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East Bay Real Estate Focus

Providing Definitive Information for the East Bay Area

By Carl Medford | Agent in Fremont, CA

New flood Of REOs Poised To Hit The Market – 3 Things You Need To Know

“Hope” may be on its’ way, but there’s continued pain in the current forecast as well. Prior to the Obama Administration taking office, lenders were asked to put foreclosures on hold in anticipation of the much touted Economic Recovery Package promised by the new president. This temporary “stay of execution” by lenders has resulted in two significant facts:  


First, the inventory of homes for sale at the bottom of the market has been dropping like a rock.


At the time of year you’d anticipate an increase in homes for sale, numbers are way down.  In Alameda County, inventory of entry level homes 1,500 square feet and smaller is down 41.6% from this time a year ago. At the same time, it’s spring and the beginning of the normal buying season. The number of buyers hitting the streets has visibly increased and, with decreased inventory, they’re actually getting in line to view existing foreclosed homes.


Unlike previous years, however, demand has already been strong for months. Bargain hunters have been out snapping up homes at an unprecedented rate. Actual sales have risen 91% over a year ago. To add excitement to the milieu, REO Listing agents have been setting offering prices artificially low, multiple offers have been pouring in on practically everything, and pending sales have rocketed skyward, up 101% over the same time period 12 months ago.


Second, just because the supply of foreclosures has dwindled to a trickle doesn’t mean we’re done.


In fact, the exact opposite is true. A tremendous backlog of homes pending foreclosure has been building and the effect is similar to temporarily plugging an active volcano. It’s gonna blow. And blow hard. The foreclosure moratorium ended April 1, 2009 and banks have already fired up their foreclosure machines and kicked them back into gear. Les Christie, CNNMoney.com staff writer states, “There is probably even more excess housing inventory gumming up the market than current statistics indicate, thanks to a wave of foreclosures that has yet to hit the market.” Carolyn Said of SFGate.com echoes this sentiment and states that there may actually be hundreds of thousands of “shadow homes” out there that have already been foreclosed but have not yet hit the market.


RealtyTrac® (http://www.realtytrac.com/), the leading online resource for foreclosure information, just released its U.S. Foreclosure Market Report™ for Q1 2009. They state that foreclosure activity (filings, default notices, auction sale notices and bank repossessions) were reported on 803,489 properties in the first quarter of 2009. This is a 9 percent spike from the previous quarter and an increase of nearly 24 percent from the same quarter a year ago. Across the US, one out of every 159 housing units received a foreclosure filing during the quarter.


It gets worse: foreclosure filings occurred on 341,180 properties in March alone. This 17 percent increase from the previous month and 46 percent uptick from March 2008 represent the highest numbers ever recorded by RealtyTrac. And with increasing unemployment, these trends may continue for a while.


Implications? There’s another flood coming, and this may be the largest deluge yet.


Here are 3 things you need to know:


1.    For those eager to see property values rise, hope is premature.


Don’t anticipate property value increases anytime soon. Especially in the upper end of the market. Many of the coming foreclosures will be the ALT-A loans, and they will be on higher priced homes. Couple this with the current lack of funding available to high-end homes and the writing is on the wall. And unlike the original handwriting on the wall that appeared to King Belshazzar of Babylon, Daniel won’t be required to read it: it’s really very clear for all to see (click here to see a relevant post).


2.    An increase in inventory is very good news for first-time buyers.


The recent reductions in inventory have meant multiple offers on almost every starter home that’s been reasonably priced and in good condition. As soon as a new listing hits the market, hordes of buyers descend on it like wasps to a church picnic. This has worsened as more buyers have been flooding into the market in this, the beginning of the peak buying season. I believe we will see the increasing demand begin to satisfy the appetite of first-time buyers and investors and I anticipate that multiple offer scenarios will slow down.


3.    I personally do not believe entry-level single family home pricing will go much lower.


The key words here are “entry-level.” Unlike the high end of the market which is still coming down (click here to see a relevant post), the bottom level has leveled off in most places in the county. In looking at a number of factors, I’ve personally concluded we are very near or even at the bottom for entry-level single family properties.  I know many will disagree with me, but, it’s a free country. These factors include:


· In many places in Alameda County, homes are priced well below the cost to actually build them NOT INCLUDING the price of the lot. This depressed pricing cannot sustain itself very long.


