REO Roundup: The Long, Slow Path to Market Clearing

A handful of non-number-based stories about foreclosures have popped up lately that I thought might be interesting to highlight here for discussion.

First up, Diana Olick with CNBC: Vacant Homes Will Drown Housing Recovery

A real estate source I knew recently told me about a guy he knows in Atlanta who has been hired by several different banks to winterize their REO’s (real estate owned, i.e. the bank-owned foreclosures).

The homes are abandoned and empty, and clearly the banks think they’re going to stay that way for a while.

The winterizer didn’t want to do an interview, for fear he would lose his clients, the banks, who might not want us all to know about this.

Interestingly, I had actually heard that exact story through the offline grapevine before reading this article. It’s not hard to see why banks might already be shuttering thousands of homes for the winter, at least in Atlanta.

Take a look at any recent Case-Shiller release for Atlanta, and you’ll see that low tier home prices have dropped like a rock in recent months. I’m not talking about three or four percent a month. Try seven to ten percent per month drops—in five of the last nine months.

Or just go do a search for Atlanta foreclosures on Redfin. Just within the city limits right now there are over five hundred foreclosures active on the market (with nearly half priced under $50k), and another four hundred or so unlisted.

And Atlanta’s not even the worst market. Obviously Phoenix and Las Vegas are bad, but even Baltimore, just a short drive from the gravity-defying DC market has over a thousand unlisted bank owned homes. Yikes.

Article number two by Daniel Indiviglio at The Atlantic touches a similar theme: Are Ugly Houses Preventing a Home Market Recovery?

Maybe Americans aren’t avoiding buying homes right now — maybe they’re just avoiding buying ugly homes. The housing market may be splitting into two sub-sectors: well-kept, good-looking homes and run-down, torn-up homes. Could the latter group be preventing the housing market from stabilizing?

The disparity between these two groups of homes matters, because Lichtenstein has seen prices of the good properties remain relatively strong recently, as prices of worse properties have declined. This means that it’s those run-down, dilapidated foreclosed homes and short sales that will disproportionally bring down aggregate home prices, while well-kept homes should see much smaller price declines, or even appreciation.

It seems like we’ve been hearing these claims a lot lately, that non-distressed homes are somehow immune to the effects of foreclosure sales. Obviously non-distressed homes won’t sell at as much of a discount as foreclosures, but I think it’s rather naïve to think that there really exists two completely separate, distinct housing markets.

Finally, here’s a piece from Rasmussen. According to their latest survey, 62% Say Troubled Homeowners Should Buy Cheaper Houses

The federal government Friday extended its deadline to apply to the Emergency Homeowners Loan Program, but most Americans believe troubled homeowners should sell their homes rather than receive government assistance to keep them.

The latest Rasmussen Reports national telephone survey of American Adults shows that 62% believe it’s better for homeowners who can’t afford to make increased mortgage payments to sell their homes and find less expensive ones. Twenty-five percent (25%) think it’s better for the government to assist those homeowners in making their payments. Thirteen percent (13%) are undecided.

These results have changed little in surveys since late 2007.

And yet, the government continues to come up with new programs designed to keep people in homes that they fundamentally cannot afford (and in many cases never could).

It’s a problem of perspective. Foreclosures are not the problem. Foreclosures are the solution.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

39 comments:

  1. 1
    Lo Ball Jones says:

    Drive down to Centralia where you can buy nice 3 bedroom prefab houses for $48,000. Buy up a dilapidated foreclosure for pennies, clear the old house and hook up the new.

  2. 2
    David Losh says:

    You have absilutely no idea what is going on today. You’re in the business of selling people houses so you never look at the larger economic picture.

    The economy contracted. Even if you pay off the house you just bought it will be a net loss to you, and your family.

    Looking at Case Schiller sales data is meaningless. It’s sales data used as a sales tool.

    Just in keeping with Real Estate, without looking at larger economic issues, like the global defaults of governments, just to name one, you have to maintain a property once you own it. That’s what banks are finding. Banks own a ton of property nationally and they are required to maintain it.

