Today I received a call from a reader that wanted to first and foremost commend me for my blog, but also had a couple questions to ask. It’s great to get calls or emails from readers (there’s a lot of you out there!) and I’m always happy to answer questions as well.
If you need something, do not hesitate to call or email me.
A debate recently in my office between another agent and I focused on whether foreclosures and short sale properties really should be used for comparables for “normal” sales.
My esteemed colleague believes that since foreclosures and short sales are sold under “distressed” situations, they are not good comparables for other homes for sale. My counter is that many foreclosures and short sale properties are not in bad condition and so they should sell at a fair market price regardless of their “distressed” situation.
When it comes down to it, foreclosure and short sale listings most often do sell at a discount to regular listings and should have that taken into consideration, but even in a slow market houses priced appropriately are selling quickly, so those are market prices.
What we do find is a substantial disparity on how much of an impact those foreclosures have on the houses around them. In areas with low numbers of foreclosure and short sale properties, we find that those properties have little effect on the market as a whole. Where there are a high number of these properties in a single area, we find the the impact is more like an exponential impact: the higher the number, the more substantial the impact each additional listing has.
If the incessant radio ads from the National Association of REALTORS were not enough, now I see they are also on television with the same garbage: “real estate is a good investment and historically doubles every 10 years.” Give me a break.
There are many, many things that my association does well but this is a prime example of a ridiculous message at a horrible time. I don’t know if there is a single consumer out there today that expects that a house they buy today will double in the next 10 years… and I think most understand that the housing market is not going to move higher for several years.
This ad simply promotes the misconception that REALTORS do not understand what is actually happening in the real estate market today, or that we simply will not accept it. When sales are down 30%+ from two years ago (and consequently commissions) and we’re seeing more empty desks and less people in the office, I can assure you that we as agents understand that this is a different market with different needs.
Instead of trying to sell promises of sunshine in the middle of a hurricane, the National Association of REALTORS would be much better off to admit that this market isn’t perfect for everyone, but that there are good opportunities out there for certain people in certain situations.
NAR: Please either promote a more realistic message or shut up entirely… I don’t need the kind of help you’re giving me right now.
While this housing market has been tough on many communities, parts of Minneapolis are being hit extremely hard. The foreclosure and short sales taking place in Camden, Phillips and North Minneapolis are not only often becoming eyesores in the community, they are also dragging average sales prices down substantially.
Based upon MAAR’s Top 100 report for Minneapolis for December 2007, I was able to construct the following chart of average sales prices in Minneapolis communities:
I wish this chart was wrong, I wish it didn’t show such a disparity amongst neighborhoods, and I wish I didn’t have to talk about it. Alas, not talking about it will not solve the problem and this is an issue I simply could not be silent on any longer.
I have been working on some figures showing the number of homes for sale in these communities that are either in a short sale or foreclosure situation but the data isn’t complete yet and I want to make sure it’s right before I release it. What I can tell you though is that these communities have been hit hard by the rise in short sales and foreclosures, as can be seen by anybody showing houses in these neighborhoods.
While there are still many homes for sale that are owner-occupied and in great condition, the sheer number of distressed properties for sale have a hugely negative effect on the market for the following reasons:
As we are still in the middle of the subprime and ARM mortgage fallout, the high inventory and pricing pressure in theses neighborhoods is not likely to moderate for quite some time, which could lead to further price erosion this year.
While this is terrible news for the current homeowners in these neighborhoods, there is supposed to be a “silver lining” to this market downturn: housing affordability in these neighborhoods has headed substantially higher in the last year to the point that many people who could not afford to buy a home years ago can get into a home today.
I just recently closed on a deal with a 1st time buyer who purchased a 3 bedroom, 1 bathroom home with 1 car attached garage just a few blocks off the Parkway in North Minneapolis. This home had quite a few cosmetic issues to fix but had a new furnace and newer roof and some great built-ins and woodwork. Her total payment is under what she was paying in rent and her home has a lot more space for her family!
