Some quick thoughts on REOs and Bank-owned sales —
At this week’s Five-Star Default Servicing Conference, the chatter centered on the “next wave of REOs” and the “tsunami of foreclosure sales” coming in 2010. The Home Affordable Modification Program (HAMP) issued in March focuses on providing loan modifications to those in default or imminent default. The US Treasury July report indicated that less than 10% (approximately 235,000) of the 2.7 million that could be eligible were modified under this program.
According to RealtyTrac, foreclosures have continued to rise in July and August but REO sales dropped below 2008 levels because of the federal and state foreclosure moratorium programs implemented throughout the year. This is causing rising housing inventory on bank balance sheets that should result in greater REO inventory starting in late 2009 and in 2010.
However, there’s a counter argument that REOs will enter the marke at higher levels in late 2009 and 2010 but in a more controlled flow than a “tsunami” as discussed frequently at the Five-Star conference:
- Banks aren’t in any rush to offload their non-performing assets and REOs at today’s price levels. Right now, losses on housing assets are book losses even with mark-to-market accounting rules, so until they begin selling these assets to hedge funds and other investors, they’ll remain as non-cash losses. Banks are well-capitalized right now, so they have less incentive to move these assets from their books while price levels are depressed.
- “Organic” sellers remain inactive. While there is usually a normal amount of housing activity every year, many would-be sellers are sitting out of the market. While these sellers might be able to get a great deal on the buy-side move-up, the losses they would take on their current home are likely to wipe out any equity they may have built over time with today’s depressed price levels. With cash constrained, households are hard-pressed to come up with the money needed for the next move. The “wealth affect” also has some affect, as households are simply playing it conservative before expanding their monthly bills. The stock market has risen nicely since it’s lows in March but is reaching the psychological ceiling of 10,000 while unemployment continues to rise.
- The $8500 home-buyer tax credit is likely to be extended. There’s talk about the upcoming December deadline, but it is far too politically advantageous to simply allow this to expire. Providing additional support to the housing market through Spring 2010 would expectedly offer some positive economic news for the 2010 election cycle. (Whether or not you think that an extension will have diminishing effects is another conversation.) My guess is that this extension will get passed in late November, making it appear that lawmakers were sweating it out until the file hour to make it work. It needs to look good and passing it too soon will cause Fall 2009 sales to slow since most people would prefer to buy and sell in Spring.
- It’s politically advantageous for the government to deter banks from foreclosing. See above comment about the 2010 election cycle.
- National housing supply has declined month-on-month since January 2009 while prices have strengthened throughout the year:
US Housing Supply since September 2008
US Housing Price Trends since September 2008
Give the banks a little credit. A tightening housing supply is a contributing factor to higher prices in 2009. Releasing large quantities of REOs to the market would cause a housing supply shock and tremendous downward price pressure for housing. This would result in even higher realized losses for the banks, placing them back into operational stress. Instead, expect the “wave of REOs” to instead trickle moderately to enable price level support and mute realized losses by the banks.
Based on the number of real estate agents and brokers attended the Five-Star Conference, industry expectations are bullish for the number of REOs that will hit the market in 2010. I’m not wholly convinced quite yet.
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Well, you left room to respond. I came on here in an effort to figure out when the inventory is coming back. I buy foreclosures, remodel, and rent or sell. I can tell you that the banks will NEVER hold on to property that could be on the market. If you own a home, you should be able to tell me why, but since you don’t in your article, I’ll tell you: CARRYING COSTS.
Here’s a few carrying costs: taxes, insurance, property maintenance, winterizing, code compliance, and I’ll throw in depreciation and damage.
If you own your own home, call your insurer, tell him your house is vacant as ask for his cheapest rate. Vacant properties are sometimes not insurable except by the most expensive due to high rates of claims.
Where is the property? You think a home makes it thru a summer in the south with 90% humidity unscathed. Your at the least going to be re-drywalling and painting. How about the winter? Hows your plumbing? Does the basement ever get damp? Did you call the mold remediator b/c the house sat empty for three years (well not empty of all living organisms, just people). How about that brand new furnace, a/c, plumbing system, hot water heater? You gonna let them all depreciate? Same goes for the roof?
So, fees, depreciation, and depreciation as a result of damage. Still want to roll the dice on a better market. The banks here don’t dare. This is an argument that exists in the classroom only.
Item #1 is the best explanation I’ve seen for why a lot of banks won’t accept even reasonable offers on foreclosures. Been seeing this a lot in the North Atlanta Area.
RM
I left the first commment, and not to be argumentative, but RM’s comment is also worth responding. I do this is Michigan for disclosure purposes, so I don’t know the ATL market. However, RM’s comment seems to imply that he misunderstood the author’s argument. The author is arguing that the Banks are NOT LISTING properties, not RM’s understanding that the banks ARE LISTING the properties but not accepting reasonable offers. That huge difference in argument aside. RM put your money where your mouth is: Give me one MLS number and the supposed “reasonable offer” you submitted. Shouldn’t be too hard to prove your point should it?
Dear none,
Although you preface your second comment with “not to be argumentative”, that is exactly what you are being. Both of your comments lack any benefit whatsoever, and reading them left me confused as to your purpose and annoyed at your tone. Blog comments are meant to be contributive, and your’s are anything but. However, you seem to espouse such knowledge about the market, maybe you should start your own un-anonymous blog so we could all glean from your profound market insights and experience.
We submit many offers on bank owned property and lately few are accepted. I know this is due to those reasons listed in the above article. In the defense of article and argumentatively to None, Why would banks further their demise by off loading homes to circumvent carry costs? When trickled out over a longer duration they can more than compensate for the carrying cost due to increased pricing and at the same time not further the hurt felt by the masses as they watch their property value diminish. We also purchase, rehab, rent or sell and have done so for decades in Florida.
We have been informed by realtors/mortgage brokers in our area that the lenders are conducting a gut check. The prevailing question seems to be, Are the carrying costs and fees for property management worth carrying the home for 6 months in an area where there is great potential for a higher return? We have been told the answer is determined by zip code and property. As always, it comes down to location and curb appeal.
I find this site and your articles to be well written and insightful.
Hi Scott,
Thanks so much for writing about this and attending these conferences that many of us can’t get to. The question of what will happen with the reos that have not come to market yet is a big question on many minds! I’ve also heard that some banks may be negotiating with investment groups for bulk purchases. Based on the numbers we’re hearing about, I find it hard to believe that they will be dripping the listings to market based on local conditions. I’m told they don’t have enough staff to manage what they are already doing. Does this mean more hiring for this sector?
A very nice article which explains the future plans of REO’s by explaining them in 4 major points. ..for more services and Related properties in India…
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