Home sales in many markets are dominated by bank REOs, or Real Estate Owned as foreclosures are called after they have gone back to the bank. Generally these REOs will sell below market and can be a great deal for the buyer. However in areas that have an overabundance of REOs they do not sell below the market, they are the market.

Las Vegas

On the surface it may appear that the Las Vegas market is going to lead the housing market out of the doldrums. Looking strictly at the numbers you will see that April home sales were up 78.3% from April of 2008 (article). The median price has dropped to $141,720, a 39.9% reduction from a year ago. Figures for inventory, days on market, and days of supply have dropped as well. These are all good things, right?

Not so fast, it depends on which side of the transaction you are on. For buyers these numbers are awesome. Homes in Las Vegas are more affordable than they’ve been in a very long time. First-time homebuyers can take advantage of an $8,000 tax credit to make it even more affordable. For buyers it’s all good.

Which leaves the sellers. REOs absolutely dominate the Las Vegas market and there are a large number of short-sales as well. In a normal market these distress sales would be an aberration and not a major factor in real estate prices. However, distress sales in Las Vegas counted for a whopping 86% of all closings in April. In a normal market an appraiser can overlook distress transactions when compiling comparable sales. When 86% of closings (article) are distress sales, they become the comps and there isn’t much that you can do about it.

Hobson’s Choice

A seller is now left with the choice of pricing a property low enough to compete with the REOs or not selling it at all. Indeed, many homes have been pulled off the market as sellers wait for prices to improve. Many sellers can’t lower prices to compete because they owe too much on the house. A recent report shows that an astounding 67% of Las Vegas homeowners owe more than the house is worth (article). Their options are to sit tight, try for a short-sale, or lose the home to foreclosure. Ouch!

New homebuilders are facing the same pricing pressure. However, they have overhead and holding costs to deal with as well. They have reacted to this by limiting the number of new homes to a bare minimum and greatly reducing prices on homes that are at or near completion. Some Las Vegas builders have actually reduced prices to a point that is below their cost in an effort to finish projects even if it means taking a loss. The positive point here is that a reduction in the supply of new homes will lead to an increase in sales of existing homes.

In their attempt to alleviate the foreclosure problem the Government created programs to help struggling homeowners. Unfortunately these programs may only prolong the agony. One program, Fannie Mae’s Home Saver, has experienced a re-default rate of 70% (article). Not exactly a promising statistic and it shows that this mess is going to be with us for quite some time.

The bottom line is that this is a terrible time to be a retail seller. If you are an investor who is looking to buy for cash flow, it’s a great time. If you’re an investor who is looking to buy cheap rehab properties and flip them at low prices, it’s not such a bad time. If you are someone who absolutely must sell, good luck because you are going to need it.

What do you think a stimulus is? It’s spending - that’s the whole point! - Barack Obama

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Tags: foreclosure, Foreclosures, las vegas real estate

I had been hearing a lot of talk lately about how home foreclosures were down. Real estate agents were pointing to this and saying that the market was going to turn around soon. Even the talking heads on the late night news were reporting that foreclosure filings were down and things were going to get better. Could we really have hit bottom?

Image via Wikipedia

Not so fast. This was just a case of spinning the facts to make them say what you wanted. What they didn’t tell you was that foreclosures had dropped because of a moratorium on new filings. Fannie Mae and Freddie Mac, along with many banks, had temporarily halted foreclosures while they waited to hear how the new administration was going to handle the crisis.

Hail Mary Falls Incomplete

However, the moratorium was recently lifted and that hoped for game saving touchdown pass fell to the ground. New foreclosures were up 24% in the first quarter from the previous year, so much for hitting bottom. When it became apparent that Obama’s plan was not going to be a miracle cure, the banks resumed taking properties back. In a press release Realty Trac’s CEO, James J. Saccacio, said “In the month of March we saw a record level of foreclosure activity - the number of households that received a foreclosure filing was more than 12 percent higher than the next highest month on record.” Clearly there was not going to be a fantastic comeback in this game.

The states hardest by foreclosures were, once again, Nevada, where one of every 27 homes received a filing, Arizona, California, Florida, Illinois and Michigan. This is a contest where being number one is not such a good thing.

Hype, Hope & Reality

The campaign trail hype and rhetoric has been replaced by harsh reality. This mess is not going away anytime soon. While Federal Reserve chairman, Ben Bernanke, sees “green shoots” and President Obama sees “glimmers of hope” in the economy, reality paints a much gloomier picture. While it is important for the President to remain optimistic, these foreclosure numbers are hardly a reason to be hopeful about any recovery in the near-term.

Nobel Prize winning economist and New York Times columnist, Paul Krugman, isn’t so hopeful. Despite being an unabashed Obama supporter, he is concerned that the administration could become complacent as a result of their own spin doctoring about these hopeful signs. In a recent column he says, “Don’t count your recoveries before they’re hatched.”

Even one of the worst economic times in our history, the Great Depression, had a number of false starts. When things are really bad people will look at any positive statistic as a sign of better days. Unfortunately many of these numbers are nothing more than the dead cat bouncing again. We may have a long way to go before this is over.