While she was successful, it was a big struggle to get her into the home, mainly because of the catch-22 on the only loan we were able to get for her:
While this buyer was able to get into this home, most other first time buyers will not be as lucky. As I said above, most banks will not let anyone do anything to repair the home prior to closing and so if the home is out of FHA compliance for almost anything, the buyer will not be able to purchase that home. Homes that are in a short-sale position are typically in better condition and sellers would work with a buyer on repairs but if it is anything costly no one will have any money to fix it!
The other issue is the 3% downpayment… many buyers simply do not have that saved, but are more than capable of making the monthly payments. There are some downpayment assistance programs available but they are a small share of the total market and many loan officers are either unaware of them or in the case of government-sponsored programs, are not approved to use them. This will put many of the rest of the homes that are in good condition still out of reach.
If a 1st time buyer does have cash, they can go with a Conventional loan & eliminate most of the lender required repairs but most of those loans need a minimum of 5% down payment and if the appraiser or Fannie Mae or Freddie Mac describe the neighborhood as a “declining market,” then the down payment requirement would jump from 5% to 10% for most and the zero down payment loans would go to 5%.
What this all means is that only a limited number of 1st time buyers will be able to take advantage of this “silver lining.” The rest of this inventory will need to be acquired by buyers who have significant cash: typically rehabbers and landlords. Rehabbers are likely to remain on the sidelines for a while longer simply because the fundamentals of the market in these areas are still softening and that makes it risky to go in and try to fix it up and sell it for a profit.
That really leaves us with landlords. As with my buyer, these landlords can come in and buy these homes for less than their rental value and make great cash flow off them. While that will mean the neglected exteriors of many of these houses will likely get some attention, it could take largely owner-occupied neighborhoods to largely rental neighborhoods and I believe that most people would agree that strong neighborhoods are those that have a good balance between owner-occupied and rental.
This situation needs immediate attention by the community. In the best of circumstances, a public-private partnership would be formed to help assist more 1st time buyers in acquiring these affordable homes and try to help keep these communities occupied and maintain the balance between owner-occupied and rental. This assistance could be in the form of additional downpayment assistance or nonprofit rehabbers turning around and selling it to eligible buyers. Either way this takes money that doesn’t appear to be just sitting around, so this will take a considerable effort to achieve.
Time and time again, I see Countrywide Home Loans (CHL) listing their Real Estate Owned (REO) properties on our local MLS and requiring buyers to get pre-approved with a Countrywide Retail Loan Officer prior to submission of their offer. In fact, in their required addendums, it is specifically noted:
If the Agreement is contingent on financing, as a sales condition, Buyer must obtain a pre-approval letter from a branch office of Countrywide Home Loans, Inc. (“CHL”) for a mortgage loan in an amount and under terms sufficient for Buyer to perform its obligations under the Agreement, and such letter must accompany the Agreement. The pre-approval shall include, but is not limited to, the pre-approval letter, a satisfactory credit report, and proof of funds sufficient to meet Buyer’s obligations under the Agreement. Buyer’s submission of proof of pre-approval is a condition precedent to Seller’s acceptance of Buyer’s offer. Seller may require Buyer to obtain, at no cost to Buyer, loan pre-approval as Seller may direct. Notwithstanding any Seller required pre-approval, Buyer is not required to obtain financing from CHL or Seller- Buyer may obtain financing from any source. As an incentive for the Buyer to obtain financing from CHL, CHL will offer a free appraisal and a free credit report if the Buyer finances and closes the purchase of the Property through financing from CHL.
This is ludicrously stupid for the following reasons (not a complete list):
According to the Countrywide Foreclosure Blog, Countrywide had 14,442 REO homes listed on their site as of 12/5/07 at a total asking price of just over $3 Billion. With so much inventory, so much competition, such a difficult buyer market, and tough times keeping Countrywide financially afloat, you would think that they would want to do everything they could to get their properties sold!
Recently I have seen several of Countrywide’s properties in the $200,000 range price reduced $30,000 and $40,000 all at once. Such drastic price reductions have generated interest in the properties but also shows the motivation, and possibly desperation, of Countrywide to get these houses off their books. If they eliminated their pre-approval requirement, they might see more interest from qualified buyers without having to so drastically reduce prices.
