Among markets tracked by NAR, New York City has the lowest vacancy rate at a little over 8 percent. Washington, D.C., with its federal government-fueled activity, also has a relatively low vacancy rate. Pittsburgh, which has been steadily transitioning from an industrial city to a high-tech and professional services city, is among the metros with relatively strong office trends.

Industrial markets are also expected to improve, with vacancy rates projected to decline from 14.2 percent to about 12.9 percent at the end of the year. Yun is predicting positive rental rate growth of about 2 percent this year. Los Angeles, with its big Asia import-export trade, has the lowest vacancies at 7.5 percent.

Retail markets continue to struggle, with consumers still retrenching in their spending. In the long run, increased savings by consumers is good, because it boosts household financial stability, Yun said, but in the short term retail properties are getting little relief. Vacancy rates are only expected to improve marginally, from about 13 percent to just slightly better by the end of the year. Even so, the sector might see some improvement in rental rate growth, moving from a negative 1 percent to 1 percent in positive territory by the end of the year. San Francisco is in the best shape among major metro areas with a vacancy rate of about 6.7 percent.

You might not “feel the impact of the recovery,” Yun said. “The hole was so deep, it might still feel like we’re in a hole.”

Source: By, Robert Freedman, REALTOR® Magazine

More Borrowers Have ‘Strategy’ to Defaulting

More borrowers who can afford their mortgage payments are opting to stop making payments and walk away from their homes. But new research sets out to help lenders pinpoint the behavior that makes up these strategic defaulters.

According to research by FICO, these strategic defaulters pay their bills on time, rarely exceed their credit card limits, hardly use retail credit cards, have a reputable credit score, and tend to have a short occupancy in their current home.

“These are savvy people who organize themselves,” says Andrew Jennings, FICO’s chief analytics officer. “This is a planned activity, not an impulse activity.

Since they know their credit scores will be badly hit after they default, they even tend to open up new credit cards in advance to prepare, according to the FICO study.

“Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting on their mortgages because they believe it is in their best financial interest, and because they believe the consequences will be minimal,” Jennings says. Most borrowers who strategically default owe much more on their home than it is currently worth.

But “before mortgage servicers can work effectively with potential strategic defaulters, they must first be able to identify them,” Jennings says.

That’s why FICO is releasing a new technology tool that will help lenders predict the probability of strategic default based on a borrower’s credit score.

“Our new research shows it is possible for servicers to find those at greatest risk of strategic default, both to prevent losses and to prevent borrowers from making a decision that will damage their credit future,” Jennings says.

How Many Are Out There?

Just how many home owners are “strategically” defaulting on their mortgage is difficult to estimate since “strategic defaulters have all the incentive to disguise themselves as people who cannot afford to pay,” according to researchers from the European University Institute, Northwestern University, and the University of Chicago. Yet, researchers have estimated about 35 percent of the defaults in September may have been strategic, up from 26 percent in March 2009.

As defaulters continue to weigh on the industry, housing experts say the real estate market will take even longer to recover since foreclosures drag home prices down.

Source: “‘Strategic Defaulters’ Pay Bills on Time and Plan Ahead, Study Finds,” The Washington Post (April 22, 2011) and “New FICO Technology Predicts Strategic Default,” HousingWire (April 20, 2011)

House Flippers Return, Still Finding Profits

More investors are taking on the risk of flipping homes, despite falling home prices and sluggish real estate markets across the country. But investors say there are still profits to be made in the house flipping business.

Nearly 1 million homes were bought as investment properties in 2010, according to the National Association of REALTORS®, and a record number of buyers purchasing properties with cash currently are flooding the market.

Flipping homes for profit is easier in rising markets, but not many markets are reporting increases in home prices, analysts say. In Washington, D.C., Justin Konz of RestorationCapital says his clients are going through four of five properties a month and are making gross profit margins of 35 percent or higher.

Where to Find the Deals

Flippers mostly are finding their homes through foreclosures auctions, REOs, and short sales. They seek homes at rock-bottom prices that will have low fix-up costs, no more than about 5 percent or 10 percent of the purchase price.

In Florida, where investors are finding it more difficult to flip homes because of the drastic drop in prices and high inventories, flippers are targeting inner-city properties that are being sold at steep discounts. For example, some of houses are selling for $30,000 when they once sold for $200,000.

Perry Henderson, a real estate agent and investor in Austin, Texas, says the biggest opportunities in flipping are the “ugly” houses that have lingered on the market or “old houses that somebody’s grandma lived in for 40 years and didn’t do anything to. Now, she’s passed away and her family wants to sell quickly.”

Real estate investor Brian Fuller, who with partners buys and sells more than 200 properties a year in the San Diego area, says he’s drawn to the “biggest eyesore on the block.” He says they then “ turn it into the best looking house there. We’re helping pull up values in the neighborhood.”

Source: “Vulture Investors Flipping Their Ways to Big Profits,” CNNMoney.com (April 13, 2011)

Foreclosure Activity Drops to 3-Year Lows

New data released from RealtyTrac on Thursday show the foreclosure crisis is easing: Foreclosure notices filed during the first three months of 2011 dropped 27 percent compared with the first quarter of 2010. More than 681,000 homes received a foreclosure filing during the first quarter of 2011.

