Clouds, followed by doom and gloom...The day of reckoning is here folks. Did you really think home prices would go up 15% per year for ever?
The retail market no longer exists: I know this sounds like a bold statement, but for the near-term it is the reality of our situation in Happy Valley. Between the Buena Vista auctions, foreclosures and short-sales there just is no market for "full retail" pricing. The huge volume of distressed homes in our area far out paces the current level of demand. Even using demand numbers from the peak year, 2005, there are more active listings than can be absorbed. So, why would a qualified Buyer (very rare right now) buy your home for $700,000 when they can get a similar bank-owned home for $500,000?
Buyer's above $417,000 are rare: One of the most severe consequences of the mortgage melt-down is the extreme cost of "Jumbo" loans. In the past Jumbo loans (above $417,000) were usually priced about .25% above conforming loans, and sometimes at PAR with conforming loans. In the current market place it is between 1.5% and 2.0% higher. On a $500,000 mortgage that can equate to an extra $835 per month! Many Buyers in this range are waiting for Jumbo Loans to retrace to their historical spread. Thus, these Buyers are on the sidelines.
100% financing is gone: Most first-time home buyers utilized some sort of 100% financing product to get into their homes. Now that a minimum of 3% is required, the market for starter homes has slowed dramatically. Why is that important in Happy Valley...the "move-up" Buyers that would normally be buying into our neighborhood are having a hard time selling their homes. If they cannot sell their starter homes, they can't move up to our homes.
What does this mean for us? This year is not the year to sell your home. If you must:
1) Hire a local experienced Broker who will be brutally honest with you.
2) Price aggressively.
3) Make yourself easy to do business with.
4) Expect that you still may not sell your home this year.
Thursday, April 3, 2008
Wednesday, April 2, 2008
The rebound is just around the corner, right???
That light at the end of the tunnel??? Well my friends, that is a TRAIN!
Without going into reams of numbers, stats (stats don't lie, Statisticians do) and a history lesson, I am just going to explain with the simple Theory of Supply and Demand.
We all understand that as supply goes up, prices come down and as supply goes down prices go up. Oil has been responding to that lately, as has corn, wheat and gold.
Real Estate Supply is: Developable land and/or finished property.
Real Estate Demand is: Willing and able Buyers (both consumer and Professional).
Let's look at supply: Inventories of listed homes are approaching 1-year nationally, well above the 3-month average we saw during the boom years. Not figured in that number are a lot of the REO (Bank owned) homes that are not listed, but actively for sale. Also, National Homebuilders are only listing a few token homes per development (maybe 10% of their finished inventory) to diminish the appearance of having too much standing inventory. Homebuilders are still building new homes at a rate FASTER than they are being purchase, further bloating the standing inventory.
1) Inventory is way outpacing current demand.
2) Inventory is UNDER reported.
3) Inventory is trending HIGHER.
Let's look at Demand: We often talk of finding a "willing' and "able" Buyer. With consumer confidence at 20-year lows, many potential Buyers are just not "willing" to jump into a declining market. Those that are "willing" are often unable. The continued tightening of lending standards and rising mortgage rates have rendered many "willing" Buyers UNABLE. During the boom an abnormally high number of qualified Buyers became homeowners, effectively taking a decades worth of demand and crunching it into a few years. Stealing from future sales to close sales "today".
1) Demand is rapidly declining.
2) Those Homeowners who have defaulted will be locked out of home ownership for 7 years.
3) Many first-time Homeowners are underwater and unable to move up the housing chain.
4) New Buyers are locked out of the credit markets.
5) Builders do not want to buy new land as they cannot dispose of their current product.
We are currently in a period where Supply and Demand are quickly moving in opposite directions. In very liquid assets the price moves quickly in response. In non-liquid assets, such as Real Estate, it takes much longer for the price shifts to show up in the national numbers. We are at the onset of a long and protracted decrease in Real Estate values.
Without going into reams of numbers, stats (stats don't lie, Statisticians do) and a history lesson, I am just going to explain with the simple Theory of Supply and Demand.
We all understand that as supply goes up, prices come down and as supply goes down prices go up. Oil has been responding to that lately, as has corn, wheat and gold.
Real Estate Supply is: Developable land and/or finished property.
Real Estate Demand is: Willing and able Buyers (both consumer and Professional).
Let's look at supply: Inventories of listed homes are approaching 1-year nationally, well above the 3-month average we saw during the boom years. Not figured in that number are a lot of the REO (Bank owned) homes that are not listed, but actively for sale. Also, National Homebuilders are only listing a few token homes per development (maybe 10% of their finished inventory) to diminish the appearance of having too much standing inventory. Homebuilders are still building new homes at a rate FASTER than they are being purchase, further bloating the standing inventory.
