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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 To Hit The Market? NOT LIKELY: Top 3 Reasons, 4 Implications

It’s no secret that we’re not out of the woods with regards to foreclosures. In fact, foreclosures are currently increasing in many parts of the country and industry analysts tell us there are at least three to four years of this still to come. Maybe even five. So this begs a serious question:


Where are all these foreclosed homes?


A quick look around the bay area reveals precious few REOs (foreclosed homes) hitting the market. REO inventory is WAY down from the highs of a year ago. Many attribute this to the California Foreclosure Moratorium and are quick to point out that, since the moratorium just ended, we should be seeing more REOs very soon. If you’ve been watching, there’s been a lot of chatter recently on Trulia and other venues forecasting an impending wave of REOs to cascade onto the market.


On the surface, this seems to make sense. With the moratorium over and the national foreclosure rate moving along at a crisp rate, this should translate into more REOs coming soon to a neighborhood near you. Right?


Not so much.


Back in April of 2009, in anticipation of the lifting of the national foreclosure moratorium, many pundits were forecasting a deluge of foreclosed homes. I personally wrote an article for the San Leandro Times and Castro Valley Forum that appeared on April 29, 2009 declaring, “Foreclosure Flood Is On Its Way.” Along with others, my optimism was a bit misplaced. All the data seemed to suggest we were right. We all, however, failed to understand one critical detail”


The banks held a wild card that no one (at least no one I know of) was able to foresee.


It has been this one factor that, in my opinion, changed the market. Permanently. And it’s my #1 reason for there not being another flood of foreclosures.


1.    I believe banks have learned to regulate the flow of REOs to the market in order to control market prices.


Although there are many foreclosures out there, it appears that banks have concluded it’s in their best interest to mete properties out slowly and thereby control market values. They’ve succeeded. And will continue to do so. Which brings up Reason #2:


2.    I believe flooding the market would be in any bank’s WORST interest.


As banks have begun to get a taste of rising prices and the ability to control the market, I believe they are responding like bears to honey. Like Winnie the Pooh, they are willing to go WAY out on a limb to get what they want. And they are most CERTAINLY getting it. If you’ve dealt with any REOs recently, you’ll have discovered that bank tactics have drastically changed the real estate landscape. It’s become a VERY unfriendly place for buyers as banks now dictate terms that are in their best interests only.


3.    I believe banks have used the bail-out funds to sustain themselves and rebuild so there is no longer any urgency to divest themselves of foreclosure inventory.


I am no subscriber to conspiracy theories and I have no ability to prove this point – but I personally believe this is what is happening. I have no definitive proof or smoking gun … BUT, I think the theory holds water. Banks stand to lose a lot of money if they put all their properties on the market right now. If they have a home on their books at $400,000 but sell it for $200,000, they have to capitalize the loss. However, if they can hang on for a while and help the market gain momentum in an upwards direction, they don’t lose as much. They don’t take the loss until they sell. If they don’t have to sell right away … you do the math.


If the above is true, then there are some serious implications that will flow from this:


1.    Market prices have already begun to rise and will continue to do so.


There are a number of factors currently affecting the bay area market:


a.    The tax credit has fueled a steady stream of buyers into the market.

Although this is slated to end on November 30th, many of the buyers who were attracted to the market for the credit have stated they will remain in the market after the credit expires. And if the credit is extended, all bets are off.


b.   Interest rates continue to be at low levels and will most likely remain low until the 2nd quarter next year.

The Fed has stated that they will be rationing out the remaining commitment of Mortgage Backed Security purchases through the first quarter of 2010. Instead of continuing to buy, they are going to wean off the program gradually. This will more than likely mean a very gradual rate increase through the first quarter of next year. In the meantime, low rates will continue to feed the market.


c.    Current low prices have galvanized many buyers into action.

Many buyers have realized it’s now or never. They’ve looked at all the factors and decided to jump in now.


d.   Very low inventory has fueled multiple offers on almost every property out there.

If there is no impending flood, then inventory will remain low for a number of practical reasons.


e.    Banks have been listing REOs at artificially low prices to attract multiple offers.

This practice continues with no end in sight.


f.     The northern California economy still remains stronger than the rest of the state and/or country and will continue to do so for the foreseeable future.

