The sad reality is that negative equity, short sales, and foreclosures, will likely be around for quite a while. “Negative equity”, which is the excess by which total debt encumbering the home exceeds its present fair market value, is almost becoming a fact of life. We know from theRMLS™ Market Action report that average and median prices this summer have continued to fall over the same time last year. The main reason is due to the volume of “shadow inventory”. This term refers to the amorphous number of homes – some of which we can count, such as listings and pendings–and much of which we can only estimate, such as families on the cusp of default, but current for the moment. Add to this “shadow” number, homes already 60 – 90 days delinquent, those already in some stage of foreclosure, and those post-foreclosure properties held as bank REOs, but not yet on the market, and it starts to look like a pretty big number. By some estimates, it may take nearly four years to burn through all of the shadow inventory. Digging deeper into the unknowable, we cannot forget the mobility factor, i.e. people needing or wanting to sell due to potential job relocation, changes in lifestyle, family size or retirement – many of these people, with and without equity, are still on the sidelines and difficult to estimate.
As long as we have shadow inventory, prices will remain depressed. Why? Because many of the homes coming onto the market will be ones that have either been short sold due to negative equity, or those that have been recently foreclosed. In both cases, when these homes close they become a new “comp”, i.e. the reference point for pricing the next home that goes up for sale. [A good example of this was the first batch of South Waterfront condos that went to auction in 2009. The day after the auction, those sale prices became the new comps, not only for the unsold units in the building holding the auction, but also for many of the neighboring buildings. – PCQ]
All of these factors combine to destroy market equilibrium. That is, short sellers’ motivation is distorted. Homeowners with negative equity have little or no bargaining power. Pricing is driven by the “need” to sell, coupled with the lender’s decision to “bite the bullet” and let it sell. Similarly, for REO property, pricing is motivated by the banks’ need to deplete inventory to make room for more foreclosures. A primary factor limiting sales of bank REO property is the desire not to flood the market and further depress pricing. Only when market equilibrium is restored, i.e. a balance is achieved where both sellers and buyers have roughly comparable bargaining power, will we see prices start to rise. Today, that is not the case – even for sellers with equity in their homes. While equity sales are faster than short sales, pricing is dictated by buyers’ perception of value, and value is based upon the most recent short sale or REO sale.
So, the vicious circle persists. In today’s world of residential real estate, it is a fact of life. The silver lining, however, is that most Realtors® are becoming much more adept – and less intimidated – by the process. They understand these new market dynamics and are learning to deal with the nuances of short sales and REOs. This is a very good thing, since it does, indeed, appear as if this will be the “new normal” for quite a while.
Short sales shot up 19 percent between the first and second quarters, with 102,407 transactions completed during the April-to-June period, according to RealtyTrac. Over the same timeframe, a total of 162,680 bank-owned REO homes sold to third parties, virtually unchanged from the first quarter.
RealtyTrac’s study also found that the average time to complete a short sale is down, while the time it takes to sell an REO has increased.
Pre-foreclosure short sales took an average of 245 days to sell after receiving the initial foreclosure notice during the second quarter, RealtyTrac says. That’s down from an average of 256 days in the first quarter and follows three straight quarters in which the sales cycle has increased.
REOs that sold in the second quarter took an average of 178 days to sell after the foreclosure process was completed, which itself has been lengthening across the country. The REO sales cycle in Q2 increased slightly from 176 days in the first quarter, and is up from 164 days in the second quarter of 2010.
Discounts on both short sales and REOs increased last quarter, according to RealtyTrac’s study, but homes sold pre-foreclosure carried less of a markdown when compared to non-distressed homes.
Sales of homes in default or scheduled for auction prior to the completion of foreclosure had an average sales price nationwide of $192,129, a discount of 21 percent below the average sales price of non-foreclosure homes. The short sale price-cut is up from a 17 percent discount in the previous quarter and a 14 percent discount in the second quarter of 2010.
Nationally, REOs had an average sales price of $145,211, a discount of nearly 40 percent below the average sales price of non-distressed homes. The REO discount was 36 percent in the previous quarter and 34 percent in the second quarter of 2010.
Commenting on the latest short sale stats in particular, James Saccacio, RealtyTrac’s CEO, said, “The jump in pre-foreclosure sales volume coupled with bigger discounts…and a shorter average time to sell…all point to a housing market that is starting to focus on more efficiently clearing distressed inventory through more streamlined short sales.”
