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Stevens & Ma…, Real Estate Pro in Centerville, MA

How to deal with the stories about Banks holding REO inventory off the market to avoid driving prices lower?

Asked by Stevens & Manley, Centerville, MA Wed Jul 22, 2009

I'm seeing more qualified home buyers holding back from buying based on the continuing folk legend that Banks are restricting the release of REO properties to avoid a glut of inventory which might drive prices down. The story is that a huge surge of new REO's are coming to market in the fall and that will be the time to be a Buyer.
Therefore, banks are strongly motivated to get REO's sold and the proceeds recycled into new loans as soon as possible. Holding them off market would be economically foolish. Unfortunately, depending on the bank they sometimes do. It is crucial to have all the relevant market information to

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Hello Kriss- Great answer from Precision Financial below...
I believe that some of the selling off/ deleveraging has already begun. Will the rate/ speed increase in the Fall for more homes on the market? Maybe so.
But I just don't know how much further home prices will drop with 50% more REO's on the market in a town, etc. There are already enough that serious buyers have their choice, and can make offers that are beneficial for them.
I do agree fully that an buyer's "gain" in that respect would be offset by rising mortgage rates. I think that will most likely be the case come this Fall and Winter.
Thanks, and good luck,

Ken L.
0 votes Thank Flag Link Wed Jul 22, 2009
Reports have indicated that the FDIC is pressuring the banks to off load their portfolios and build up their capital. An issue which could occur is that if all the REO's come out at once it would flood the market and could drive home prices down. It is a great time to buy and the interest rates are low. If the interest rate go higher you will loose out on the buying end.
16 votes Thank Flag Link Fri May 6, 2011
Ask a lender.
Flag Tue Aug 28, 2012
I think the market is changes.
Flag Fri Aug 24, 2012
Thanks for all your response.
Flag Mon Aug 20, 2012
I've replied to a similar question here in the Q&A section of Trulia, I'm sure its on my profile. However I'll add a few more details under your question that may help out in understanding the myth.

First I noted that it could be a logistics issue with banks, the number of REOs and the management of such volume have created a slower release pattern...I made the example in the other answer...however to expand in support of this theory: If a bank is releasing properties in a regional fashion and these REOs are now balance sheet assets, then it stands to reason that logistically you would start with the less desirable more high cost to maintain properties in higher density areas. This seems to be the case in my BofA example in the other answer.

To further expand, some Private Equity firms, Hedge funds and other non-bank investors are holding properties for balance sheet enhancement, using them as part of their leveraging to gain new or increase lines of credit. I've made mention of this as well.

What I didn't mention in the other answer is the pressure the lenders and banks are under. Despite the idea that government regulators are there to help, these regulators still are not managing many institutions hand doesn't know what the other is doing.
On one side FDIC is pressuring the banks to off load their portfolios and build up their capital, on the other hand SEC is doesn't want publicly traded banks to off load a million assets and surge the share price, which will stimulate buying, but what happens if the banks dump their REOs in one swoop, share's surge and then two quarters later earnings are down because of the lack of available assets to sell...lower share values create a surge of sell off in the market driving share value lower.

Point is that most of us, whether in commercial or residential real estate sales and/or financing are not dealing with buyers who are completely tuned in to the industry. An geologist will be able to tell you why the house he wants to buy will sink 3 inches over the next hundred years, but he won't be able to tell you why interest rates will move up in the next year...he is sophisticated in his field, not ours.

The best answer you can give people is breaking it down to the stupid and arming yourself with facts. Find an article about why mortgage interest rates will go up...such as the strengthening of the dollar against foreign currency. Find historical data such as the early Greenspan years when rates were low, inflation was up and that was the norm. Then show them that by waiting on a myth, the risk outweighs the

They have no idea what their credit will look like in three months.

They have no idea where interest rates will be in three months - what if they save $50,000 on a home but rates are 1% higher - that's a thousand dollars per hundred thousand borrowed...over 30 years that is $30,000....and that's on only $100,000...using that example, for the life of the loan, they will only save $20,000. At a 1% higher rate per $100k, they are shelling out $84 per month (per $100k).

Yes there will be value drop in home, price drop in homes and more homes hitting the market, but that will only drive more buyers into the market because more people will see the affordability, therefore...your fence sitting buyer will have more competition, and competition means bid war, bid war means price increases.

We cannot make every buyer or borrower, regardless of property type, read the trades and stop listening to the arm chair professionals, stop watching the local Bull$h!+ news, but as professionals we can use the truth, common sense and facts to overcome their objections. As professionals, if you can't overcome the objections, then find the opportunity...if a buyer is convinced they will find a lower priced, equivalent property because of the myth, then find them 2 of something. Who doesn't want a 2 for...if they are sitting on the fence over $20g, then find them a property that needs some work, similar sq. ftg for $50g less and then an investment property for $100k...turn their bargain shopping against them and educate them on how their waiting is going to benefit their income in the long term.
2 votes Thank Flag Link Wed Jul 22, 2009
Great advice! Thank you for sharing.
0 votes Thank Flag Link Fri Aug 31, 2012
Just as an FYI
Today on CNBC there was a small report regarding banks holding out on releasing REOs. I looked for the video on their website but did not find it.

The interviewee could not speak on behalf of banks, but did note that Fannie and Freddie would release REOs in slow succession [paraphrased] because of the 6 month supply of conventionally priced housing on the market (20 month supply in Jumbo).

It did not seem that there was any concrete evidence or discussion as to the validity of concerns regarding a deluge of properties hitting the market and driving the pricing down, but it was alluded to that Fannie and Freddie were thinking that way.

One has to suspect that if this is the case, then the rumor of new homes flooding the market is not true, price points won't fall into the abyss and the buyer is hedging on minimal savings. If Fannie and Freddie are approaching the industry with this thought process, we can be sure that some larger institutions will follow suit.

Buyers who are going to misread the report will believe that they may have better bargains six months from now when the 6 month supply dries up...we know it doesn't work like that, but that's why we are in Real Estate and they aren't.

Maybe the video report or the story will be up on CNBC by tomorrow.
0 votes Thank Flag Link Thu Jul 23, 2009
So, is your point that banks are immune from doing anything "economically foolish?"

People are hol;ding onto this theory because there is plenty of information that supports that this is indeed the case. One would only hope the through this process that someone it developing a plan to keep homeowners facing foreclosure in their homes and off the streets.
0 votes Thank Flag Link Wed Jul 22, 2009
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