· List prices for REOs have been artificially low because REO listing agents have been playing the “list low get multiple offers” game. They want their list-price to selling-price ratio to be large so they look good to their asset managers. The simple facts are that low-priced listings are getting adjusted back up to where they should be by multiple offers. While it may look like we’re still going down, in many places in Alameda County prices are actually going up. I have the data to prove it.


· I believe that the new wave of REOs into the lower end of the market will fill the void currently in place. If a variable is going to change, I suggest it will be a decrease in be the number of multiple offers being received on any given property, not the prices. In other words, we may see a few offers per property, not the 10-30 we’ve seeing. The fact that multiple offers will continue will, in my opinion, keep the prices up.


· While beset with layoffs across the nation, the Bay Area economy is still stronger than almost any other area in this country. This has always been a resilient region and I believe that trend will continue. Where the economy is strongest, housing retains its’ value the most.


So hang on – this promises to be “Toad’s Wild Ride” revisited. We can only hope it won’t reap as much destruction as the previous wave of foreclosures.

But then, it’s really too soon to tell.



By Steve,  Fri Apr 24 2009, 17:45
Nice post Carl.

Couple things I wanted to mention. You say:

"Unlike previous years, however, demand has already been strong for months. Bargain hunters have been out snapping up homes at an unprecedented rate. Actual sales have risen 91% over a year ago"

I don't really follow Alameda real estate, but it's a similar story up this way. I'd argue "bargain hunters" isn't quite accurate, rather "pent up demand from first-time home buyers who were priced out of the market for years". I don't think these current buyers are seeing "bargains" -- rather "something we can actually buy". I'm not sure how sustainable this segment is. The pool was likely large to begin with but each REO sale drops the pool in size, as the previous foreclosed owner is effectively out of the market for 5 years or so.

I theorize there's a few year's worth of these would-be first time buyers that have sat on the sidelines. As the low-end home prices fall to, say, 60% of peak, a tier of this pool can finally afford to buy. But that pool will run out eventually and low-end supply will build up again, driving prices to, say, 50% of peak where a new tier can afford (presuming interest rates/loan requirements hold steady) and the cycle repeats itself.

So long as the supply of low-end houses continues and wage inflation doesn't occur I can't see how this cycle breaks (for a few years at least, until the foreclosed begin to re-enter the marketplace) until median homes near affordable to median incomes. The NODs seem to indicate there will be a steady supply, and the June 09 CA law to extend the foreclosure process an extra 3 months might as well be a billboard promoting "Walk Away, dump your underwater debt and live rent free for a year!!" to all non-HELOC'ed buyers from 2003-2006 -- suggesting even more REO inventory mid 2010. Not to mention the pent-up sellers of this stuff who've been waiting for a rebound and are going to throw in the towel at some point.

I just don't see how the low-end homes are in the clear. I'll certainly agree that from this point on the mid and high-end stuff is going to take a greater beating. Of note too, as mid-end homes take a hit, does that begin to draw first-timers into that second bracket?

Guess my question is, do you think there are really enough presently-renting households that can afford (and qualify) for $325K homes, or investors deciding that landlording is the best place to stick their retirement, to keep the supply of low-end in check over the short/medium term?
By Monika Kumar & Realty Geeks,  Sun Apr 26 2009, 02:54
Good Info, I thought similar for long but was searching for the "Result of it if does happen" and I feel reading your post I got the answer - with a next hit of foreclosure homes the Numbers of Offers per property may change to 1-3 & that will bring in stability than turbulance like NOW for the buyers being outbid!!
I think we are through further price drop here in DC Suburb of No VA but do need some more homes on the market to get our buyers in.

Nice Post.

Monika Kumar
http://www.realtygeeks.com (tm)
National Realty
By Carl Medford,  Sun Apr 26 2009, 06:03
Based on the number of people we're seeing at every home we visit, I'd say that it is going to be a while before we burn through any new inventory. In addition, since it is now possible in many places in Alameda County to secure a positive cash flow on a rental, many investors are lining up and buying homes in bulk. Wise investors are not buying with the hopes of future appreciation, they are buying homes that pencil now and provide positive cash flow. Any long term appreciation will be gravy.

