Home Tax Credit a Costly Failure

Apr 28, 2010 | No Comments | Sean Mills

From David Kocieniewski at the NY Times: Home Tax Credit Called Successful, but Costly
Though the Treasury Department and the real estate industry have termed the program a success, helping 1.8 million people buy homes, many tax policy experts say it has been singularly cost-ineffective: most of the $12.6 billion in credits through end of [...]

From David Kocieniewski at the NY Times: Home Tax Credit Called Successful, but Costly

Though the Treasury Department and the real estate industry have termed the program a success, helping 1.8 million people buy homes, many tax policy experts say it has been singularly cost-ineffective: most of the $12.6 billion in credits through end of February was collected by people who would have bought homes anyway or who in some cases were not even eligible.

There is no question this program was very costly. And why is the Treasury confusing activity with accomplishment? Sure sales briefly surged, but were new households formed? How many new jobs were created?

“We were happy in our apartment, but $8,000 was just too much to pass up,” said [Mr. James Green, a student at Purdue University], 29, who shopped furiously with his wife for two months before signing a contract in March to buy a three-bedroom ranch.

“We bid on a couple places that didn’t work out,” he said, “but we always made sure we had a backup plan because we didn’t want to miss the deadline for the credit. And when we finally agreed to a contract, it was this huge relief.”

For every home buyer like the Greens, real estate agents say there are at least three others who collected the credit even though they would have bought without it. That means for each new buyer who was truly lured into the market by the credit, the federal government paid more than $30,000.

This is very optimistic – the ratio was probably 5-to-1 for the initial credit and even higher for the extension. But this shows two failures of the tax credit: 1) the high cost, and 2) it was just moving people from apartments to homes and didn’t reduce the excess housing inventory (yes, rentals count as housing inventory too).

“The tax credit helped to stanch the price declines, which had substantial benefit for the entire economy,” said Mark Zandi at Moody’s Economy.com.

And this has been the policy – support asset prices by limiting the supply (all the foreclosure delays), and pushing demand (low mortgage rates and the tax credit). This has helped the banks significantly, and Zandi argues this has boosted confidence. Maybe … but I’m not convinced that supporting house prices above the market clearing level to help the banks and boost consumer confidence makes sense. I think targeting jobs – and therefore household formation – would have been a far more cost effective program.

Source Article

Prices Fell .64 Percent in February, But Gained 1.43 Percent In Last Year

Apr 28, 2010 | No Comments | Sean Mills

I come across so much information in my research and as i have been so busy as of lately I have not posted much of anything.  I will just keep doing it regardless of the feedback.-Sean

Prices fell .64% in February, but increased 1.43% compared to a year earlier, according to new Case Shiller data, with [...]

I come across so much information in my research and as i have been so busy as of lately I have not posted much of anything.  I will just keep doing it regardless of the feedback.-Sean

Prices fell .64% in February, but increased 1.43% compared to a year earlier, according to new Case Shiller data, with the gain representing a significant positive change.

The Case Shiller 10-City Index would fall 7.68% over 12 months if the February fall continued, but the data on the direction of values point in many different directions. Prices for all of 2009 were flat, but have fallen 30% since values peaked in June 2006. The year-over-year increase is a new and positive pattern, but there are many negative trends to consider.

Most analysts for property values (and all assets including stocks) are naturally positive, which calls into question a positive zeitgeist now attached to property values. It is however unambiguously positive that both the 10-City and 20-City index registered a simultaneous annual gain in February — which was last seen in DECEMBER 2006 (more than THREE years ago).

Prices Fell .64 Percent in February, But Gained 1.43 Percent In Last Year

April 27, 2010

tags: New Observations Forecast of Property Values

by Michael David White

Prices fell .64% in February, but increased 1.43% compared to a year earlier, according to new Case Shiller data, with the gain representing a significant positive change.

The Case Shiller 10-City Index would fall 7.68% over 12 months if the February fall continued, but the data on the direction of values point in many different directions. Prices for all of 2009 were flat, but have fallen 30% since values peaked in June 2006. The year-over-year increase is a new and positive pattern, but there are many negative trends to consider.

Most analysts for property values (and all assets including stocks) are naturally positive, which calls into question a positive zeitgeist now attached to property values. It is however unambiguously positive that both the 10-City and 20-City index registered a simultaneous annual gain in February — which was last seen in DECEMBER 2006 (more than THREE years ago).

Clouding any and every forecast on property values should be record delinquencies of 15% of all mortgages outstanding, unemployment at just under 10%, and a mortgage market of exceptionally high risk which has been abandoned by all private money sources. About 13.6 million homeowners have no equity or negative equity and therefore have no current wealth to protect by making their mortgage payment. Real estate prices would fall flat on their face without government mortgage money which represents nine of ten new mortgage dollars.

New Observations has previously forecast a fall in values in 2010 of 13 percent based on an average of four major property price indexes. In a separate analysis of a 120-year time series, we forecast a total fall still ahead in the national market of 22% and a total fall from peak-to-trend of 49 percent. Radical government intervention may stop these forecasted falls.

The Case Shiller monthly changes and annual changes for individual cities and for the composite indexes are listed above.

Check Calculated Risk for a good chart of rising and falling property prices and unemployment. Cool charts here on many of the cities covered by Case Shiller. Wall Street Journal on Case Shiller update.

***

PRINT — Prices fell .64% in February, but increased 1.43% compared to a year earlier

Please forward questions, corrections, and reactions to comments below or send me an email. Please send an email if you would like to take out a new mortgage.