The San Francisco Bay Area has, since the inception of Silicon Valley, become a unique economic entity. Although we suffer the same issues as the remainder of the country, we’ve always demonstrated the ability to rebound quicker.


g.   There is a strong investor base currently buying properties.

And they are paying cash. As an example, not only have we represented a number of cash buyers in the past three months, in just the past few weeks we’ve received cash offers on four of our listings. Strong offers. Investors understand that the market still offers good values and they also see that prices are moving back up.


Looking for bargain basement prices on REOs? Those days are gone. I believe we will see a minor price adjustment at the end of the year or early in 2010. This will produce a minor market correction, and then I believe bay area prices will see gentle movement upward through the summer of 2010.


2.    More “regular” sales are coming into the market.


With the past glut of REOs and short sales, “normal” homeowners held their properties off the market. It made sense: no point competing to be the low price leader. Until recently, normal sales were typically confined to probate, divorces or relocations. However, with inventory tightening, I’ve personally seen a tremendous increase in normal listings. With less pressure from REOs and subsequent rising prices, sellers are feeling more confident. In some areas, normal sales now actually exceed other types of sales. This trend will probably increase as we head into 2010.


3.    Market values for “normal” sales are correcting.


Whereas most REOs list low and sell high, normal sales tend to list high and sell low. This has given the appearance that the market is still decreasing. Nothing could be further from the truth. What is actually happening is this: normal sales are correcting downward to actual market values. It may take a bit longer, but normal sellers eventually get it. If they actually want to sell, that is. In fact, price per square foot is actually increasing in most cases.


4.    There is an exception to this: the top of the market is still VERY sluggish.


The “top” of the market varies from area to area; however, if your property is viewed as the “high end” of your local market, you’ve probably already discovered that the market is still very soft. I believe the high end of the market will continue to deflect downward as we see the current wave of ALT-A defaults moving through the high end of the market and there is still a severe shortage of money available to finance high-end homes.


So there is it … and it’s based on a lot of market watching, detailed analysis and a good measure of conjecture tossed in to complete the recipe. I’m sure there will be many who disagree. Time will tell who’s actually right. I’ve been know to have been wrong before, but I’ve also nailed it a bunch of times as well.


Personally, I’m betting that this time … I’m right!


By Norma Leppert,  Tue Sep 29 2009, 14:28
You make some good points Carl but... I disagree that there will be a new flood of foreclosed properties.
I do a lot of BPOs for banks and am seeing an increase in orders. And most of these are in default. Quite a few short sales ARE selling but those that don't sell will soon become foreclosed kproperties.
Norma Leppert, Realtor
Windermere Properties of the East Bay
By Steve,  Tue Sep 29 2009, 16:08
The elevated NOD and NTS figures haven't corresponded to elevanted foreclosure figures for six+ months now, and we know there have been relatively few loan mods over that same period. That means an overhang obviously exists.

I really don't think the banks are in a position to control the supply - though it's a catchy theory. I believe that HAMP has effectively served as a pseudo-moratorium. The government lobbed this loan mod scheme out there that effectively buried the banks in paperwork, forced trial mods, forced individual negotiations and a host of other 'feel good', yet ineffective ideas. This will clearly slow down the foreclosure cycle, especially in a hard hit state like CA. But the surrounding climate has not changed in the least. Employment is significantly worse than a year ago, and even more owners are upside down, and by even greater amounts. As the banks catch up on their processing of defaults, failed "trial mods" are also completing as are re-defaults on other loan mods. That's a big supply of foreclosure inventory that most almost certainly is coming.

Couple that above with Option ARMs are beginning to recast in mass. Many of these 'homeowners' will choose the "eh, I'll walk - thank you very much" option rather than begin paying a fully amortized 25-year on a grossly upside-down property.

