With all the talk of foreclosures and short pays in the news, homeowners have to be wondering when will this all end and what effect does all this bad news have on my own home and does it effect my immediate neighborhood?
First, what is an REO, short pay and foreclosure?
A “short sale” or “short pay” is when a homeowner is in trouble on their property and owe more on the property than it is currently worth and/or can be sold for. Sometimes the lender will allow the property to be “sold short” of what the loan balance is and allow the seller to walk away from that loss – usually because the seller is cooperating with the sale and keeping the property in good repair and allowing showings etc. An REO simply means Real Estate Owned or bank owned property. It has already been officially foreclosed on by the bank and they now have ownership of it and probably want to get it sold fast.
What do REO’s have to do with my neighborhood?
In many neighborhoods across the Country there may be 10 for-sale signs on the same street. Lets say on the hypothetical street there are 10 similar homes for sale, of those, 4 have been on the market for months at full price, say $500,000, 3 are short sales and have permission from the lender to sell for $450,000 and 3 are REO’s and being blown out at a 20% discount to get sold fast at $400,000. You as a buyer have the choice of paying 500, 450 or 400 for a similar house. Typically the cheaper REO house will sell first. This lowers the values for the entire neighborhood making it harder to compete against these low sales.
How do these distress sales affect me?
This is where the trouble starts. If the only homes transferring are REO sales and short sales, then this becomes the market and sets the market value lower for the entire neighborhood. Since for lending purposes sales are used to determine market value it is most important what buyers are willing to pay not what sellers are trying to get. In a healthy or increasing market with many sales to choose from appraisers would try to always avoid distress sales. But, in a declining market an appraiser may not be able to find even one non-distress sale as more and more foreclosures hit the market. So if you were trying to sell or refinance then your home would likely be compared to those lower sales.
What happens next?
The strange thing is that at the beginning of a downturn there is almost two sets of prices. The higher conventional sales and the much lower bank blow-out sales. As the market enters negative territory, foreclosures continue to rise, supply has risen to 10-12 month supply levels, demand has dropped to historic levels and lending criteria has tightened on the limited buyers willing to purchase. A newer pattern of more distress sales than conventional sales emerge and lenders offer their latest REO at even steeper discounts further eroding market values in a neighborhood.
What effect does government or banking regulations have on a housing recovery?
Many of the loans that were made from 2003 to 2006 were made with lets say, easier lending criteria. This allowed many people to buy and trade up and this made demand stronger and supply shorter and increased property values at an accelerated rate. When the loan supply/credit is restricted this decreases demand, increases supply and in an already weak or declining market can accelerate a very rapid decline in values. This restriction although was needed is perhaps ill-timed and much like throwing gasoline on a forest fire.
Is there any good news?
It may sound like its all bad news but if you bought your home to stay put, you will probably be just fine and could ride out this real estate cycle. What goes up will come down and go back up again. I have seen it happen many times in my long career. Also, you may want to consider having your house appraised and/or re-assessed if you are being assessed at more than your home is worth – call your appraiser and find out. Also, if you are renting and have good credit there will be a tipping point where your rent payment will be more than it would cost to buy a home and can take advantage of tax incentives, new FHA loan programs etc.
Are all areas dropping?
I have found that not all areas are declining, and of those declining not all are declining at the same rate. Here in Southern California, many upper end neighborhoods are stable and homes listed are snapped up as soon as they hit the market. It takes a professional and knowledgeable appraiser with years of experience to determine what is happening in different neighborhoods in your local market area. Please call on me and I would be happy to discuss it with you.