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Freddie Mac: “Potential Large Wave of Foreclosures”

Feb 24, 2010 | No Comments | Sean Mills

Another fine calculated risk article.-Sean

“We start 2010 with some early signs of stabilization in the housing market, with house prices and home sales likely nearing the bottom sometime in 2010. We expect that low mortgage rates, relatively high affordability and the homebuyer tax credit will help continue to fuel the recovery. Still, the housing recovery [...]

Another fine calculated risk article.-Sean

“We start 2010 with some early signs of stabilization in the housing market, with house prices and home sales likely nearing the bottom sometime in 2010. We expect that low mortgage rates, relatively high affordability and the homebuyer tax credit will help continue to fuel the recovery. Still, the housing recovery remains fragile, with significant downside risk posed by high unemployment and a potential large wave of foreclosures.”
Freddie Mac Chief Executive Officer Charles E. Haldeman, Jr.

The quote is from the Freddie Mac Q4 earnings release:

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Foreclosure picture bleak, unemployment wreaking havok

Jan 19, 2010 | No Comments | Sean Mills

Does this surprise anyone?  Do you need to be a rocket scientist to figure this out?  I guess you do with all the mis-information floating around. -Sean
A record 3 million U.S. homes will be repossessed by lenders this year as high unemployment and depressed home values leave borrowers unable to make their house payment or [...]

Does this surprise anyone?  Do you need to be a rocket scientist to figure this out?  I guess you do with all the mis-information floating around. -Sean

A record 3 million U.S. homes will be repossessed by lenders this year as high unemployment and depressed home values leave borrowers unable to make their house payment or sell, according to a RealtyTrac Inc. forecast.

Last year there were 2.82 million foreclosures, the most since RealtyTrac began compiling data in 2005. More than 4.5 million filings are expected this year, including default or auction notices and bank seizures, said Rick Sharga, senior vice president for the seller of default data and forecasts based in Irvine, Calif. There were 3.96 million filings in 2009.

“This will be the peak year, and the main reasons are unemployment and house prices that have stabilized way below mortgage amounts,” Kenneth Rosen, chairman of the University of California’s Fisher Center for Real Estate and Urban Economics in Berkeley, said in an interview.

Government and lender efforts to keep people in their homes are failing to relieve the worst foreclosure crisis since the Great Depression. Unemployment was 10 percent in December, unchanged from the previous month, while the so-called underemployment rate that includes part-time workers and discouraged workers rose to 17.3 percent from 17.2 percent, the Labor Department said Jan. 8.

U.S. lenders permanently modified 31,382 mortgages, or 1 percent, of the 4 million loans targeted under the Obama administration’s foreclosure prevention plan through November, the U.S. Treasury Department said last month. Fewer than half of the 3.2 million homeowners estimated as eligible for mortgage relief by the Treasury actually qualify, according to Herb Allison, assistant secretary for financial stability.

“The government doesn’t have their act together on housing,” Rosen said. “They seem to be pussy-footing around. We need a much more robust effort.”

Obama’s loan-modification program is “destined to fail” because it doesn’t confront the problem of negative equity that is driving foreclosures, Laurie Goodman, senior managing director at Amherst Securities Group LP, told Congress Dec. 8. Homeowners with negative equity, where a property is worth less than the loan, have little incentive to keep paying the mortgage and will “strategically default,” Rosen said.

More than 728,000 borrowers have already received an average $550 reduction in monthly payments, giving them “a second chance to stay in their homes,” she said.

An $8,000 first-time homebuyer tax credit and a $200 billion lifeline to keep mortgage buyers Fannie Mae and Freddie Mac solvent are among the administration’s efforts to date that have supported the housing market, she said.

“Modifications will not be the solution for all homeowners and will not solve the housing crisis alone,” Reilly said.

The number of homeowners with negative equity totaled 10.7 million, or 23 percent, at the end of the third quarter, according to a Nov. 24 report by First American CoreLogic, a Santa Ana, Calif.-based real estate research firm.

Home prices probably fell 13 percent in 2009 to a median of $172,700, following a drop of 9.5 percent the previous year, Walt Molony, a spokesman for the National Association of Realtors, said in an interview. Prices are down 26 percent from the July 2006 peak.

Defaults among prime borrowers are likely to accelerate, adding to a “huge” inventory of properties that banks possess and haven’t yet put on the market, according to Robert Shiller and Karl Case, who created the S&P/Case-Shiller Home Price Index. In September, Goodman estimated that 7 million homes were already in foreclosure or likely to be seized.

The housing market is weighed down by a “a massive supply of delinquent loans” that will end up in foreclosure this year, James Saccacio, RealtyTrac’s chief executive officer, said in a statement Friday.

The end of the government’s tax credit for first-time buyers, scheduled to expire in the spring, and the end of the Federal Reserve’s $1.25 trillion purchase of mortgage bonds, may add to housing woes, Rosen said.

A total of 2,824,674 U.S. properties got at least one foreclosure filing in 2009, a 21 percent jump from the prior year and more than double the number in 2007, RealtyTrac said.

About 2.2 percent of households received a filing last year, according to the company, which sells default data collected from more than 2,200 counties representing 90 percent of the U.S. population.

December filings increased 15 percent from a year earlier to 349,519, the 10th straight month the tally surpassed 300,000. Foreclosures in the fourth quarter jumped 18 percent from the same period in 2008 and fell 7 percent from the third quarter.