    If you just look at the insurance coverage of a bank owning thousands of housing units at even $300 a year, then add taxes, at $300 per year, you start adding up to real money. Then you have the neighbothoods of people who foolishly bought houses last year, or this year where prices are dropping, continueing to drop, where people who bought within the last ten years see no reason to maintain a property that is losing them money every month.

    In that way the United States will become, or is becoming, like any Third World country with really nice neighborhoods, and really bad neighborhoods.

    Shees.

  3. 3
  4. 4

    I don’t think anyone says that one market is immune from the other. Three or four years ago I was commenting on how new construction prices were affecting resale prices. The contractors were getting desperate, and where previously you could ignore new construction prices, things had changed. They had to be taken into account in pricing a listing.

    As to short sales I still maintain that they are not comps in most of our local neighborhoods. But REOs are a bit different. While they have more risks and idiosyncrasies, they are priced to reflect that, so as they drop in price they will affect the other sales. But it’s not like a $10,000 difference in price is going to affect the resale prices. The discount has to be much steeper than that. except on the best REO properties in the best condition.

    As to that last point I would note that investors are usually locked out of those REOs during the initial period of the listing (say 14 days). So for the investor interested in an REO, the selection is worse than for the owner occupant buyer, because they may never get an opportunity to make an offer on the best properties..

  5. 5

    In My Neighborhood

    There’s been 3 Hud Homes next to me the last couple years. The first one sold last year after no one would pay $100K for it, so the banks put at least $60-70K into it and it sold last year for $140K….a loss to the banks.

    The other two [one is painted a horrifying bright pink pony color] have sat the last year unsold. One was a foreclosure eviction and the other the owner found a stupid buyer [who apparently got foreclosed on too, before anyone could move in].

    The immaculant $119K house down from me is still unsold, on the normal RE listing environment, there’s no 1st time home buyers that qualify for it the owner tells me.

  6. 6

    By softwarengineer @ 5:

    The immaculant $119K house down from me is still unsold, on the normal RE listing environment, there’s no 1st time home buyers that qualify for it the owner tells me.

    How could there be no buyers that would qualify for it, as opposed to no buyers that would want it?

  7. 7

    As a side topic, one of the things I’ve noticed about REOs of a certain age is that a very large percentage of them have been converted to vinyl windows. Many more than non-REO listings. So many that it makes me wonder if it’s a sign the foreclosed owners had spending problems. I know those were a high pressure sales thing a few years ago, and that many were quite pricy.

  8. 8
    ray pepper says:

    “It’s a problem of perspective. Foreclosures are not the problem. Foreclosures are the solution.”

    Like it!! Bingo Bingo!

    So many friends and investors I know stopped paying either years ago or just recently and I have lost track. Many recently got the LOVELY LARGE PAMPHLET from Bank of America entitled ” Home Transition Guide- Preparing to Transition From Your House.” I got more laughs outta that pamphlet then I did at Bridemaids and Horrible Bosses combined.

    It is so comical that I had to read it twice just for kicks. To sum the entire thing up ” Its better to short sale or complete a deed-in-lieu NOW because foreclosure takes so long that your credit will be impaired and you are in essence prolonging YOUR derogatory credit further down the road.”

    No where does it state the positives of being able to SAVE your money, live for free, build a nice nest egg, leave when you desire, take your time in looking, etc………….Furthermore it goes onto educate the home owner to ASK a new landlord if they are current on the payments…Also, it talks about securing an extended stay America type rental. There are so many funny things it it all the while trying to educate the homeowner to do whats right FOR THE BANK.

