Sunday, February 21, 2010

What strikes fear into the hearts of sellers? Only "the shadow" knows...

"The shadow" being unsold, banked-owned inventory called "shadow inventory". You'll often hear people in the foreclosure side of real estate talk about this like it's a scary monster ready to come crashing into the market to drop prices.

In the hardest hit areas of the country including Southern California and the North SF Bay Area, there are plenty of bank owned properties not on the MLS and simply not for sale. In some areas there are thousands of homes but in most areas there are only a handful. So, why the fear?

In areas with a lot of shadow inventory the fear is that the banks will dump the properties to get them off their books. The flood of inventory would thus force sales prices down leading to more short sales and foreclosures. Fear mongers argue that there are years of inventory built up and that local markets will take that long to recover.

Here's why "the shadow" is NOTHING to fear; banks don't want to lose money and dumping inventory to sell fast would increase their losses. It's that simple. All the shadow inventory comes from foreclosures and in California there's no recourse to the original owner (with some exceptions). So, the banks have no incentive to dump these homes. They're better off waiting and selling based on demand - which is exactly what they're doing.

Moreover, do a search on articles about "shadow inventory" in markets with a lot of "shadow inventory" and you'll find that investors are buying a lot of these homes as fast as they come on the market. Most homes held by banks are low-cost, making them perfect for rentals or flips. Several research groups have done studies on this side of the business including a recent one posted on the C.A.R. website. That study and others have found that "shadow inventory" is not as large or as scary as once thought because of investor demand and first-time home buyers.

By shining some light on "the shadow" and moving past the fear, we see the market for what it is, balanced and improving. Inventory levels in the Los Altos area and Santa Clara County in general are normal for this time of year. Sales prices are increasing but just slightly which helps motivate new sellers to list properties, including the banks. Sales volume continues to be strong, especially in the low-end. I had over 100 people through my open house yesterday for a very nice but modest $1.4 million home in Los Altos. I'd say that's a good indicator that there are plenty of buyers out there.

What do you think about shadow inventory or the prospect of a flood of bank owned properties?

Friday, February 12, 2010

Fear mongering will not help the recovery

There was an article in the SJ Mercury News with a headline saying home prices "may drop" which got me thinking...isn't fear mongering one of the factors that kept the mortgage meltdown going? The article is here:
http://www.mercurynews.com/real-estate-news/ci_14368647?nclick_check=1

Sometimes the press does a decent job of reporting. I've been fair about discussing both positive and negative news in my blog. However, I take issue with this article on the basis that buyer and seller psychology is fragile right now. We're finally getting to a point where rational markets are coming back.

If the media can take a break from spreading FUD (fear, uncertainty, and doubt) then 2010 should be a good year for real estate. However, enough baseless rumor mongering WILL stall the market. My suggestion for the media, report facts, stop projecting, and try to stay positive.

Tuesday, February 9, 2010

Zombie short sales could come back to haunt you

Last week I attended the C.A.R. Conference in Indian Wells, CA as a newly appointed director. There were a great many interesting topics but none so scary as the prospect of what I call the "zombie short sale".

Most sellers and agents believe that a short sale means their debt obligation to the bank is over. However, that's not entirely true. If you asked for a "non-recourse" agreement with the bank then yes, you're off the hook. However, since most people don't ask for that the bank CAN come back to recover the loss from the short sale. This erroneous assumption is taken from the foreclosure arena where non-recourse is part of the deal. California is a "non-recourse" state.

So, if you walk away from a short sale down a few hundred thousand dollars, you can expect the bank to come back looking for it somewhere down the line. The zombie short sale returns!

Now, just to make things more interesting is that a lot of borrowers obtained what we called "liars loans" or "no doc" (aka no documentation) loans which could include exaggerated incomes and assets. If someone got one of these loans and lied on the application, then all bets are off.

In either a foreclosure or short sale, fraud becomes a basis for recourse on the loan - meaning they can come after you to collect the loss. Once again, the zombie returns!

Los Altos and other high-end markets have seen a few short sales so I dont' see this being a major problem for us. However, it could be a HUGE issue in the Bay Area in general. What I believe it could do is create a large rise in personal bankruptcies, prolong the recovery, and reduce the pool of available buyers in future years. All of which could stall future growth in property prices - regardless of the area.

For clients and agents - what do you think about this situation?

Friday, February 5, 2010

Los Altos and Los Altos Hills sales up on 2009

We all know the high-end took a pricing hit in 2009 but now we can see how well we did on a unit sales basis. As is well known, some cities did well and others took huge hits. Look at the sales drop-off in Saratoga. If you wonder why prices have dropped so much there, look at sales.

Here's the article in the SJ Mercury News this morning about the high-end:
http://www.mercurynews.com/business-headlines/ci_14335062

For Los Altos Hills, sales increased from 157 units in 2008 to 174 units in 2009. Keep in mind that includes sections of Los Altos with a 94022 zip code. However, we also know from past posts here that the unit sales and average sales prices in Los Altos increased strongly last year.

In Los Altos and specifically the 94024 zip code, sales increased from 204 in 2008 to 211 in 2009.

The only other luxury market in the area to see a move up in sales volume was Palo Alto. The hardest hit areas were Sunnyvale and Saratoga.

While I don't think we're back to a boom market at all, we're starting to see a more normal market and I think that will continue in 2010.

Monday, February 1, 2010

Foreclose does not mean short sale

A frequently asked question at open houses is "Is this a short sale?" Given the current market that's a reasonable question. On occasion, I'll get someone who asks if the home is a foreclosure/short sale as if they're the same thing. That usually prompts an explanation of the difference.

A Realtor should know the difference. A foreclosure usually happens when someone falls behind on their payments. I say usually because I've heard rumors of banks foreclosing on homes when they are faced with liquidation. Regardless, a person behind on their mortgage may or may not have equity. If they have equity, it's NOT a short sale.

Short sales are when the homeowner wants or needs to sell and the current value of the home is below what they owe on the mortgage(s). When that happens, the bank has to approve how much "short" the seller is - meaning what the difference is between the bank loan and the amount the home is hold for.

A home in foreclosure, with plenty of equity, will sell just just like any other home with the seller taking any equity in the home after paying off the loans. If the home is bank owned (aka REO), meaning the foreclosure process has been completed, it should sell just like other homes as well. With a REO property, equity doesn't matter since the home is owned by the bank.

However, a short sale can be a long process taking many months while people at the bank decide if the offer made on the home is acceptable. If not, a new offer or counter is submitted and the process restarts. While most short sales only take a few months, some take over a year. Patience is the key.