The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy. - Milton Friedman (economist)

Tags: Ben-Bernanke, Foreclosures, Great Depression, obama, Paul Krugman

We are constantly hearing about homeowners who are upside-down on their homes. The only hope that they seem to have is doing a short-sale, or getting the bank to agree to take less than the amount owed. Frequently no buyer can be found and the home winds up in foreclosure. That is especially true here in Las Vegas where we have been at or near the top of the foreclosure statistics for a long time.

With so many homes having negative equity it would seem to be enormously difficult for a real estate investor to have success here. At real estate club meetings I constantly hear investors talking about the difficulty of just finding a deal, let alone closing one. The strategy for most is to let the properties become bank-owned and them try to buy them. That’s the strategy for most, but not all.

A Different Approach

Brian is a Las Vegas real estate investor that I have come to know over the last couple of years. While many complain about the inability to find deals or raise funds when they do, Brian is absolutely thriving. He doesn’t complain about funding because he uses very little of his own money. Instead of complaining about the lack of equity he creates it. Huh?

Brian has been specializing in pre-foreclosures since the Las Vegas market was hotter than a two-dollar pistol. He had a much harder time then than he does now. Back then homes typically had equity and were easy to sell. Today when a homeowner winds up on a Notice of Default (NOD) list he will be inundated with calls offering various forms of assistance. However most of the callers will wind up telling the homeowner that they can’t help him because there is no equity. But that’s the kind of homeowner that Brian loves.

That’s not to say that every upside-down homeowner can be helped because many cannot be. However many people are in that situation because they have a second or even third mortgage in addition to the first. That is Brian’s bread and butter.

Pulling A Rabbit Out of the Hat

The first step is to find a property where the first mortgage is low enough that there would be plenty of equity if not for the second and/or third mortgage. At this point you work to strike a deal with the homeowner to purchase the home subject-to the first mortgage. (For more on subject-to investing search Jason Hanson’s posts) The key here is to make that deal contingent upon being able to purchase the second and/or third note on favorable terms. At this point the homeowner has generally resigned himself to the fact that he is going to lose the home and is willing to take any deal.

Once he has the home locked up, Brian contacts the junior lien holders (2^nd and/or 3^rd mortgage) and offers to buy the notes. The junior lien holders are aware of the fact that the home is in foreclosure and they know that when the sale takes place they will lose everything. When Brian calls to offer pennies on the dollar they are frequently willing to take the deal. After all, something is better than nothing. Are all lenders willing to settle? Surprisingly no, many will let the foreclosure happen and wind up with nothing.

The end result is that equity has been created in a property that once had none. The house can now be sold at a profit or held as a rental.

The Cat’s Out of the Bag

You might think that Brian would be upset with be for sharing his secret. The truth is that Brian shares his techniques willingly. He has created a real estate club in Las Vegas that holds a monthly meeting at his office. The club charges no membership fees, has no dues nor do they sell anything or promote gurus. By sharing his method he has created an army of bird dogs who are out hunting for deals. Quite often some the novice investors will bring a potential deal to him and they work out a split arrangement. It’s a case where everybody wins.

So the next time that you find yourself complaining about how tough things are or how it’s impossible to do a deal, ask yourself a question instead. What could I do differently or what is it that nobody else is doing? Get creative!

Tags: buying real estate notes, Foreclosures, subject-to investing

Don’t pop those corks just yet. We may have ducked a few thunderheads, but we still have enormous storm clouds ahead.

The news that existing home sales rose in February at the fastest rate in some six years, certainly brings with it the hope that the bottom (or end) to this mortgage caused misery is nearing.

While hope is good, false hope is not so good.

Let’s take a closer look.

Forty to fourty-five percent of the sales last month were “distressed sales” –according to the National Association of Realtors. And these homes tend to sell at about 20 percent less than the so-called “normal” market place, says NAR chief economist Lawrence Yun in an interview with Reuters.

The people buying these bargains are atypical in numerous ways…they have really good credit ratings, jobs or personal wealth, and the ability to plop down upfront money.

The Obama administration, of course, hopes its just revealed plan for a joint private investor/government effort to buy up $1 trillion in toxic assests will further stimulate the housing market (and every other market) by unfreezing credit.

Although Wall Street reacted with great joy to this announcement, it is not at all certain the plan will work (which is not to say it shouldn’t be tried…just that it might not work!)…

The key question remains whether banks will be willing to sell assests a the lower prices set by bidding, or hold on to them hoping to weather the storm?

There is also no way of knowing yet how the public will react to this plan….The A.I.G mess didn’t go over big, did it?

Already one leading critic, New York Times columnist Paul Krugman, a Nobel-Prize- winning economist, is blasting the plan claiming investors will be able to profit should asset values increase but walk away if they fall, says a Reuters report quoting Krugman’s column.

So, much can go wrong..and, considering the laws that seem to govern the universe, probably will.

Hope, yes. Blind hope, no.

Photo Credit: ToastyKen

Tags: bankruptcy, Economy, Foreclosures, housing

Almost 291,000 homes across the US received at least one foreclosure-related notice last month, up 6 percent from January, says RealtyTrac.com, a compiler of foreclosure data.