Nevada had the highest foreclosure rate for the third straight year in 2009, with more than 10 percent of households receiving at least one filing. December filings fell 22 percent from a year earlier and rose 27 percent from November.

Arizona had the second-highest rate for the year as more than 6 percent of households got a filing. Florida was third at 5.93 percent, followed by California at 4.75 percent and Utah at 2.93 percent, RealtyTrac said.

The other states among the 10 highest rates were Idaho at 2.72 percent, Georgia at 2.68 percent, Michigan at 2.61 percent, Illinois at 2.5 percent and Colorado at 2.37 percent.

source article

Bad bets: The condo meltdown in Las Vegas mirrors Miami’s

Dec 29, 2009 | No Comments | Sean Mills

Though Las Vegas’ problems are on a much smaller scale, the boom and bust is fairly similar. Some blame South Florida developers, in part, for whipping up the frenzy.

Photos

BY MONICA HATCHER

mhatcher@MiamiHerald.com

LAS VEGAS — With foreclosures soaring and home prices in the tank, Miami and Las Vegas often compete for the dubious distinction of being [...]

Though Las Vegas’ problems are on a much smaller scale, the boom and bust is fairly similar. Some blame South Florida developers, in part, for whipping up the frenzy.

Photos

BY MONICA HATCHER

mhatcher@MiamiHerald.com

LAS VEGAS — With foreclosures soaring and home prices in the tank, Miami and Las Vegas often compete for the dubious distinction of being the nation’s hardest hit condo market.

Just a few years ago the two cities shared a reputation as invincible boom towns. Now both real estate markets are climbing out of an abyss of stalled condo developments, spiraling foreclosures and stymied sales.

Trying to figure out which is the biggest real estate loser isn’t so easy. But comparing the two markets puts into perspective just how unprecedented Miami’s condo explosion was.

“They built less in Las Vegas than in Miami,” but there are fewer potential buyers, said Marty Burger, president and chief executive of Artisan Real Estate Ventures in Las Vegas.

Vegas condo owners like Kathy Riggle, a retiree from Tucson, who bought a condo conversion sight unseen for $180,000 during the boom, have watched in disbelief as values have dropped by more than half.

“Will Rogers once said, `Buy land because they ain’t making any more of it.’ We got caught up in it like a lot of people,” Riggle said.

Her unit, now valued at $49,000, is in foreclosure because she can no longer rent it for enough to cover the mortgage.

Las Vegas analysts and builders blame South Florida developers, as well as other out-of-market players, for helping whip up the condo mania in the nation’s gambling mecca.

During the the boom, Miami development companies launched full-scale assaults on the Vegas market — complete with cocktail parties (hosted by gorgeous models) and million-dollar sales centers.

The developers dreamed of expanding their empires on the new Vegas condo frontier.

They figured frequent visitors to Las Vegas from Canada and the mega-population hubs of Southern California would buy second homes rather than continue paying for high-priced hotel rooms.

Faulty assumption, said Richard Lee, a Las Vegas analyst and vice president with First American Title Company.

And here’s another false perception the Vegas condo boom was built on: Locals, tired of traffic and long commutes, would seek a more urban lifestyle closer to the action on the Vegas Strip.

“There was no real demand that you could point to,” said Jack Winston, a consultant with Goodkin Consulting who cautioned several South Florida developers about their ambitious Las Vegas plans. “The people in Las Vegas, if they want to gamble, they have their own casinos in the suburbs. Permanent residents rarely go down to the strip.”

Just as in South Florida — hemmed in by the Everglades and the ocean — the vertical push out West was propelled by the belief that developable land was running out. Although Las Vegas is surrounded by empty desert, much of it is federally owned and off limits to development.

“Outside developers came here and really misjudged this market,” said Irwin Molasky, a veteran Las Vegas real estate developer, who also built the 84-unit Park Place condominium that sold out in 2001. “It is not a Miami market. We don’t have the South American trade, the New York trade, and they just thought, if you build it, it will come.

“And, unfortunately, they turned out to be wrong.” he said.

Aventura-based Turnberry Associates was one of the first to go vertical in Las Vegas with the four-tower Turnberry Place project. It rapidly closed out 770 units and made tremendous profits.

Others tried to mimic them.

“It was like the gold rush after that,” said Bruce Weiner, president of Turnberry Ltd., the residential division of Turnberry Associates.

But condos weren’t the only buildings sprouting on the Vegas skyline. There was also a casino building spree that pushed construction and labor prices through the roof, forcing dozens of developers to shelve plans. In the end, a fraction of what had been proposed actually made it out of the ground.

PROJECTS STALLEDIn Las Vegas, only 8,300 condominiums of 29,000 residential condo units planned since 1999 were built, most of them around the Strip. Only 13 high-rise projects, comprising 21 towers, went up. Six were Turnberry’s.

 

Another 4,800 units are stalled in their tracks or otherwise yet to be completed, including almost 900 residential units in the vaunted CityCenter development, a $9 billion mixed-use project of shimmering hotels, condominiums and retail space that sits on 68 acres adjacent to the strip. The units are scheduled to begin closings in the first quarter of the new year.

As in South Florida, several developers were caught mid-construction when the market froze. Others, like Turnberry, which finished the two-tower Turnberry Towers in 2007, were stuck with unsold units.

“We were about 50 percent sold out in the second tower when Armageddon set in,” Weiner said. Turnberry’s partner in the venture, Prudential Real Estate Investors, ended up paying off the banks and taking ownership of the project, which still has about 250 of 636 units unsold, he said.