Saccacio says short sales “give lenders the opportunity to more pre-emptively purge non-performing loans from their portfolios and avoid the long, costly and increasingly messy process of foreclosure and the subsequent sale of an REO.”
Together, REOs and short sales accounted for 31 percent of all U.S. residential sales in the second quarter, RealtyTrac reports. That’s down from nearly 36 percent of all sales in the first quarter but up from 24 percent of all sales in the second quarter of 2010.
States with the highest percentage of foreclosure-related sales – REOs and short sales – in the second quarter include Nevada (65%), Arizona (57%), California (51%), Michigan (41%), and Georgia (38%).
States where foreclosure-related sales increased more than 30 percent between the first and second quarters include Delaware (33%), Wyoming (32%), and Iowa (30%).
By now, most Realtors® have heard the rumblings about defective bankforeclosures in Oregon and elsewhere. What you may not have heard is that these flawed foreclosures can result in potential title problems down the road.
Here’s the “Readers Digest” version of the issue: Several recent federal court cases in Oregon have chastised lenders for failing to follow the trust deed foreclosure law. This law, found inORS 86.735(1), essentially says that before a lender may foreclose, it must record all assignments of the underlying trust deed. This requirement assures that the lender purporting to currently hold the note and trust deed can show the trail of assignments back to the original bank that first made the loan.
Due to poor record keeping, many banks cannot easily locate the several assignments that occurred over the life of the trust deed. Since Oregon’s law only requires assignment as a condition to foreclosing, the reality of the requirement didn’t hit home until the foreclosure crisis was in full swing, i.e. 2008 and after.
Being unable to now comply with the successive recording requirement, the statute was frequently ignored. The result was that most foreclosures in Oregon were potentially based upon a flawed process. One recent federal case held that the failure to record intervening assignments resulted in the foreclosure being “void.” In short, a complete nullity – as if it never occurred.
Aware of this law, the Oregon title industry is considering inserting a limitation on the scope of its policy coverage in certain REO sales. The limitation would apply where the underlying foreclosure did not comply with the assignment recording requirement of ORS 86.735(1). This means that the purchaser of certain bank-owned homes may not get complete coverage under their owner’s title policy. Since many banks have not generally given any warranties in their
REO deeds, there is a risk that a buyer will have no recourse (i.e. under their deed or their title insurance policy) should someone later attack the legality of the underlying foreclosure.
Realtors® representing buyers of REO properties should keep this issue in mind. While this is not to suggest that brokers become “title sleuths,” it is to suggest that they be generally aware of the issue, and mention it to their clients, when appropriate. If necessary, clients should be told to consult their own attorney. This is the “value proposition” that a well-informed Realtor® brings to the table in all REO transactions.
At present, banks and lenders own more than 872,000 homes in the United States today. And that number, twice the number of REOs in 2007 and set to grow by around 1 million in the years ahead as current foreclosures move forward, is starting to make a lot of real estate professionals pretty nervous. Although home sales volumes are up, many experts fear that the growing backlog of foreclosures and the necessity of getting them off the balance sheets is going to create a “vicious cycle” of depressed home values that cannot make a recovery until the foreclosure backlog is reduced – and that could take many, many years as some forecasts predict that 2 million homes will be REO properties before the bottom truly hits.
Nationwide, Moody’s analytics predicts that the foreclosure backlog could take three more years to clear and that home values are likely to fall another 5 percent by the end of 2011. However, the firm predicts a “modest rise” in prices in 2012, which has some people thinking that the situation might not be quite as bleak as it seems. However, regional analysis is going to be more important than ever before for real estate investors. For example, while hardest hit areas like Phoenix and Las Vegas are finally starting to work through their backlogs as prices get so low that buyers – both investors and would-be homeowners – can no longer resist, real estate data firm RealtyTrac recently released numbers indicating that New York’s foreclosure backlog will take more than seven years to clear. Currently, it takes an average of 900 days for a property to move through the state judicial system. This means that while New York City may be, as some residents and real estate agents insist, impervious to real estate woes, the state market could suffer mightily in the years to come as those foreclosures slog through the system.
Do you think that a 5 percent drop in price in the coming year followed by “modest gains” sounds terrible, or does that just get you in the mood to buy?