Yes, but how fast will prices drop?

[PerryChase]

LA_Renter. I’m with you on this. Sellers who need to sell will drive pricing. They will go through the 5 stages of grief… then they’ll do whatever it takes to sell.

I anticipate that by fall of 2007, we’ll see some drastic adjustments.

Like you said, the disintegration of lending standards will lead to a hard landing.

[HereWeGo]

I tend to agree with VCJIM. I suspect there will be many investors that try to pick up NOD/foreclosed properties at a bargain rate, in the belief that the bottom will be in the neighborhood of the bargain price. Will those properties prove to be a bargain 2-3 years from the purchase?

[VCJIM]

If they can flip them fast, it may work out ok but it will be very risky.

[Diego Mamani]

Howdy neighbor! So, I guess you’re Ventura County Jim.

[VCJIM]

Yes I am : )

[Diego Mamani]

Liquidity of RE is quite important. Very interesting arguments in this thread. The speed of RE depreciation will depend on how liquid properties are. Traditionally, post-boom price drops have been very slow due to the inherently illiquid character of housing or land.

This time, however, it can be argued that housing will become (or is becoming) less illiquid due to:

(1) Highly leveraged buyers (I can’t call them homeowners, since they are really owers).
(2) Countless newbie investors who jumped in the bandwagon w/o really appreciating the risks involved.

Without some degree of liquidity, meaning, without a substantial number of transactions, prices wouldn’t drop and we would be stuck with the 2005-2006 comparables. That’s why I think that Powayseller’s (or renter?) argument of high illiquidity in the post-boom era contradicts the notion of fast housing depreciation.

I think that factors (1) and (2) above have different prevalence in different cities or regions, and therefore, the speed of housing depreciation will vary widely from say, La Jolla on the one hand, to San Bernardino, on the other. However, cumulative depreciation (in percentage terms), will be about the same across all areas by the time the cycle bottoms out.

[no_such_reality]

That’s right VCJIM, NOD buying only works if the NODder has equity, substantial equity. Hypothetically, say at $630K house at current (real, sellable) market price with a loan balance (all combined) of $500K in NOD and knowing their really heading to foreclosure.

The sharks buy it at $525K if they’re kind (and it’s immaculate, less if not. Let the buyer walk away debt free or small change in pocket if they haven’t listed, do quick window dressing, pop the house on the market 5% below market (below the real selling market) at $600K and walk away from a sale with $50K or so in their pocket.

That’s were the problems start. If you don’t have significant equity at a quick sale amount and not needing significant repairs, a foreclosure flipper can’t get you out. There’s no money in it for them.

A non-pro, is approaching it like a real home and you’re really just doing a distressed sale. A big part is educating the seller, that the distress, is really distress and the train is rapidly leaving the building on the ability to get them out.

[smfj]

Has anyone seen the commercial telling retirees that their path to a carefree life is taking out an interest only mortgage on their home? It makes me cringe everytime I see it. To be honest, I haven’t really considered any reasons that it might make sense to do this (only if you’re paying credit card interest at a higher rate, or can invest the $ at a higher rate of return than the interest rate, right?), but it seems pretty shady to me. Even if the house was paid off long ago, and the mortgage that they take out is a fraction of the home’s current “value”, there is still the real possibility of an unhappy ending. Not to mention the fact that this is a demographic that’s constantly taken advantage of.

[powayseller]

no_such_reality, why wouldn’t the owner sell his own house for $550K, and pocket the difference, however small? If the owner has equity, he won’t let it get to foreclosure, or why would he?

[HereWeGo]

*nm*

Thinking through this stuff makes my head hurt …

[no_such_reality]

powayseller, they would, if they could. Granted, I’ll be honest, I’m not a foreclosure guru, but these are my thoughts.

The problem is housing is by nature, illiquid. Typical DOMS are 90-120 or more in a regular market. The question really isn’t who will buy it, but is who will buy it in the timeframe needed? Keep in mind that closing takes takes a normal buyer 30-45 days to complete. Once you’re NODded, the clock is running.