Another Turnberry project, the $3 billion Fountainebleau Las Vegas, with its 1,000 condo/hotel units, filed for bankruptcy in June.

PERFECT TIMINGJorge Perez of Miami’s Related Group, sensing an impending market implosion, pulled out at the last minute. He said his decision to cancel plans for a $3 billion mixed-use project called Las Ramblas was one of the smartest he ever made.

 

“The market was clearly showing signs of decline and the demand for construction services was so great that construction prices had been inflated to the point of making our project unfeasible,” Perez said in an e-mail. “Instead of taking the immense risk, I decided to sell the land at a huge profit.”

Perez also nixed ICON Las Vegas, a separate two-tower project in which three-quarters of the 502 units were pre-sold.

His timing was not as good with ICON Brickell, his $1 billion mega-condo in the 400 block of Miami’s Brickell Avenue. Although the project was completed in 2009, only about 100 sales in the 1,800-unit towers have closed. Perez has recently suggested that he may soon turn the project over to lenders in a “friendly foreclosure.”

Unlike the bulk of Miami’s new condominiums, which are clustered around the downtown area in stunning high-rise towers, most of the new Las Vegas projects are mid-rise buildings and condo/hotels perched on top of casino hotels.

In that sense, the problems plaguing the Las Vegas market have been less visible than the darkened condo towers of Miami and are obscured by massive LCD screens and the glitz of surrounding buildings.

Several real estate watchers estimated at least 1,000 Las Vegas units remain unsold, excluding apartments in CityCenter and other condo hotels. About 4,800 additional existing townhomes and condos also were for sale in November, according to the Greater Las Vegas Association of Realtors.

Since the condo model was relatively untested in Las Vegas, the volume of building was huge. But Miami’s building boom was far, far more expansive.

During the boom, developers had filed plans to build 85,000 new units throughout Miami-Dade County. The final count, according to Bal Harbor-based research firm Condo Vultures, has been about 23,000 units since 2003, more than double the amount built in the previous 40 years.

In the greater downtown area, where most new construction is located, developers still had almost 8,500 units to sell at the end of September. There are an additional 16,700 existing condo and town homes listed around Miami-Dade County as well.

Miami is burning off its excess supply of condos nearly twice as quickly as Las Vegas. The median price for an existing condo in Las Vegas stood at $72,500 in November and $149,000 in Miami-Dade.

Thousands of foreign investors, many from Latin America and with long-held ties to South Florida, have helped jump-start new condo sales. Although its just as hard to get a condo loan here as in Las Vegas, Las Vegas does not have hordes of foreign buyers willing to pay cash.

Also, lenders have begun allowing South Florida developers to sell units for less than the amount needed to repay their loans. That lowers prices for buyers.

Bulk buys, or the purchase of large blocks of condos for deep discounts by investors, have also taken off in Miami but not in Las Vegas.

“They haven’t gotten to the point of capitulation yet in Las Vegas,” said Peter Zalewski, a consultant with Condo Vultures. Burger, of Nevada-based Artisan Real Estate Ventures and also the leader of Related’s ICON Las Vegas project, said prices are all over the lot in Las Vegas — from more than $1,000 a square foot at CityCenter to $80 a square foot. Not even Miami, where new construction maxes out at about $500 per square foot, matches the lofty prices of CityCenter.

“There is a lot of cash out there ready to buy bulk, but they are ready to buy bulk at much cheaper price than developers and banks are willing to sell for right now,” Lee said.

Burger and partner John Tippins, a broker with NorthCap Commercial property, are among them. Caught in the stare-down, they decided to use their expertise in managing, selling and leasing Las Vegas condos still held by developers.

“We said, since we can’t buy the units at the moment, let’s keep our foot in the door,” Tippins said. “We think we can do a better job operating these buildings than some outside company.”

As for which market will mend more quickly, most analysts said it’s hard to tell.

For Weiner, so many unsold condos in South Florida will be tough to sell off.

But “as bad as it is,” he said, “I think South Florida will absorb its condos probably as fast, if not faster, than Las Vegas.”

Source Article

More homes are poised to hit the market

Dec 21, 2009 | No Comments | Sean Mills

A ’shadow’ inventory of properties close to foreclosure or seized but not yet for sale has been growing.
A supply of 1.7 million homes headed for sale because of foreclosure or delinquency looms over the nation’s housing market, which could dampen progress toward recovery should the Obama administration fail in its efforts to aid struggling homeowners, [...]

A ’shadow’ inventory of properties close to foreclosure or seized but not yet for sale has been growing.

A supply of 1.7 million homes headed for sale because of foreclosure or delinquency looms over the nation’s housing market, which could dampen progress toward recovery should the Obama administration fail in its efforts to aid struggling homeowners, researchers said.

A variety of measures to keep discounted bank-owned properties off the market — including moratoriums on foreclosures by major lenders and federal initiatives aimed at keeping people in their homes with mortgage payments they can afford — has helped increase a backlog of so-called shadow inventory 55% in the year ended Sept. 30, according to a report released Thursday by First American CoreLogic, a Santa Ana-based real estate research firm.

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American Dream 2: Default, Then Rent

Dec 15, 2009 | No Comments | Sean Mills

PALMDALE, Calif. — Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.
But ever since they quit paying their mortgages and walked away from their homes, they’ve discovered that giving up on the American dream has its [...]