And while 215,046 borrowers lost their homes, that marks a 17 percent decrease year-over-year.

However, while the improvement may be encouraging, experts warn that the decrease in foreclosure activity is likely temporary.

“The nation’s housing market continued to languish in the first quarter, even as foreclosure activity fell to a three-year low,” says James Saccacio, RealtyTrac’s CEO. “Weak demand, declining home prices, and the lack of credit availability are weighing heavily on the market, which is still facing the dual threat of a looming shadow inventory of distressed properties and the probability that foreclosure activity will begin to increase again as lenders and servicers gradually work their way through the backlog of thousands of foreclosures that have been delayed due to improperly processed paperwork.”

Following this fall’s “robo-signing” scandal, in which banks were accused of processing foreclosures without proper reviews, banks have slowed their pace of foreclosures until they clean up their paperwork procedures, experts say. Otherwise, the number of foreclosures would be much higher for the quarter, says RealtyTrac spokesman Rick Sharga.

Meanwhile, Nevada continues to post the highest rate of foreclosure activity, followed by Arizona and California. Nevada alone had 32,000 properties, or one in every 35, receiving a foreclosure filing.

Source: “Foreclosures Off 30% This Year,” CNNMoney.com (April 14, 2011) and “Processing Delays Cut Foreclosure Activity by 27% in 1Q 2011: RealtyTrac,” HousingWire (April 14, 2011)

Short Sales: 7 Legal Pitfalls

In addition to educating yourself on the ins and outs of these complex deals, you also need a good picture of the legal risks that exist for you.

 1. Misrepresenting tax consequences.

Although it’s true that the federal government passed a law in 2007 directing the IRS not to count mortgage debt forgiven by a lender as income, the provision is limited. It applies only to purchase money; it doesn’t apply to debt on a cash-out refinancing, and it doesn’t apply to second homes. There’s also a dollar limitation, albeit a generous one ($1 million for married couples filing separately, twice that for joint filers). “A lot of associates are telling people there are no tax consequences,” says Lance Churchill, a short sales specialist and trainer who operates in Boise, Idaho, and San Diego. “But it’s a limited law and you just need to be accurate about it.”

2. Misrepresenting how secondary debt is treated.

Practitioners might mistakenly tell sellers that all the house debt is forgiven once the primary lender approves a short sale. But that might not be the case, Churchill says. Holders of second deeds of trust don’t typically forgive the debt. More commonly, they accept a partial payment, like $2,000; and rather than write off the balance, they sell the balance to a collection agency for another few thousand dollars. In many states, these second loans are recourse, so sellers can be caught by surprise when the collection agency contacts them a year later seeking payment of the debt.

3. Acting on inappropriate lender requests for seller contributions.

It’s not uncommon for lenders to go after money that the sellers have in the bank or in a retirement account before they approve a short sale request. They’ll sometimes seek to put the onus on the real estate practitioner to get sellers to sign over a note for the amount they have in the bank as a condition of sale. But in states where mortgage debt is nonrecourse, lenders have no right to the money, and associates that suggest otherwise to the sellers might be later sued for negligence.

4. Breaching fiduciary duty.

Investors are increasingly executing what’s known as a “double close and flip,” a type of short-sale transaction that can leave practitioners exposed to irate sellers who say they got a raw deal. Here’s what typically happens: Investors insist on handling short-sale negotiations with the lender, freeing up their real estate practitioner to concentrate on finding a buyer. During the negotiations, the investors—often without the practitioner’s knowledge—talk the sellers into turning over the deed. Once the practitioner finds a buyer, the investors do a double closing, buying it themselves at a deep discount and then flipping it to the buyer at the listed price, making money on the spread. “The seller might feel he got less than he would have had the associate done his job and not handed over negotiations to the investor,” says Churchill.

5. Providing poor oversight of a loss mitigation company.

Companies that specialize in managing short sales promise to focus on the complicated details of the short sale, freeing up practitioners’ time to find buyers. But if you take a hands-off approach, you can be charged with negligence if a deal falls apart. “A lot of these companies are fly-by-night or have one person who’s overworked,” Churchill says. “Practitioners are coming back a month later to find no one’s even opened the file.”

6. Lacking the required license to undertake loss mitigation.

It often makes sense for practitioners to take a two-pronged approach with clients facing a difficult time paying their mortgage—first trying to help them accomplish a loan modification (for a fee), and then finding a buyer if a modification doesn’t work. But watch out. Depending on your state, you could need a specific license, sometimes called a credit repair license, to earn a fee for helping owners modify mortgage terms. Without having the right credentials, taking a fee for loan modification assistance could be a criminal offense.

7. Facilitating transactions not listed on the HUD-1 form.

It’s not uncommon for investors to offer incentives to sellers to move a deal forward, but lenders typically frown upon sellers who walk away with money when they’re supposedly taking a loss. Investors sometimes work around this limitation by offering to buy something from the sellers at an attractive price, such as a couch for $5,000. Associates who communicate these offers to sellers can get tied into charges of lender fraud because the deals may be deceptive.

Source: By Robert Freedman (April 2009)