Banks cutting prices, paying "cash for keys"

Seeking widsom from the front lines of the foreclosure crisis, we paid a visit today to the Big Kahuna himself -- big wave surfer and foreclosure sales specialist Leo Nordine. His take on the market: it's bad. Really bad.

We began by asking his assessment of the current market in relation to the last big downturn. "Armageddon," he said. "This one's worse, especially in the Inland Empire."

What's different? In some cases, he said, "Banks and institutional lenders are just giving up. They're just renting out some houses (instead of trying to sell them). That didn't happen before."

Are foreclosed homes selling at all? "Any place where there were first-time buyers is dead. South LA is dead. Anywhere prices are under $400,000 is really, really hard to sell right now."

He predicts prices will fall 65% in some areas of the Inland Empire, and sees the market hitting bottom in 2009. "There's one buyer, maybe, for every 20 houses for sale in Riverside," he said.

"We're not gonna bottom out until 2009 -- because they were doing so many crappy loans in 2006 -- even until March of '07. It'll be a while before those loans start defaulting. I hope I'm wrong. But I'm not wrong."

In a declining market, it makes sense to get a house on the market as soon as possible. For that reason, banks often speed the foreclosure process by paying defaulting homeowners cash to vacate the house -- "cash for keys." The going rate is $1,500, but in a sign of how quickly the market is deteriorating, some lenders are now paying up to $6,000, he said.

Banks and lenders are finally realizing how weak the market is, and slashing prices. "Just in the last month, they finally woke up -- we're getting $50,000 price reductions all over the map."

How bad will it get? "The banks will start selling houses in bulk -- very quietly, they'll sell off, say $20 million worth of loans. That always happens at the bottom. I arranged a couple of those deals (in the last down cycle), and my clients made a ton of money."

Thoughts? Comments? Email story tips to lalandblog@yahoo.com.
Photo Credit: Malibur Surfing Assn.

Comments

[Cal]

I posted in the listing price thread that I noticed some REOs becoming more motivated but wasnt sure if it was a trend or just misperception on my part. It sounds like its a trend. Houses under the conforming limit not selling.. but Fannie/Freddie are supposed to save the jumbo market?

"In a declining market, it makes sense to get a house on the market as soon as possible."

How existing home sellers dont see that every day their home doesnt sell is a day of losing even more money. It is all hope and dreams waiting to hit the lotto with a magic buyer being conjured out of thin air. There are a ton of sellers clearly in distress (property tax not paid for example) with sufficient equity to get out at a break even but they quite simply wont do it. It is either make 100k or lose it to foreclosure.

Foreclosure it is.

[N_C]

How do bulk sales affect local neighborhoods in terms of comps? I've never heard of "bulk" real estate sales before. o_O

[Toby]

It's only the beginning. Prices must go way, way, WAY lower. Remember, the last 5 years have be totally made up.

No one gets to keep it.

[Arthur in WeHo]

I would be, fascinated to see a comparison of the inventory of homes requiring a jumbo mortgage versus the actual number of homes sold with jumbo financing. My sense is that despite the subprime hype, the bottom end of the market is actually holding up better in terms of months of inventory on the market than the jumbo market. With the median sale price and the median listing price both over the jumbo loan criterion of 417k, reading the numbers in various posts leads me to believe a simple calculation should show that days of inventory are 4 times higher for the properties requiring jumbo loans than those at the low end of the market. Peter, could you please look at this and post the results?
Arthur in WeHo

[Jax]

If you look at the number of properties that already need to be re-sold and add the number that will foreclose as ARM's reset over the next two years............and then add the homeowners who will need to sale due to divorce, job transfer, job loss, etc.............I just can't see who's going to buy all these homes. Now that sanity has returned to the "qualification for affordability" with the lenders, the pool of buyers has been greatly diminished. I've read a lot about Leo before and he's a pro. My only disagreement with him would be with his timing for reaching the bottom. I think it's not going to bottom out until the end of 2011 or mid 2012. Then, prices are going to be stagnant for a long, long time. There is absolutely no need to rush out and buy a home anytime soon.

[Willie]

This bubble was so big that it is still deflating. We are in for a ride since everything sooner or later will come crashing down to the point in which prices may reach pre bubble levels by 2009 and 2010. Cash for keys? Banks are desperate. Renting homes, well that's a good way to hold on to overpaid property, but how long that is gonna last?

With respect to N_Cs question, bulk real estate is not about scooping a bunch of houses, but rather scooping mortgage loans at cents on the dollar for speculative purposes. While you can make a lot money buying distressed loans and the properties attached to them, you need to learn how to stomach the downturn since it will be awhile for you to make money on the deal. In the meantime the cost of upkeeping the properties while waiting out the downturn will fall upon you. You'll need a lot of cash and, in this market, patience.

[John T Watts]

So, even with the bottom not yet in view, does it seem like some investers are beginning to accumulate properties? It makes sense that most individuals who are looking for one house only, will simply wait until the bottom is in clear view or until priices have started to rise again before making a purchase. But with so many people waiting, the rise in prices, whenever it does take place, may be very rapid.

[kim]

It's funny how greed can make otherwise smart people absolutely too stupid to live. But then that is the beauty of it - greed is it's own punishment.

To all the people who thought they would just buy up outlandishly priced houses then turn around and sell them in six months to the next stupid greedy schmuck, you deserve to get stuck. People were playing a greed version of musical chairs in the real estate market and the stakes were high. Only htey didn't know it. They just thought the market would continue to bear half million dollar asking prices for slums. No one ever sat down and thought - "holy shit, how will people pay for these houses?" Did anyone wonder how anyone stupid enough to pay half a million dollars for a slum was smart enough to earn enough money to pay for it?