1) Inventory is way outpacing current demand.
2) Inventory is UNDER reported.
3) Inventory is trending HIGHER.
Let's look at Demand: We often talk of finding a "willing' and "able" Buyer. With consumer confidence at 20-year lows, many potential Buyers are just not "willing" to jump into a declining market. Those that are "willing" are often unable. The continued tightening of lending standards and rising mortgage rates have rendered many "willing" Buyers UNABLE. During the boom an abnormally high number of qualified Buyers became homeowners, effectively taking a decades worth of demand and crunching it into a few years. Stealing from future sales to close sales "today".
1) Demand is rapidly declining.
2) Those Homeowners who have defaulted will be locked out of home ownership for 7 years.
3) Many first-time Homeowners are underwater and unable to move up the housing chain.
4) New Buyers are locked out of the credit markets.
5) Builders do not want to buy new land as they cannot dispose of their current product.
We are currently in a period where Supply and Demand are quickly moving in opposite directions. In very liquid assets the price moves quickly in response. In non-liquid assets, such as Real Estate, it takes much longer for the price shifts to show up in the national numbers. We are at the onset of a long and protracted decrease in Real Estate values.
Who is really in Foreclosure
The papers and news are full of stories of "2 million American Families losing their homes". If you listen to Congressional testimony on CSPAN it sounds like each and every home in foreclosure has the perfect American family about to have their dream ripped from them. Well....the truth is for from the perception....
1) Speculators: This group makes up the vast majority of early foreclosures and accounts for the 100,000's of vacant homes scattered across the country. They were purely playing a financial game, and when the tide turned...they bailed. Estimates are that fully 40% of the foreclosures currently reported are speculator activity. This group was comprised mostly of amateurs who lacked the knowledge and resource to properly function in the heavily leveraged Real Estate market. They artificially drove up demand, and the feverish bids drove prices to unsustainable levels. Think "Flippers". This group will be almost totally purged out of the market by early 2009 and will represent an ever declining share of foreclosures.
2) Investors / Private Builders: This group, who normally carves out a business in Real Estate using a more conservative approach to buying, selling and developing found themselves up against a huge wave of speculators who were bidding up the cost of the Real Estate that they needed to sustain their livelihood. Many started making bad decisions based on the "new" market realities. Initially they all profited handsomely, but when the market suddenly ground to a halt in 2007 they were left holding the bag on 100,000's of properties that they suddenly couldn't move. Many Investors / Private Builders use local banks to fund their projects. I know of two regional banks here in the Northwest that are on the verge of failure because of the non-performing loans to Builders and Developers. This group initially started to heavily discount their product to get any funds out that they could, driving down prices in their locals. Now that the markets have seized up, they are going into foreclosure by the droves. It is estimated that they account for 25% of the outstanding foreclosures. This segment will continue to falter and should be a larger segment of the foreclosure market for the foreseeable future.
3) Marginal Individual Homeowners: Enticed by ever easing lending standards and the perception that housing prices would go up in perpetuity. This group represents those that either should NEVER have become homeowners because they just did not have the financial means to do so (Liar Loans), or who bought much more house than they could actually afford (Pay-option ARMS). This group was sold on the American Dream and the chance to create 10's of thousands of dollars of wealth. This group also was blinded by greed and shares culpability. They only listened to what they wanted to hear, did not ask the tough questions of their Realtors and Mortgage Officers and turned a blind eye to the fact that every financial transaction contains risk. This group makes up approximately 30% of the current foreclosure market. This group will also be purged from the market by the beginning of 2010 and will see an ever decreasing share of the foreclosure number.
4) Traditional Homeowner: This group (Good credit, fully employed, has 20% or more equity) has benefited from the huge run up in prices and either cashed out through the sale of their home or tapped equity lines to get cash. Traditionally they rarely go into foreclosure (usually caused by job loss, divorce or death). Currently they make up only about 5% of the foreclosures. But, as prices rapidly deflate, the economy continues to cool and tighter lending standards make it more difficult for future Buyers to come into the market their numbers will soar. By 2010 this group should account for over 50% of active foreclosures.