PALMDALE, Calif. — Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.

But ever since they quit paying their mortgages and walked away from their homes, they’ve discovered that giving up on the American dream has its benefits.

Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes — one with a pool for the kids, the other with a golf-course view — for a fraction of their former monthly payments.

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House Flipping Makes a Comeback

Dec 9, 2009 | No Comments | Sean Mills

SCOTTSDALE, Ariz. — Four years after the collapse of the U.S. housing bubble, flipping homes is back in fashion.
Jon Mirmelli, a Phoenix real-estate investor, learned late in the morning of Sept. 28 that a never-occupied custom house on the northern fringes of this Phoenix suburb was going up for auction around noon the same day. [...]

SCOTTSDALE, Ariz. — Four years after the collapse of the U.S. housing bubble, flipping homes is back in fashion.

Jon Mirmelli, a Phoenix real-estate investor, learned late in the morning of Sept. 28 that a never-occupied custom house on the northern fringes of this Phoenix suburb was going up for auction around noon the same day. The six-bedroom home, built on a three-acre desert plot, has a kitchen with two dishwashers, four ovens, “antibacterial” copper sinks, and a master “spa” bathroom with space for a flat-screen TV visible from the tub.

The minimum bid, as set by a unit of Citigroup Inc., which had a $1.3 million mortgage on the home, was $379,900. After several minutes of bidding among investors and their representatives, some wearing shorts and flip-flops, Mr. Mirmelli won the home for $486,300. A week later, he agreed to sell it for $690,000 to a woman who moved in this month.

During the housing boom, millions of Americans tried to make money by buying and then quickly reselling new houses and condominiums. That kind of flipping stopped several years ago as home sales stalled amid a surge in foreclosures and curtailed lending.

Now, a different breed of flipper is proliferating: one who seeks bargains at foreclosure auctions. Unlike the boom-time flippers, the latest generation needs cold cash, lots of local-market knowledge and strong nerves.

Investors compete mostly with other full-time professionals who monitor foreclosure auctions at county courthouses across the country. The bidders often haven’t had a chance to inspect the property or determine whether it’s occupied by tenants, who may be hard to evict.

Sometimes “you have half an hour to make a half-million-dollar decision,” says Damon Lines, an executive at PostedProperties.com, a Phoenix firm that provides information to foreclosure investors and bids on their behalf. “That’s something most people can’t or aren’t willing to do.”

In the states where home prices have fallen the most, many local real-estate markets are dominated by foreclosed property, dragging down the value of neighboring homes. Barclays Capital estimates that banks and mortgage investors have 639,000 foreclosed homes for sale across the U.S., largely concentrated in Florida, California, Arizona and Nevada. That’s equivalent to more than 10% of expected U.S. home sales this year.

Flippers swoop in at public auctions of foreclosed homes, known as trustee or sheriff sales. In many states, the lender sets the minimum bid, and takes possession of the property only if no one bids more. In the past, the minimum generally was about equal to the mortgage balance due. But in today’s market, in which many home values have dropped far below the loan balance, lenders wouldn’t attract investors if they set the minimum at that level.

So lenders, or the loan-servicing firms that represent banks and investors, are increasingly likely to set the minimum much lower. Their goal is to tempt others to buy the house and spare banks the headaches and costs that come with taking possession.

Sean O’Toole, chief executive officer of ForeclosureRadar.com, a research firm, estimates that in November about 21% of homes sold in trustee sales in California went to investors rather than to a foreclosing lender, up from 6% a year earlier. The trend is similar in some other areas with high foreclosure rates, including Phoenix and Miami.

The advantage of such an outcome for the bank is that it gets money for the property right away, even if it isn’t enough to cover the loan balance due. The bank doesn’t need to make repairs to the home, cover the taxes and insurance, or pay real-estate-agent commissions.

The risk for banks is that if they set the minimum bid too low, the home might end up selling for much less than they could reap if they took ownership of it and sold it themselves. But with some 7.5 million U.S. households behind on their mortgage payments or in foreclosure, many lenders are overwhelmed. They’re negotiating with distressed borrowers and figuring out how to sell the growing supply of foreclosed homes.

“The banks are so screwed up,” says Mr. Mirmelli, the Phoenix investor, that they don’t always have a clear idea of the value of the property they are foreclosing on.

To help them set the minimum bid, banks often consult with local real-estate agents and use software that estimates housing values. American Home Mortgage Servicing Inc., which collects payments and handles foreclosures on behalf of banks and loan investors, uses a formula designed to “achieve a fair value for the property and induce third-party bidders,” says Christine Sullivan, a spokeswoman for the Coppell, Texas-based firm.

American Home starts with a broker’s estimate and subtracts the expected costs of taking ownership of the house and selling it. The minimum bid is above the net proceeds American Homes believes it could get by acquiring and selling the property itself, she says.

Outside the Maricopa County court building in downtown Phoenix, trustees, companies that are hired to handle foreclosure auctions, offer as many as 600 or 700 houses every weekday. A typical auction lasts only a few minutes. On a recent afternoon, a few dozen bidders and onlookers were clustered around a trustee employee seated on a lawn chair conducting auctions. He kept track of the bids on a laptop computer perched on one knee.

Many of the bidders are regulars at the sale, bidding for themselves or on behalf of investor clients. “We’re all kind of like a little dysfunctional family,” says Steve Mutsaers, a representative of PostedProperties, who was wearing black sunglasses, a white polo shirt and gray plaid shorts. During the summer, Mr. Mutsaers says, he wears a sombrero to cope with temperatures well above 100 degrees.