    Additionally, it does not talk about the 1000’s upon 1000’s of homeowners whose homes have foreclosed yet the owners WILL NOT LEAVE. I have 2 investors in Maple Valley that simply will not leave and their home and it foreclosed nearly a year and a half ago…

    This train wreck in housing is educating millions while the government/banks are simply hopeless. Rental society –YOU BET! But, I say it again people will only remain STUPID for so long and they are ALL coming back….Not a matter of if…………just when….Living many years for free while attempting Loan Mod after Loan Mod and then finally releasing your upside down home to the Lender and then STILL NOT LEAVING will be practiced by homeowners for the next decade.

  9. 9
    Cheap South says:

    Homes in Central Florida get winterized. All vacant homes need to be winterized regardless of how long you think they’ll be empty. I am not arguing against “we are in a mess”; I am just stating that winterizing should not be proof of the mess. It’s just prudent to estimate that a home will be in the market for at least 6 months.

    More intriguing is the lack of power. In FL, the humidity/mold stink when you walk in these homes is not welcoming. Banks are concern about busted pipes; but completely ignore the mold problem which can be as damaging.

  10. 10

    RE: Cheap South @ 9 – Up here one thing I notice is people will sometimes turn on the heat to 90 degrees, and leave it there. So maybe they winterize to prevent surprises in utilities? Also, houses can leak from their pipes for reasons other than flooding.

    I hate looking at REOs that don’t have water because you can’t assess the condition of the plumbing until after you get into contract.

  11. 11

    RE: Kary L. Krismer @ 6

    One Buyer Wanted It

    But didn’t qualify.

  12. 12

    RE: Kary L. Krismer @ 10

    Even Homes With Middle Income People for Owners

    Mostly leave the heat off during the evening and workdays, some real poor owners, live in one room heated and leave the rest of the house freezing cold….attracting mildew. So….mildew damage isn’t just empty foreclosed.

    Maybe that’s why the banks board them up in the winters and try selling in the drier summers, when the mildew odors mitigate.

  13. 13
    Spherical says:

    “Foreclosures are not the problem. Foreclosures are the solution.” Well, from an economy wide perspective, maybe. But what’s happening right now is a variant of the paradox of thrift. In order to break out of it, you would have to encourage more pain in the short term for certain individuals in order to help turn the general situation around for the rest of us.

    That said, you’re right that it has to happen eventually, barring some sort of additional federal intervention. A more effective loan modification program, some sort of debt forgiveness program, or increased inflation (which would have plenty of downsides, but would inflate away portions of many mortgages) would all help– but none of those seem to be on the table politically.

    One thing I’m curious about– has anyone done an analysis of the declining low tier seen in the Seattle Case-Shiller data? I’m wondering home much of the decline is from inferior properties, and how much is from properties in inferior neighborhoods? Run down homes is decent Seattle neighborhoods can edge into the low tier, but well maintained homes in the south end are often in that tier as well.

  14. 14
    ray pepper says:

    RE: Spherical @ 13

    “some sort of debt forgiveness program”

    BINGO BINGO BINGO!

    Its happening all around us with the Regionals. But make no mistake about it…Are you listening Kary?….You unbeliever!!………….Mortgage Principle Cramdown is coming ( with penalties) and it will be a WHOPPER that will ANGER millions but be sold to America as for the GREATER GOOD!

  15. 15
    Cheap South says:

    RE: softwarengineer @ 5

    I have to agree with Kary; $119K and no takers?

    OK, one taker that did not qualify? Crappy places next to I-5 are going for more than $119K.

    Can you share the address or the listing number? I believe you; but I would like to look it up in Redfin and check the schools in the area. I want to see if there are reasons I would not consider it.

  16. 16
    LocalYokel says:

    By ray pepper @ 14:

    RE: Spherical @ 13

    “some sort of debt forgiveness program”

    BINGO BINGO BINGO!

    Its happening all around us with the Regionals. But make no mistake about it…Are you listening Kary?….You unbeliever!!………….Mortgage Principle Cramdown is coming ( with penalties) and it will be a WHOPPER that will ANGER millions but be sold to America as for the GREATER GOOD!

    One thing for certain is that you have stayed on message as long as I have been
    reading this blog.