The only possible cure to foreclosures was more jobs and rising incomes. The inverse occurred. Recent delays have simply been bureaucratic in nature, not a well-conspired multi-bank effort to control supply.
By Lori Parks,  Wed Sep 30 2009, 09:44
Well for Pete's sake! I was completely in agreement with you Carl until I read Steve's comment above. He makes some valid points and now I'm going to have to mull it all over again. And just for fun, I'll be throwing the no/short sale properties into the mix. How/why is it that banks agree to a short sale on a property knowing the price is nuts and that there is no access to the house? With the exception of only a couple of banks the whole short sale dance appears to be another stalling (manipulative?) mechanism. What a mine field our industry has become...........Lori
By Carl Medford,  Wed Sep 30 2009, 11:04
Thanks for the comment, Lori. There is SO much information out there right now (much of it conflicting) and there are SO many different ways of interpreting the data. It is VERY confusing. That’s why I’ve stated in this post that it’s MY opinion … It will be interesting to see how this all shakes out. Personally, I think I’m right!

We’ll see.
By John Juarez,  Wed Sep 30 2009, 17:40

I am in agreement that the rumored flood of foreclosures is an unfounded rumor. It was the lending community’s combined stupidity and greed that drove them to make loans on overleveraged properties that no one could repay simply because they could make profits selling the loans.

Now, in an effort to maintain earnings by cutting losses, they are feeding foreclosed properties into the market in a controlled manner so that the prices will not fall from over-supply. This is not conspiracy. All of the holders of problem loans have figured out that there is a demand for their houses at some base price. They allowed the free market to determine what that base price is and now they are trying their best to maintain prices by controlling demand. We, the taxpayers, have helped them out by making TARP funds available to rebuild their capital positions.

Yes, there are many more foreclosures to come. That is why we will be in this type of market for several more years.

John Juarez, REALTOR
Windermere Properties of the East Bay
By Karen Setnor,  Mon Oct 12 2009, 12:39
As a buyer, this is really frustrating. The signs all pointed to something obvious: 13% of all mortgages are either delinquent or in some stage of foreclosure. That means if the banks got serious about this you would see a "for sale" sign outside of one in every twenty homes in the United States. And we haven't even begun on the wave of recasts yet. Wile E. Coyote ran off the cliff, and I figured by now he would have looked down and gravity would have taken effect.

But... it hasn't happened. Either through incompetence, or sudden competence, the banks are kicking millions of cans down the road. People are sitting in homes for a year without making payments and the banks won't foreclose! Some times the banks even give them free money via a balance reduction! Meanwhile I've been scrimping and saving and watching while renting, but it looks like I'll still get screwed in the name of "saving" the housing market. Oh, goody, $8000 of my own money given back to me as a bribe. How about you foreclose on all those deadbeats instead, then I'll save MUCH more in the home price!
By Carl Medford,  Mon Oct 12 2009, 15:44


I TOTALLY agree. I have a long list of buyers who want to avail themselves of this unique moment in history to get a home of their own … and now they are being priced out of the market by the multiple offers that appear on every decent property that shows up on the MLS.

FHA buyers are being particularly hard hit – there are SO many cash buyers out there right now – people who are emptying their 401Ks and other lackluster investments and plunking it down on the Wheel of Real Estate hoping to hit it big. I’ve also seen a large number of foreign investors who’ve realized that the USA is on sale at bargain prices. As soon as a cash buyer enters the picture, the FHA offers are off the table.

It’s VERY frustrating. We’ve been HOPING for a flood – something that would stabilize the market and get the huge existing backlog of potential buyers into the huge existing backlog of foreclosed homes. It kinda makes sense. Unfortunately, as you state, it hasn’t happened.

And I agree that many of the wrong people are getting help. Those who’ve been responsible, made all their payments, worked hard to stay in their homes and keep their credit intact … are not getting the help they need. On the other hand, those who did a 110% refi, bought an Escalade, a new boat and a fun-filled trip or three to Los Cabos … are getting bailed out with our tax dollars.

And you don’t get a house. Couldn’t agree with you more.

Here's a post I did a while ago that sums it up for me:

People Who Did EVERYTHING Right … (Get Screwed)
By Karen Setnor,  Thu Oct 22 2009, 14:32
Carl -

I appreciate the thought, but I resent being lumped in with someone who gambled on two properties with ARMs that, in all honestly, he couldn't have paid in a "normal" market with average interest rates. Rates on those loans should not have gone up significantly any time this year - if his payments were going up enough to ruin him, then he got neg-am mortgages and had been racking up debt, no doubt planning to flip one home or the other. He did not do "everything" right. I'm not sure he even got half of it right.
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