People who attend trustee sales here and in other foreclosure hot spots around the nation say the auctions have recently been attracting more bidders. “Properties are getting bid up,” says Hal Feinberg, a Phoenix property investor. “You can still get good deals, but you’ve got to be more patient than you were a year ago.” He and other investors in the Phoenix area say they have been flipping a lot of the homes they buy to Canadians taking advantage of a weak U.S. dollar.

Buying at these auctions is perilous. There are no public viewings, so bidders often can’t know how much damage may have been done inside a house by occupants facing foreclosure. “We’ve seen everything,” says Doug Hopkins, chief executive of PostedProperties. “We’ve seen people pour concrete down the toilets.” Unless they’ve done their homework, bidders also don’t always know whether they’re buying a home subject to a lien from another lender, which can happen in cases where the borrower took out more than one home loan.

View Full Image

Joshua Lott for The Wall Street JournalInvestors in Phoenix gather at one of the 700 auctions that take place here each weekday.

Because of such complexities, many of the bidders are people with experience in the property business. Jon Goodman, a real-estate lawyer in Boulder, Colo., for example, has bought 19 properties so far this year with other investors and sold 11 of them.

In February, the group won an auction for a home in Commerce City, Colo., near Denver, by bidding $142,000. Only afterwards did they discover that the previous owners had stripped the house of a toilet, much of the carpeting and a kitchen range. They replaced the missing items and made other minor improvements, eventually selling the house in May for $209,000. (The loan balance on the house had been $265,663.)

Mr. Goodman says their expenses came to about $24,000, including about $8,000 for real-estate commissions. That left a pretax profit of about $43,000.

The foreclosure auction was handled by American Home Mortgage Servicing. Ms. Sullivan, the spokeswoman for American Home, says the firm believes it didn’t underprice the home and it received “a fair, market-value price for the property.”

In Miami, a group of investors led by Oded M. Kaiser recently bought a condo at auction for $170,000. Two weeks later, they flipped it for $330,000. The loan balance was about $466,000. A spokeswoman for Litton Loan Servicing, which handled the sale on behalf of mortgage investors, declined to comment.

Not all flippers come out on top. Mr. Goodman says one of his legal clients, bidding on his own, unwittingly bought a house that was still subject to a first-lien mortgage. To gain control of the property, the client had to pay off the first mortgage. As a result, says Mr. Goodman, the client, who declined to be named, is likely to have at least a small loss on the deal.

Last summer, Phoenix investor Greg Thielen bought a home at an auction and later found that the former owner had stripped out air-conditioning units, granite countertops and kitchen cabinets, and uprooted palm trees from the lawn. Repair costs came to about $30,000, leaving Mr. Thielen with a small loss on the purchase. “It’s not as easy as people think,” says Mr. Thielen.

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James R. Hagerty/The Wall Street JournalInvestor Jon Mirmelli in the kitchen of the Scottsdale home he flipped.

The Scottsdale property bought by Mr. Mirmelli was supposed to be the dream home for Brad and Michelle McCaughey and their three children. Mr. McCaughey, who grew up in Ann Arbor, Mich., was a minor-league hockey player and coach after graduating from the University of Michigan. About nine years ago, having moved to Phoenix, he says he discovered “a passion for real estate.” He became a real-estate agent and began investing with his father and brothers-in-law in rental properties. Soon they had a dozen homes.

In 2005, Mr. McCaughey and his wife paid about $500,000 for three acres of desert land and began building a home. By the time the house was nearing completion in 2008, the family rental-property business was in trouble because financing and other costs were exceeding their income.

The McCaugheys started selling their rental properties and put their own house on the market. They hoped to avert a foreclosure by getting Citigroup to accept a short sale, in which a home is sold for less than the loan balance due. Before they could find a buyer, though, Citigroup foreclosed on the home, and it went up for auction at the Maricopa County Courthouse this past September.

Citigroup initially set the minimum bid at auction at $1.3 million, far more than the market value, given comparable sales in the neighborhood. Then, on the morning of the sale, Citigroup lowered that minimum to $379,900. PostedProperties, which monitors Web sites for such price changes, sent out an email on the opportunity to Mr. Mirmelli.

Developments Blog

• A Reluctant House Flipper Yearns to Buy and Hold

Mr. Mirmelli has his iPhone set up so he can call up the address of a home due to be auctioned, see a map of the neighborhood with a tap of his finger and then see panoramic photos of the street with another tap. While he researched the home, one of his partners drove out to see the exterior and make sure there were no occupants. A PostedProperties employee bid on their behalf and won the house for $486,300, a sum that then went through the trustee to Citigroup.

After expenses of about $54,000, including real-estate commissions and minor repairs, Mr. Mirmelli and his partners expect a profit of about $150,000 on the flip. “It turned out to be a very good return,” he says.

A spokesman for Citigroup declined to comment on the transaction.

The McCaugheys, who formerly owned the house, are now renting a smaller home. Mr. McCaughey now works for a telecommunications service and is thinking about going back into hockey-related work.

Over a bowl of soup at a Paradise Bakery & Café in Glendale, a suburb of Phoenix, Mr. McCaughey says he sees a lot of real-estate bargains now and may jump back into the market at some point. As for the losses he’s taken on his former holdings, he says: “It is what it is. You deal with it.”