5) National Homebuilders: Why am I talking about this group? They don't go into traditional foreclosure, right? Because they represent the single largest threat to home values over the next 2 years. Many are technically insolvent, only fighting of Bankruptcy through fiscal maneuvering. Once a major (my bet is Centex) goes BK, there will be a cascade effect. We are already seeing bulk land deals from the likes of Lennar, KB Homes and Centex where they are selling off lots in the $10,000 to $20,000 range. They continue to build homes at a rate faster than they are being absorbed. Once a large one goes into receivership, the value of their finished homes will plummet as they are sold off in a REAL auction, not these bogus auctions that we have been ready about, but a no-reserve highest bid wins...PERIOD type of auction. Once this starts, those traditional homeowners who thought they had 20-30-40% equity may find that they are under-water on their homes and that giving the keys back to the bank may be a better solution.
Bottom line, the current wave of foreclosures is not really affecting the solid homeowner, in fact most foreclosures are vacant homes held for investment or pure speculation. But, this first round of bad loans will have a prolonged effect on the market and put the rest of us at jeopardy....
1) Speculators: This group makes up the vast majority of early foreclosures and accounts for the 100,000's of vacant homes scattered across the country. They were purely playing a financial game, and when the tide turned...they bailed. Estimates are that fully 40% of the foreclosures currently reported are speculator activity. This group was comprised mostly of amateurs who lacked the knowledge and resource to properly function in the heavily leveraged Real Estate market. They artificially drove up demand, and the feverish bids drove prices to unsustainable levels. Think "Flippers". This group will be almost totally purged out of the market by early 2009 and will represent an ever declining share of foreclosures.
2) Investors / Private Builders: This group, who normally carves out a business in Real Estate using a more conservative approach to buying, selling and developing found themselves up against a huge wave of speculators who were bidding up the cost of the Real Estate that they needed to sustain their livelihood. Many started making bad decisions based on the "new" market realities. Initially they all profited handsomely, but when the market suddenly ground to a halt in 2007 they were left holding the bag on 100,000's of properties that they suddenly couldn't move. Many Investors / Private Builders use local banks to fund their projects. I know of two regional banks here in the Northwest that are on the verge of failure because of the non-performing loans to Builders and Developers. This group initially started to heavily discount their product to get any funds out that they could, driving down prices in their locals. Now that the markets have seized up, they are going into foreclosure by the droves. It is estimated that they account for 25% of the outstanding foreclosures. This segment will continue to falter and should be a larger segment of the foreclosure market for the foreseeable future.
3) Marginal Individual Homeowners: Enticed by ever easing lending standards and the perception that housing prices would go up in perpetuity. This group represents those that either should NEVER have become homeowners because they just did not have the financial means to do so (Liar Loans), or who bought much more house than they could actually afford (Pay-option ARMS). This group was sold on the American Dream and the chance to create 10's of thousands of dollars of wealth. This group also was blinded by greed and shares culpability. They only listened to what they wanted to hear, did not ask the tough questions of their Realtors and Mortgage Officers and turned a blind eye to the fact that every financial transaction contains risk. This group makes up approximately 30% of the current foreclosure market. This group will also be purged from the market by the beginning of 2010 and will see an ever decreasing share of the foreclosure number.
4) Traditional Homeowner: This group (Good credit, fully employed, has 20% or more equity) has benefited from the huge run up in prices and either cashed out through the sale of their home or tapped equity lines to get cash. Traditionally they rarely go into foreclosure (usually caused by job loss, divorce or death). Currently they make up only about 5% of the foreclosures. But, as prices rapidly deflate, the economy continues to cool and tighter lending standards make it more difficult for future Buyers to come into the market their numbers will soar. By 2010 this group should account for over 50% of active foreclosures.
5) National Homebuilders: Why am I talking about this group? They don't go into traditional foreclosure, right? Because they represent the single largest threat to home values over the next 2 years. Many are technically insolvent, only fighting of Bankruptcy through fiscal maneuvering. Once a major (my bet is Centex) goes BK, there will be a cascade effect. We are already seeing bulk land deals from the likes of Lennar, KB Homes and Centex where they are selling off lots in the $10,000 to $20,000 range. They continue to build homes at a rate faster than they are being absorbed. Once a large one goes into receivership, the value of their finished homes will plummet as they are sold off in a REAL auction, not these bogus auctions that we have been ready about, but a no-reserve highest bid wins...PERIOD type of auction. Once this starts, those traditional homeowners who thought they had 20-30-40% equity may find that they are under-water on their homes and that giving the keys back to the bank may be a better solution.
Bottom line, the current wave of foreclosures is not really affecting the solid homeowner, in fact most foreclosures are vacant homes held for investment or pure speculation. But, this first round of bad loans will have a prolonged effect on the market and put the rest of us at jeopardy....
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