The sale has to be closed before the the last right to reinstate ( 5 days) before foreclosure sale. The foreclosure process from NOD to setting the foreclosure sale date is only 90 days.

So in reality, the NODder, needs to go from getting the NOD to realization that they need to sell, sell right now and then do the sale in under about 80 days.

How fast is someone that is stressed and trying to juggle the missed payment thing going to decide that the home they think, maybe even know, is worth $630K needs to be sold for $550K giving up $75K when they’re going broke as is?

[PerryChase]

All this time I thought that VCJim was Venture Capital Jim.

According to the lastest data from Dataquick prices already dropped 6% in 7 months in SD.

http://www.signonsandiego.com/news/business/20060811-1208-bn11homes.html

I expect 25% from the peak by this time next year.

[Diego Mamani]

I’m glad he’s not Viet Cong Jim.

I agree with the NOD argument. In a slow market it may take more than 3 months to sell, even in you pick a realistic price. Add another 5 weeks for escrow to close, and it becomes clear why the defaulting homeower (sic) can’t sell the house himself fast enought to avoid foreclosure.

[powayseller]

Rrising foreclosures will NOT halt the price slide. You are forgetting about buyer psychology. When the NASDAQ lost half its value, did people suddenly rush in to buy up the cheaper shares? Of course not. After the frenzy dissipated, they realized that earnings mattered. Likewise, by next year, people will realize that fundamentals matter, that mortgages made with exotic loans are not sustainable, and that houses should be worth a reasonable multiple of that city’s wages and its underlying rental income stream.

Above, several people proposed that dropping prices will increase demand, saving the housing market. They are basically saying that prices and demand are inversely related: as prices drop, demand picks up.

The fact is, it doesn’t work that way in an asset bubble. What we find is the opposite: as prices rise, demand increases as people are in a frenzy state to get in before prices rise further. When the bubble pops, demand falls, causing prices to drop, making demand fall further, in a vicious cycle. Buyer fear leads to fence sitting, as they are afraid to buy today in fear that prices could be lower tomorrow.

Prices will keep falling until they return to their fundamental value, and then people will start getting interested in buying homes again.

My guess is that the first group of buyers will be landlords, who wil pick up lower priced properties because the time is right to be cash flow positive on rentals. This will make the median drop further, as the low end sales will make up more of the solds. Once home prices are a multiple of 3x a person’s income, they will become interested to buy a house, since it will be affordable. So the necessary condition for psychology to turn is low prices that are back to fundamental values.

Another factor is lending and credit availability. Rising foreclosures and the new FDIC lending guidelines will tighten underwriting rules. Soon enough, borrowers will be qualified on the fully indexed rate, not the teaser rate. They’ll need to prove their income and make down payments. Bank defaults and foreclosures will lead to less money available for mortgages, so only the most creditworthy will qualify. This will reduce the number of possible buyers.

In summary, prices can only turn around once they are down to fundamentals and people can truly afford a mortgage based on traditional underwriting standards. Don’t look for any false bottoms or sucker’s rallies. Houses are not like stocks.

Schahrzad Berkland

[no_such_reality]

Powayseller, agree, foreclosures will drive prices down.

My original question on how liquid a foreclosure is was geared to the number of people I suspect are upside down and won’t be able to afford their loan.

They basically have two options: negotiate a short-sale or go foreclosure.

For those houses, an investor could arrange the short sale and loan payoffs, but… it requires more experience to make money on it.

For the homes that end up worth $500,000, with $600,000 of loans. How liquid are they and how much downward price pressure do they have once they go foreclosure sale? How long can they sit as a REO, owned by the bank? Once they go to auction, investors, really professional foreclosure buyers, will buy them, cheap. That price doesn’t get reported. The question is, when they turn back around to sell, how discounted will they be?

I also recall another thing. I remember 1994 and listening to coworkers talk and needing to talk to the bank about forgiving a chunk of their loan or they’d walk away because they were so upside down.

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