Source article www.wsjonline.com

Foreclosures Spread to Middle Class

Nov 2, 2009 | No Comments | Sean Mills

Foreclosures Spread to Middle Class
Forget the subprime-mortgage borrowers. This latest wave in the foreclosure crisis is hitting homeowners hurt by unemployment.
The foreclosure crisis may be coming to a middle-class neighborhood near you. As joblessness continues to rise and as a person’sunemployment lasts on average 6.5 months, roughly 3.4 million homes are expected to go into [...]

Foreclosures Spread to Middle Class

Forget the subprime-mortgage borrowers. This latest wave in the foreclosure crisis is hitting homeowners hurt by unemployment.

The foreclosure crisis may be coming to a middle-class neighborhood near you. As joblessness continues to rise and as a person’sunemployment lasts on average 6.5 months, roughly 3.4 million homes are expected to go into foreclosure by the end of 2009. That’s up from 1.2 million homes in 2007, according to RealtyTrac, a subscription-based site that tracks foreclosures nationwide. “We’re not out of the woods yet,” says Rick Sharga, RealtyTrac’s senior vice president.

Sharga recently spoke to NEWSWEEK’s Nancy Cook about the various waves of the foreclosure crisis, the future of homeownership and why the Obama administration’s loan-modification program won’t stem this latest crop of foreclosures. Excerpts:

What’s this new “wave” in the foreclosure crisis?
The first wave was caused by bad loan products, while the second will be driven by unemployment. Right now, we’re at the beginning of wave two. There are virtually no more foreclosures that are the result of subprime lending. The demographics of the foreclosure crisis are changing and affecting people who were blue collar and entry to midlevel white collar. We’re now seeing foreclosures on properties with higher loan values. Probably the single best predictor of the areas hardest hit in next wave will be where you will see rising unemployment rates. The third wave is going to involve borrowers who had adjustable rate loans, in which they had the option of deciding what payment to make including interest-only payments. These loans are going to default at ridiculous rates, and that wave will go from the middle of next year until 2011.

If more middle-class people are expected to lose their homes, is the geography of the foreclosure crisis also expected to change?
We’re already seeing some shifts. Four or five states—California, Nevada, Florida, and Arizona—will always be among the top in the foreclosure parade. They overbuilt and overpriced those homes and sold them with horrific loans. What’s happening now is that you’re seeing places like Michigan and Ohio that were devastated by unemployment have an increase. Those foreclosures are much harder to salvage because those people have no income.

But even as the numbers of foreclosures rise, the housing market seems to be stabilizing.
We will see a L-shaped recovery in the housing market if this scenario plays out until 2013 and if the financial institutions meticulously manage the disposition of these properties. We won’t see a huge dip in home prices, but you also won’t have a huge run-up in the building part of the industry that contributed a fair number of jobs to the economy. The housing market will not feel healthy for a few years. This is not a short-lived recession.

What will this mean for the future of homeownership?
We had sort of gotten to an illogical point with the high levels of homeownership. In practice, it turns out that not everyone can afford a house. I think there is more of a realization among potential homeowners that they won’t do it until they can afford it.

If more people will rent, what will this mean for the rental market?
People assume that apartment rentals rates will go up, but in many markets in the country, the rental rates are the lowest they’ve been in years. In Las Vegas, Arizona, Florida, and California, people now rent a whole house instead of an apartment, so these cycles have an affect of lowering apartment rental prices and increasing vacancy rates.

Do you think the Obama administration has done enough to prevent foreclosures?
By sheer volume, the Obama administration’s plan is really having a minimal effect. The administration’s loan-modification program won’t have any success with the types of foreclosure you see now. If you’re unemployed, you don’t qualify for a loan modification.

Source Article Newsweek

Housing bottom? Analysts wary

Oct 28, 2009 | No Comments | Sean Mills

If intervention continues by the feds we are just going to put off the inevitable correction until….?  I know this is for the east coast and most people will say this does not pertain to me or where we are but the biggest foreclosures and pain in real estate are concentrated in the coastal states or [...]

If intervention continues by the feds we are just going to put off the inevitable correction until….?  I know this is for the east coast and most people will say this does not pertain to me or where we are but the biggest foreclosures and pain in real estate are concentrated in the coastal states or west coast.  (i.e. Florida, Nevada, Arizona and California)  Over 50 % of the loan origination for the distressed housing is in major cities in the west or in coastal states.  Do a little leg work check out www.lpsasap.com and run the  numbers for the auctions in your area for today, one week and for the last 30 days then you tell me if you this we have seen the end of this. -Sean

Housing bottom? Analysts wary

For months now, it appeared that Southwest Florida real estate prices had bottomed out.

But two analyses commissioned by the Herald-Tribune suggest that a second wave of home foreclosures looms and will likely cause a new flood of homes for sale — and even lower prices, possibly lasting through 2011.

Zillow.com analyzed monthly median home values in Southwest Florida since the start of the decade.

The online home valuation service found that the rate of decline in markets from Bradenton to Punta Gorda has slowed to the point where it is statistically flat, meaning it rose or fell by about 1 percent or less from July to August.

That would seem to imply the bottom many real estate experts have noted, but Zillow’s chief economist thinks that the results only point to a respite before the new wave of foreclosures pushes prices down again.

“In Sarasota metro, there is a fair bit of supply of for-sale homes, and since we suspect that there is a high number of foreclosures ready to stream in, that will continue to keep the inventory of for-sale homes high and thus prices low,” Zillow’s Stan Humphries said. “I expect prices will dip down in the coming months.”