Some people suggest that Countrywide requiring a pre-approval is smart business, that it gives them an opportunity to pick up the buyer’s mortgage. I would be surprised if they had more than a 20% capture rate on these leads (but I have no knowledgewhat their capture rate is), and the added holding costs for longer sale, disinterested buyers, and further price reductions make me think that this is a losing battle for them.
Message to Countrywide: eliminate your CHL pre-approval requirement. You’ll sell more houses, sell them faster, and likely at a higher price.
CNBC has a great aricle titled: “Loan Modification Anyone?”
The article does bring up a good point… while saving buyers that are in danger of losing their homes is a good policy, going too far is not fair for everyone else and can potentially lead to more fraud in the market. It’s amazing to see the differences in opinion and direction this market seems to be taking.
All I know is that they better come up with something… the foreclosure market continues to grow as a percentage of listings for sale on the MLS and that isn’t good for the long-term health of our housing market.
I wrote in June about agents who still had snow pictures on the MLS. Today I mention another thorn in my side: agents who represent bank-owned foreclosed homes that do not take photos of the inside.
In the Twin Cities, as in many other large metro areas nationwide, we have seen a sharp increase in foreclosures over the last year. This has been a boon to the business of agents that work with the banks carrying this inventory. Unfortunately, some of these agents are either too busy or feel they are getting paid too little to take the effort to snap interior photos of the house and also often do not measure room dimensions. Sometimes the house’s interior is in bad condition, sometimes it is in remarkably good condition. Either way, consumers want to see layout and general condition before they make the trek out to see the home.
When we have record levels of inventory on the market and many investors waiting on the sidelines, the consumer looking for a home for owner-occupied use is still the best buyer for most homes. Since these consumers have so many choices, they narrow down their options using the photos and other MLS information provided online. Fewer buyers seeing the home means less potential to sell the home quickly and at a good price.
Until banks wake up and demand the agents selling their inventory to do more to market the home, they will find that they are not receiving the full benefits of the MLS and are missing many potential buyers.
In a recent Star Tribune article, Mayor Rybak says he’s embarrassed by the failure of the Minnesota Legislature and Governor to reach a deal for new money for road and bridge repairs/improvements. While Governor Pawlenty’s argument that the legislature was asking for too much could be valid, the refusal by both sides to do anything for our failed infrastructure is absolutely unacceptable.
One of my roles as a Realtor is to negotiate for my client’s best interest… and 99% of the time my client gets what they wanted. Here are professional politicians, a.k.a. negotiators of everything, and they can’t come to any sort agreement on one of the biggest issues we’ll have in this state.
Write your representatives, force the issue, be heard before we lose any more time!
I was talking to my favorite loan officer, Cheryl Stuntebeck at Edina Realty Mortgage, about the current market for loans. While most lenders have tightened up lending standards, the current loan loan products she has are almost identical to the ones she had 5 years ago. This means that 100% financing is very limited, that credit scores and income verification are necessarily most of the time, and that sanity has come to the lending market.
Some of the standout loan products today are geared to 1st time and/or lower income borrowers. Via government-sponsored programs there is still 100% financing with market rates and no mortgage insurance. No private loan program can beat that!
The loan products that we had 5 years ago worked just fine for consumers… we had great sales activity and low defaults in those years… and will serve us yet again. While lending has tightened, it isn’t like we’ve gone back to 1980’s style loans… there’s still a lot of great options in this market and I’m quite confident that qualified buyers will still be able to buy a home in this changed landscape.
Star Tribune had an article entitled: Want an interchange? Show us the money. The idea is that there are areas of underdeveloped land that is just waiting for new infrastructure to unleash the land into a torrent of new building (and profits!). Developers are willing to invest the money upfront to get the development moving years sooner.
Personally I love this idea. If the road/interechange was already going to be built but just years (or a decade) later, then it is just a question of timing. If it can be built sooner with the upfront cost paid by the developer, then that sounds pretty good to me. I do have a few thoughts though:
Aaron Dickinson