  17. 17
    Scotsman says:

    Five years from now everyone will be talking about how they should have sold in 2011, before the government faced austerity measures and the market completely collapsed.

    While everyone here watches monthly home sales figures and median prices the supporting macro economic environment continues to deteriorate at a steady pace. When there’s more debt than the income can support, and no growth in the income, there’s only one way out. The losses have to be allowed to happen, and the debt cleared.

  18. 18

    RE: Cheap South @ 15

    Its Biggest Shortfall is Its a Two Bedroom

    I just learned that from a neighbor at the mail house yesterday….it does explain a lot of that unit’s problem, albeit it has an enclosed two car garage [room for to I imagine], the others mostly have car ports with closed storage attachment areas.

  19. 19

    RE: Cheap South @ 15

    Send me your email address to:

    softwarengineer@yahoo.com

    And I’ll give you the address. Entitle Your Email, “Cheapsouth from Seattle Bubble” so I don’t trash it by accident.

  20. 20

    RE: Scotsman @ 17

    Those Pictures of Greece With Fire in the Streets and Fists Waving Over the Cuts

    Could be us very soon at a theater near you.

    I hear Medicaid already butcher axed all dental benefits this year [before even more cuts], hades, dental expenses are about half of what we pay out for medical out-of-pocket. The poor [middle incomes?] will all have to let their teeth rot now or stop eating…we are becoming 3rd world.

  21. 21

    By ray pepper @ 14:

    RE: Spherical @ 13

    “some sort of debt forgiveness program”

    BINGO BINGO BINGO!

    Its happening all around us with the Regionals. But make no mistake about it…Are you listening Kary?….You unbeliever!!………….Mortgage Principle Cramdown is coming ( with penalties) and it will be a WHOPPER that will ANGER millions but be sold to America as for the GREATER GOOD!

    Have I ever been against principle reductions? I’ve been supporting the so-called mortgage cramdown in Chapter 13, and I don’t recall ever having been against it in loan modification.

  22. 22
    Scotsman says:

    RE: softwarengineer @ 20

    “The poor [middle incomes?] will all have to let their teeth rot now or stop eating…we are becoming 3rd world.”

    Or at least Britain. Remember, they too used to ruyle the world. They have “free” health care. Doesn’t cover anything. but they have it.

    People think the U.S. is special, and in some ways it is. But we’re not above the laws of mathematics.

  23. 23
    Spherical says:

    RE: Scotsman @ 22 – The NHS, for all it’s faults, isn’t half bad. It’s certainly better than what we have, and the Brits are absolutely terrified that the NHS will be replaced with an Americanized (i.e. privatized) disaster in the name of reforming it:

    http://www.latimes.com/health/la-fg-britain-health-care-20110613,0,1237142.story

  24. 24
    NESeattleSeller says:

    RE: Scotsman @ 22
    Being in healthcare and having seen the English system I can say their system is at least as good as ours and far less expensive. Some reports put their health far ahead of ours: http://health.usnews.com/health-news/family-health/boomer-health/articles/2011/03/09/americans-have-worse-health-than-english-peers-study-finds
    As far as dental goes, one friend’s father was visiting from the UK and had a crown come loose. He saw a US dentist and was quoted around a thousand dollars. He chose to wait a few days, went home and got it done the day he returned for well under $50 USD.

    But we make it easy to get cosmetic surgery….

    Just rented out a SFR in NE Seattle for more than the PITI of what the monthly payment would be if it were sold at the price Zillow lists (pretty fair, I think) with 20% down. I had applicants in droves and they wanted to bid up the price 4-8% from my asking rent (to get their app processed first). I think the REOs in Seattle will be bought by investors and rented out. Might not work in car-commuter-only land, but in the city, near jobs and transit, seems like rental demand is high enough to support rational prices. Of course if the crazies ruin the good faith and credit of our country as they attempt to make political hay, all bets are off.