“This is what a bottom would look like,” Humphries noted. “You should take some comfort in the fact that these numbers look good, but I would not say it is completely behind us in Florida by any means.”

The second analysis — this one by California-based RealtyTrac Inc. — looked at foreclosures within various ZIP codes in the region.

It found that despite banks’ growing ability to both forestall and to more quickly process distressed properties, the rate of foreclosures is still growing. Foreclosures also are rising in traditionally strong segments of the Southwest Florida real estate market.

Foreclosures in downtown Sarasota and on Lido Key, for example, were up 51 percent in the third quarter from a year ago.

That could be an indication that it is no longer just investors or buyers with marginal financial strength who are suffering. Prime borrowers — those with good credit scores and traditionally strong finances — are being hit, many the victims of the region’s 12.5 percent unemployment rate.

“Rational, reasonable, intelligent people that normally take great pride in paying all of their bills on time are deciding to turn in their keys and walk away from their homes,” said Jack McCabe, a Deerfield Beach-based housing analyst who correctly predicted the housing downturn.

But many regional real estate experts do not buy this gloomy scenario.

They argue that the growing interest of buyers — demonstrated by a 30 percent increase in sales during July, a 23 percent rise in August and a 42 percent jump in September in the Sarasota-Bradenton market — will help ameliorate the effects of rising foreclosures.

Budge Huskey, the Southeast region executive vice president for Coldwell Banker’s parent NRT LLC, also has data that suggest the growth in foreclosures could dampen or lower prices in Southwest Florida.

But Huskey argues that the market’s future is unwritten because historically low interest rates will continue to govern buyers. He also notes lenders’ growing sophistication in handling distressed properties.

Rising markets

 

In real dollars Zillow’s analysis of the Southwest Florida real estate market found median home values actually rose in three local markets from July to August:

• By $500 to $221,700 in Punta Gorda.

• By $1,000 to $91,100 in Port Charlotte.

• By $1,200 to $120,700 in Bradenton.

The biggest decline was just $700 in Englewood.

But Zillow’s median home values — derived from a formula that includes both homes that have sold and those not on the market — have been greatly influenced by historically low interest rates and the $8,000 first-time home buyers credit set to expire at the end of November, said Humphries, the company’s chief economist.

At the same time, the list of foreclosures continues to grow in Florida.

There are more than 200,000 mortgages in the state that are substantially delinquent, but in its most pessimistic view of the potential for the Sunshine State, a California lender processing services company predicts that number could rise to 900,000.

Applied Analytics — which tracks more than 40 million mortgages nationwide — predicted that those high levels of foreclosures could persist throughout 2010.

The company expects the total to then fall slowly through 2013 to roughly 500,000.

Huskey has data that suggest a similar track for foreclosures in Southwest Florida.

“We are at delinquency and default rates that are higher than anything we’ve seen in years,” said Huskey, who works out of Sarasota. “Many of the models suggest that defaults will peak in the second half of 2010 and into 2011.”

Huskey’s models show that there will be more loan defaults this year than in 2008.

But “the ultimate impact will be largely influenced by the direction of interest rates,” Huskey said. “Fortunately, interest rates are at historic lows, but there is a general belief that rates will begin to escalate as we move through next year.”

Although the increasing trend of delinquencies and defaults is unmistakable, Huskey believes that the final impact is uncertain.

Lenders are becoming much more effective at loan modifications and short sales, transactions where the lender agrees to accept less for a property than what is owed to avoid a foreclosure.

Banks also are better capitalized now and will control the release of foreclosures over time to minimize the losses on their balance sheets, Huskey said.

Foreclosures in some of the region’s neighborhoods have been snapped up to the point where there are more buyers than homes for sale, Huskey noted.

That may help keep inventory levels low at some price points even when the new wave of foreclosures hits, he said.

The prime problem

 

During the second quarter, delinquency rates on conventional prime mortgages were up in every category when compared with a year before, the Mortgage Bankers Association reported.

During the second quarter, a majority of loan delinquencies were represented by prime mortgage products.

Prime mortgages that are past due have increased from 3.73 percent in 2008 to 6.01 percent this year. Prime mortgages in foreclosure have risen from 0.61 percent of all such loans to 1.01 percent.

Prime mortgage foreclosure inventory more than doubled during the last year — from 1.42 percent to 3 percent.

RealtyTrac’s analysis for the Herald-Tribune found delinquencies and defaults rising by double-digits in most areas of the region.

Foreclosures rose by 38 percent along western Cortez Road in Manatee County and by 17 percent in Charlotte County’s Rotonda community.

That supports the case that McCabe — the Deerfield Beach housing analyst — has been making for months: that the first wave of foreclosures may be slowing, but that the new wave of foreclosures will push in, driven by a fresh crop of adjusting subprime mortgages written during the boom and by rising unemployment.

The recent “bottom” in pricing is a “short-term thing,” McCabe said.

“We are three-and-a-half years into this unfolding case and you can say there were five years of the build-up, so we’re looking at at least two more years before we work through all of this,” he said.

Foreclosures in the last 24 to 36 months were laden with subprime and investor-owned mortgages — the most risky. Nationwide, there are as many as 8 million adjustable-rate mortgages poised to reach their first-term adjustment within the next two years, and as many as 12 million during the next five years, McCabe said.

“There are a lot of foreclosures in limbo and a lot of lenders are allowing people to live in them so they do not have to assume the risk,” he said. “These are the next big shoes to drop.”

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