Email from a realtor

[Prufrock]

Just thought I would pass along this email from a San Diego County realtor. Let his knowledge fill your soul.

—
Prufrock,

I get a lot of questions about foreclosures due to all the press commentary. I copied the section below from a recent newsletter I received from the “San Diego Daily Transcript”. It shows that the number of actual foreclosures in San Diego county this year has increased from about 60 per month to a little over 100 per month now in a county with about 3,000,000 people that is nearly out of buildable land that is already, by many estimates, about 50,000 homes short of meeting the demand. For those reasons most of the foreclosed homes sell for nearly full market value and often do not represent the “deals” many people expect. While I agree that some of the leveraged loans could add to the numbers I don’t see a huge impact locally. Time will tell.
/s/
—

[Bugs]

Ahh, the standard NAR party line, regurgitated.

The agent’s phrase “meeting the demand” is meaningless because “the demand” is irrelevent until those people have the financial means to satisfy their demand. That happens in one of two ways – either those households all have to make the $150k+ annual incomes it would take to buy at the current prices, or the current prices have to come back down to what an annual household income of $70k can afford to buy.

If there is so much demand at these prices, why are there 15,000 units languishing on the market right now?

[PD]

The realtor is totally ignoring the fact that foreclosures were selling at market prices because the demand was high and everyone expected rising prices. When demand falls and everyone starts to worry about falling prices, foreclosures will sell for less and less money.

[zk]

There’s been a lot of talk in this forum lately about economic fundamentals. They are, of course, important. But, in my opinion, for nominal prices to drop by more than, say, 15% will take more than just problems with economic fundamentals. If fear doesn’t set in, I wouldn’t be surprised to see nominal prices drop by no more than 3-4% per year for 4 or 5 years followed by stagnant prices for a few more years. I think that for a larger correction, there will have to be some fear.

I think that for there to be enough supply (scared homeowners wanting to get out in addition to the people who can’t afford their loan resets) and little enough demand (potential buyers who can afford a house but are afraid to buy a house because they think prices are going to continue downward) for a correction of 30% or more in nominal prices, fear will have to dominate the market.

As I said, I think there will be enough supply and little enough demand for a significant (15%) drop. But for a 30% drop, we’ll need some pretty outrageous supply and demand numbers. Numbers that, in my opinion, only dominant fear can provide.

[PD]

I wonder how much the internet is going to affect prices. Realtors no longer control the information (and it is harder for them to get people to believe the positive spin). The general public will have much greater access to information about scary markets as well as the bad news in their own market. I think this will stoke the fires. Just like Greenspan’s “irrational exuberance,” fear feeds on itself.

[Bugs]

The one thing that these markets have demonstrated, time and again, is that the psychology of the herd is one of the fundamental elements the contributes to the trends. After a certain point, the perception does become the reality until the reality runs too far to the extreme.

[North County Jim]

For those reasons most of the foreclosed homes sell for nearly full market value…

One data point does not establish a trend but..

17xx Tara Way
San Marcos

Bought in July 2005 for $860,900 by realtor/speculator. Went on the market in September for $875-925k with no success. Foreclosed last month and just appeared as an REO on the MLS. Asking price of $818k.

The three competing listings on the same street are all asking anywhere from $860k to 1 million. Of course, these have window coverings and backyard landscaping so the comparison is limited.

Nevertheless, it’s selling at a $44k discount to a year ago.

[ocrenter]

your standard 0 down, 80/20 piggyback loan for $860,900. Probably had an extremely low teaser rate for the first 6 months on that 20% ARM. Figured they can get it sold before the rate adjust.

[ocrenter]

NC Jim, I took the liberty of using your example in my latest post on my Blog, hope you don’t mind.

[JJGittes]

Will be interesting to see if it actually does sell at a $44k discount. Also, not good for the others on the street regardless. I just posted in another thread about all the resales in SEH I saw yesterday when I was in the area. No shortage of inventory, new and reasle, in there.

[North County Jim]

Two data points. Not yet a trend but..

31xx Sycamore Heights Pl
Escondido

Bought in October 2004 for $924,900. Foreclosed last fall and has been on the MLS as an REO since February. Original asking price of $880k now reduced to $855k.

Assuming the condition has not deteriorated, we’re looking at a $70k reduction in 19 months. And it’s still sitting.

[powayseller]

Looks like over 10% reduction, and we haven’t even got in the 2007 major ARM resets yet!

Assuming the price peaked in Summer 05 for $990K, a 10% reduction would be $891K. We’re even below that.

Now who around here is predicting a 10-20% drop? With a 9month drop of 10%, and a rate of change which is increasing, we could be down 15% just this year alone.

[sdrealtor]

Your assuming a peak of 990K is not a reasonable assumption. The price they paid in late 2004 was the peak and they may have over paid at the time. 5% reduction seems far more reasonable.

[an]

I don’t get your logic. Why is 990k in Summer 05 not a peak when it’s higher than late 04? Doesn’t peak = the highest point? Regardless whether the owner over paid or under paid, the price sold is the only data we have and the only one that matter. If we’re not on the way down, you probably wouldn’t say he/she over paid.

[powayseller]

sdrealtor believes the peak was in 2004.

[Author]

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