We currently have a glut of short sales that have been on the market a very long time. I anticipate that many of these are finally going to be foreclosed and that the short sale inventory will begin to tighten. This is going to mean a new flood of ex-owners who are going to need rental housing. With the number of renters increasing, rents are increasing as well. In fact, in many places rents are up sharply. It’s a catch 22: as rents increase, more and more potential buyers are hitting the streets to see if they can get a place of their own, and as the inventory tightens, rents increase even more.

I really believe that we are coming to a point of equilibrium in the lower end of the single family house market – how long it will sustain itself against the flood of new foreclosures is the great unanswerable question.
By Nancy Gray,  Mon Apr 27 2009, 01:10
In my marketplace the lower priced inventory has drastically depleted and most of what is left is really in bad condition or circumstances regarding the individual owners situation don't result in the property being desirable. We have also found that many of the first time buyers who have tried their hand at a "short sale" that did not culitvate in a closing are not willing to do it again. Not many entry level housing in my marketplace is the "arms lenght" transaction. Results of these two scenarios are that there aren't many desirable lower end homes for sale that are appropriate for the first time buyer who is looking to seek housing at the New Jersey Shore area. This area would be Southern Monmouth county through to all of Ocean County. Areas I am most familiar with are Brick, Howell, Manchester, Lakewood, Jackson, Toms River, Beachwood, Bayville, Ocean Gate, Pine Beach, Lanoka Harbor, Lacey Township, Forked River, Waretown and Stafford Township.
By Ted Mackel,  Mon Apr 27 2009, 01:29

The $8k tax credit and the low interest rate have much to do with this buying frenzy we are seeing right now. That isn't going to last for ever. As the new backlog of REOs and Shorts hits us over the next couple of months any increase interest rate will cause more decline in price. I'd like to say we hit some stabilization on the lower end, but here in my area I see the entry level buyers looking to stay between $1800 and $2200 per month PITI. Interest rates right now are giving entry level buyers the opportunity to do that with a single family house. How long can the government keep rates this low?
By Yvettesloan,  Tue Apr 28 2009, 19:22
In our area Northern CA, (Hidden valley Lake)Lake County we hardly have any inventory under $150K, a few months ago we had many homes for sale and now that all the foreclosures have not been listed all the current foreclosures have gotten multiple offers and it has been crazy. We are in a desirable area just 30 mins from calistoga, ca and have a large gated community (3 areas) 18 hole golf course and many amenities. I am currently co listing countrwide listings and the listing are down but we have many coming. Interest rates dropped today again.
By CJ Brasiel,  Tue Apr 28 2009, 20:48
Carl - very good post. If you pull up the inventory and look at it on a map, most of the listings are near busy corners, near highways, bad school districts, so on etc.. This fact is actually increasing the demand for the $600,000 to $700,000 market. Many buyers who have seen enough "AS IS" inventory are looking for turn key homes in good neighborhoods.

I understand the ALT-A argument but not sure we will see the drop is average sales price as we did with the entry level market. In my market, the demand for quality in good neighborhoods is generating cases of multiple offers from strong buyers. There are smart buyers out there that know that even if we aren't at the bottom that they don't want to take a chance on being priced out again.

There is a great debate about how the lenders/corporate owners will manage this next wave of NODs. Some say they will cherry pick properties to "hold" until the market recovers as their own investments. (Remember when everyone said "banks don't want to be in the real estate business."? - They obviously can become educated sellers quick.)

Some say corporate owners will not flood the market because a flood simply drives down the ASP and shoots oneself in the foot. As it is, their process for getting a home to market is slow paced. Add that to the fact they would like to distribute to more trained REO agents so that they can turn the properties faster. Having a "few" agents that cover hundreds of miles of REOs, doesn't make sense.

I expect average sales price will decline in the "core" communities as they are always last to give up the price. However, low interest rates will keep up the demand. The only reason I would predict significant drops (greater than 20% through 2010) is if unemployment becomes a significant player in the bay area.

Bio engineering both for medical and green should keep us in balance enough to manage through. My prediction is a "bumping along the bottom" market for the remainder 2009 and into 2010. Either way, I am in for the long haul.
By Joeneighborcity,  Wed Apr 29 2009, 14:50
Excellent market analysis and assessment. Yes, this market offers the best values i the mid range and high-end market. I know that areas like Vallejo California, prices have dropped to half of the entry level pricing, so there is some movement below that baseline as well.
By Patti Hooker,  Fri May 8 2009, 22:40
Excellent article. Phenomenal statistics.

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