  25. 25
    Cheap South says:

    RE: NESeattleSeller @ 24RE: Spherical @ 23

    Everyone that has traveled a bit, or thinks for him/herself knows the Universal system is better. But the Insurance industry has a sweet deal here and thousands of lobbyists to keep it going at any cost. There aren’t enough studies, reports, or even Brits to counter what these people believe from Fox News, Rush and all the right wind websites they frequent. I witnessed it at a friend’s gathering 2 years ago (during the health care debate), where one of these people was telling a 70 something year old Brit visiting what her system did not cover. She kept on nodding no and saying “that’s rubbish!”. At the end, he concluded “well, anyway, it’s not the system we need in this country”. Never even considered reasoning; maybe ask a question and learn; nothing. Whatever he heard from Rush and Fox had to be true, period. Not allowed to think!

    How brainwashed are these folks? They pay taxes when they buy used cars; but they defend the right of the rich not to pay taxes when they buy planes. Try to explain that one!!!

    The reality is that the world copies most everything we do. Insurance companies could bribe politicians anywhere and take over the system. Yet, it does not happen with health care. Why? Politicians don’t want their testicles hanging outside Parliament.

  26. 26
    Scotsman says:

    RE: Spherical @ 23

    “The NHS, for all it’s faults, isn’t half bad. It’s certainly better than what we have”

    Complete B.S. “Free” does not equate to better- there’s more to it than that. This isn’t the health care thread, so I won’t respond beyond this. But I can’t let such lies stand. Why, just today- another article about rationing. How is that “better” if you’re the one not getting the treatment? Unbelievable:

    “Cataracts, hips, knees and tonsils: NHS begins rationing operations

    Almost two-thirds of trusts affected as cuts bite”

    http://www.independent.co.uk/life-style/health-and-families/health-news/cataracts-hips-knees-and-tonsils-nhs-begins-rationing-operations-2327268.html

  27. 27
    David Losh says:

    RE: Scotsman @ 26

    Insurance companies ration care every day.

  28. 28
    David Losh says:

    RE: ray pepper @ 8

    Not a bingo.

    Foreclosures mean Bank Owned. Banks take away from people to sell for dollars, which they lend to other people, to put it simply.

    More foreclosures mean more bank owned properties that will sit there.

    This idea that people bought more house than they could afford is absurd. More to the point is that properties are worth much less than the loan, or mortgage amounts. You bet people have lost jobs, and income, but the underlying cause of that is general debt.

    It just seems every one wants to blame the consumers for an economic collapse, and give banks as many hard assets as possible.

  29. 29
    Spherical says:

    RE: Scotsman @ 26 – If you’re going to complain about rationing, that means you’re complaining about a lack of access to healthcare. There are huge numbers of people in the US without any health insurance, compared to none in Britain. How’s that for access? And David at #27 is also spot on. Right now the US rations, severely, via the market. And just in case you’re about to tell me that free market driven health care isn’t rationing, then I should point out that if you accept that premise, then there isn’t rationing in Britain either– the Brits are perfectly free to go pay a doctor for what the NHS won’t do immediately.

    Also, I didn’t know there was a healthcare thread… I’ll take the argument there from now on.

  30. 30
    mukoh says:

    RE: Cheap South @ 15 – CS Its a mobile home! In a community of mobile homes!. Thats why its so low. SWE always says my neighborhood forgetting to put it in perspective, that the neighborhood is MOBILES!. Some are double wides even.

  31. 31
    Nick Sincere says:

    RE: Scotsman @ 22

    Just wondering, in what ways do you consider the U.S. to be special?

  32. 32
    kfhoz says:

    RE: Cheap South @ 25
    I agree. Lived 6 years in Australia with “government” national health care system. It was much better.

  33. 33
    dvdivx says:

    By Scotsman @ 26:

    RE: Spherical @ 23

    “The NHS, for all itâ��s faults, isnâ��t half bad. Itâ��s certainly better than what we have”

    Complete B.S. “Free” does not equate to better- there’s more to it than that. This isn’t the health care thread, so I won’t respond beyond this. But I can’t let such lies stand. Why, just today- another article about rationing.