The big question in the minds of pundits is when the Obama administration is going to officially own the economic and housing crisis. Fifty days into his administration, the President continues to remind us at every opportunity that he inherited this crisis, and that it is the fault of Bush and anyone other than him. Now that the President has made his Housing plan, his multi-trillion dollar budget, and more bailouts official, isn’t he officially running the show? Isn’t he the one whose policies dictate what is to happen in housing, the stock market, and every other facet of the economy?

My Way News reports “nearly 12 percent of all Americans with a mortgage - a record 5.4 million homeowners - were at least one month late or in foreclosure at the end of last year, according to the Mortgage Bankers Association. That’s up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007.”

Now that the Obama plans are officially up and running, we should be seeing a slowdown in the foreclosure data, right?

Only time will really show whether these various plans are effective, and we must give it some time, but I have an important question (amongst many others) . . .

Who is in Charge?

I believe that the current President is now fully responsible for what happens under his watch. If his plans don’t work, then he needs to step up and re-work them. If his stimulus isn’t effective, then he should take it back to the drawing board. If the foreclosure plan makes no sense, then man up and do something about it.

I’m tired of the whining and the blame game. If we’re going to blame people, we’re going to have a big list that includes in many ways, practically all Americans, including the President, Congress, Wall Street, Lenders, Agents, Home Owners, and on and on.

Lets focus our energy on ending the housing/foreclosure/economic crisis and stop telling everyone “it wasn’t my fault”, because it was. Most people just don’t care . . . they want to stop living in fear.

Lets do something about that!

Tags: Economy, Foreclosures, housing, obama

The Obama budget announced this week - in the middle of biggest housing crisis since the Great Depression - seeks to raise tax revenue by removing the mortgage interest tax deduction for those that are in the 33% and 35% income tax brackets.

What? You’ve got to be kidding, right?

I can’t count the ways this is bad for housing. The one big reason renters all across this country make the decision to become home owners is the extra incentive the tax code gives them. Sure they have the, “I can paint the walls any time I want without getting permission from anyone” reason, but that is no where near as motivating as $1,000’s they get via the deduction every year.

Obama limiting this to the “wealthy” may think he’s not hurting those home owners in the lower tax brackets, but he’d be wrong. The housing market is a connected market. In other words, what hurts home values at the top eventually spreads lower depressing all home values.

Aren’t home values depressed enough?

Another big problem with this proposal is that those “wealthy” folks buy homes in the areas of the country still getting ravaged by massive foreclosures. Places like Arizona, California, New York, and Florida need this like they need a hole in the head.

These States are still reeling from a glut of homes due to the foreclosure crisis. Many of which are of the “luxury home” variety. I guess Obama forgot that only the rich can afford a luxury home.

Don’t get me wrong, I’m not crying for the rich. I’m crying for the housing recovery. Choking it off before we even get started is just plain dumb.

So Obama and his removal of the mortgage interest deduction wins my “Dumbest Idea of the Week” award.

Can’t wait for next week!

Good Luck!

Photo Credit: SEIU International

Tags: Economy, Foreclosures, housing, mortgage interest, mortgage interest deduction, obama

So far, we’ve tackled the subprime lending crisis (and failed), the credit crisis (and failed), we’ve got a TARP, a Stimulus Package, Trillions of dollars in borrowed debt repayments as a result, and from what the Wall Street Journal tells us, we’ll learn about the President’s Housing Bailout Package - aka. Foreclosures R US, on Wednesday:

One likely element of the plan would reduce Americans’ payments on troubled mortgages, people familiar with the discussions said late last week, possibly through a cut in the interest rate, the costs of which would be shared by the government and mortgage servicers. Government officials would make the reduction available to people who are at risk of defaulting. A loan-modification program at government-backed Fannie Mae and Freddie Mac currently calls for holding monthly housing-related payments to 38% of pretax income. The new formula is likely to be as low as about 31%, according to some people.

In addition, the administration is expected to endorse a plan to allow judges to modify mortgages during bankruptcy proceedings in some circumstances, a move long opposed by the mortgage industry. And it could push measures that would remove some contractual obstacles that hinder mortgage servicers from modifying troubled loans. Pending any announcement, the country’s three largest mortgage lenders are putting a temporary halt on foreclosures.

Additionally, “David Axelrod said the plan that President Barack Obama plans to announce on Wednesday will aim to stem foreclosures, provide immediate help to homeowners who are ‘right on the edge’ of foreclosure, and ultimately help in ‘raising home values that have been plummeting.’”

Praised as a “good plan” from senior White House aides, Axelrod said that the plan’s foreclosure prevention aspects would cost somewhere on the level of $50 to $100 billion.

Will this become yet another in the line of failed attempts to stop the bleeding?
Only time will tell. Hopefully this Foreclosures ‘R Us plan at least makes a dent instead of bleeding taxpayers dry for generations to come.

Surprise me Mr. President, please!

Tags: axelrod, bailout, billions, Foreclosures, housing, obama, TARP