    This will fall on deaf ears in a heavy blue area like this. Plenty here will continue to support Obama and ilk irregardless of the economic destruction.

    The foreclosed homes here are not for sale in this market either nor in any US market. It’s due to write down laws.A small hand full might go out but nothing compared to the massive existing inventory. Instead the homes will be bulldozed over time. These homes aren’t being maintained and the previous owner didn’t replace the roof or siding either before the bank got it. Mold sets in and costs more to remove than the house is worth for the low end of the market. The bank bulldozes the house and donates the land. Rinse and repeat. Except more land tax falls on the remaining homes and the price of rentals goes up. Sadly I’ve seen an enormous amount of out of state people moving into the Seattle area who don’t have jobs thinking that there are jobs here.

  34. 34

    By Spherical @ 29:

    RE: Scotsman @ 26 – If you’re going to complain about rationing, that means you’re complaining about a lack of access to healthcare. There are huge numbers of people in the US without any health insurance, compared to none in Britain. How’s that for access? And David at #27 is also spot on. Right now the US rations, severely, via the market.

    First, there is a health care thread here people! ;-)

    Second, the US is bi-polar when it comes to health care rationing. Some people get health care almost with complete disregard for scarcity, and others are left out and in even worse position because of that. It would be like if you had a grocery store where 60% of the people (those with the better jobs) could buy for 90% off. With such a system the shelves would be relatively bare and the prices of things would skyrocket. Food would be wasted. (For the analogy to work you have to assume that the 60% couldn’t buy and sell or give to the 40%.)

  35. 35

    By mukoh @ 30:

    RE: Cheap South @ 15 – CS Its a mobile home! In a community of mobile homes!. Thats why its so low. SWE always says my neighborhood forgetting to put it in perspective, that the neighborhood is MOBILES!. Some are double wides even.

    That certainly could affect the availability of financing. I’m not familiar with financing on mobiles, other than a vague recollection it depends in part on the age, but it’s possible that there are some mobile homes that even Bill Gates couldn’t get a secured loan on.

  36. 36
    David Losh says:

    RE: dvdivx @ 33

    You are touching on a specialty of Real Estate called property preservation. Banks have to do the work, and maintain the property, or look for buyers who will take the properties.

    There are plenty of laws that make home owners keep properties from being a hazard, or a blight to a neighborhood. properties get condemned.

    Bull dozing sounds like a great idea in a rural setting, but it’s a skilled trade. You would also have to consider that the insurance companies also have requirements.

    It’s much better to give the housing units away than to take on the expense of demolition.

  37. 37
    David Losh says:

    RE: Kary L. Krismer @ 35RE: Lo Ball Jones @ 1

    Which brings us to mobiles, or more likely, prefabs. They are financed like cars. You leave the wheels on. You can remove the wheels and keep them near by, or toss them, but ultimately the lender hauls the unit away, if you don’t pay.

    I don’t know what the current terms are, but kind of remember a 40% down payment. It may be less if the dirt secures the loan. In theory though the dirt is worth more than the mobile.

    I only mention this because between the two comments there may come a time when this becomes a preferred way to live.

    We almost put a mobile onto a lot we had in Greenwood. Some friends of ours did a few blocks away. The city didn’t like the idea, but they have no choice. We rehabbed the house instead, but under current zoning we could have kept the house, and put the prefab in front.

  38. 38

    RE: David Losh @ 37 – Modular are similar, and I could see it as a viable alternative, especially for an older couple with no kids still at home.

  39. 39
    MichaelB says:

    RE: Scotsman @ 26

    This is related as medical bills are the number one reason for bankruptcy in the USA.
    This seems like a binary argument – one system is good and the other bad. Actually, the USA already has socialized medicine – it’s called Medicare and it works great. In other countries, they have a base offering that covers everyone and all children and then people pay an additional amount to receive extra benefits like private hospital cover, etc… So there is no one right answer.

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