No. No one sat down and drew that one out in the dirt. Now the circus has left town and the clowns are crying.

[Michael Snyder]

A friend who was kibitzing as I surfed the net asked what I was up to. Whale watching, I replied. As my friend started to give me directions to the beach I explained: If Countrywide stockholders had reacted to Angelo Mozilo's stock sell-off this spring they would have recouped a tidy profit. Now most are holding stock worth a quarter to half of what they may have paid for it. Mr. Mozilo's continued sales of shares in Countrywide confirms Leo's gloomy forecast. After all, these people are the ultimate insider traders. Personally I'm holding my cards close to the vest and watching the whales.

[Rich]

The problem with bottom-fishing scenarios is the one I'm discovering personally here in a northeastern (New England) market; if you already own a house you're stuck, because even with sellers willing to take a Hubbard clause ("I buy yours when I sell mine") the buyers can't unload their own homes to seal the deal. Only first-timers and buyers who live in modestly priced housing are completing transactions; the further a would-be buyer's own house selling price is from the regional median income, the harder it is to find a third buyer to complete the whole transaction circle. And carrying the second mortgage is a very bad idea for the same reason, that the buyer-as-seller may have to carry those costs far longer than anticipated.

I think attempts by buyers to unload their current homes will be the factor that really starts to drive prices down, because in those situations the seller is highly motivated to get out of their current house...

[Pat]

Let me know when Leo gets some REOs to sell in his own neighborhood.

[Rob]

"I hope I'm wrong. But I'm not wrong." .... lol, thats great......

[sandiego]

Hmmm.
A foreclosure specialist has zero material interest in talking down the market.
Riiiiight.
The old paradigm: RE never goes down.
The new paradigm: RE only goes down.

Sure, the IE is in trouble. Too many houses for the size of the market.

But the rest of SoCal that's not in an overbuilt hinterland, maybe not so much.

[Jeremy (jemarqu)]

John T Watts wrote: "But with so many people waiting, the rise in prices, whenever it does take place, may be very rapid."

You may have a valid point. The one thing in this market that amazes me though is how many people are still buying homes today. I couldn't imagine paying 550k for a home that I could get for 60k cheaper in 9 months.

[dav]

John T Watts, I've head this "buyers on the sideline" argument before and I'm not sure I buy it. Sure, there are a lot of people waiting to buy, not wanting to catch a knife. But when people start actually trying to buy again, the pool of available buyers will be much smaller than in recent years. The crazy-termed loans have gone bye-bye (at least for awhile... institutional memory seems to fade fast). I don't think that there will be a huge glut of buyers to drive prices up anytime soon. Maybe in another 10 years or so...

[MyLessThanPrimeBeef]

A smart delinquent homeowner will not settle for anything less than $10K plus the microwave for the key.

A smarter delinquent zero downpayment homeowner, knowing the flood of rental units existing and coming on the market, will then offer to lease that same hosue back and, explaining to the banker of the advantage of the zero down time (i.e. no vacancy period), proceed to ask for 3 months rent free, with new carpet and new paint, of course. As for his creditworthiness, well, let's let bygones be bygones. It miay be worth it to keep the relationship cordial. Who knows, the bank may need to sell the house back to him in a couple of years at 50% off the defaulted loan amount, when new management comes in (see Citicorp) and decides to clean the slate by getting out of home rental business?

[MyLessThanPrimeBeef]

Sandiego, in my opinion, and it's just an opinion, like a stock market correction where initially bad stocks are sold but eventually the capitulation comes and even the good ones are dumped, whch, BTW, invariably signals the bottom, even the not overuilt non-hinterland areas will be swept under in the tsuanmi and go down by as much.

The declines won't be less..well, at least not much less.

[Bob]

With the Euro at 1.4 and Sterling at 2.04, you're going to see a lot of speculation from Europe in US property. These house are CHEAP and getting cheaper if you're from Europe.

You might even see some the the trillion the Chinese have come back. We can export Victorville, it's cleaner than Beijing

[Martin]

Ok - he talks about Riverside - but what about South Orange county?
Is irvine, Lake Forest, or Mission Viejo market going to drop soon?
I hope i really want to buy there and I would like to get the most for my money.

[Paul Hiller]

Leo is the "go to" guy in foreclosure, and I have seen his interviews before. We can debate the bottom date all we want. As a mortgage broker in the Palm Desert area everything seems to melting down [China syndrome anyone?] at a faster pace than even the most bearish of us predicted. My own home which topped in the peak at 500k has good comps today at 350K. My guess is that when they return to 250-275K, the average two income families can buy again and kick start the move-ups. I did a drive around the other day, looking at all the outlying tracts that are in distress. I expect them to be at 50-75 bucks a sq. ft. before long.

[Rob]

"We can export Victorville, it's cleaner than Beijing"

The dollar has no bottom in site; she was last spotted in Nevada working at the Chicken Ranch. So, don’t expect foreign investors anytime soon.

But Victorville does have some nice sandal wearing weather....

[Kim]

Here's what I wonder about how people will know when the bottom has dropped out.

Is it all contingent on foreclosures? What about peole living in homes who are upside down by 100 or 200k? The market is not going to bottom owing to people selling their homes for 1/3 less than they paid.

I also hope that the people waiting to make their move know when the time is right because as soon as the moment comes and people start snapping up homes the prices will go right back to where they were - worse. It will happen over night and the same people squeezed out before will be squezzed out in the frenzy.

It's too bad the people in CA can't buy a home the way the rest of us do. In the rest of the world, you get to a place where you can afford a home and you go out and start looking. Then you find one you like and buy it.

In California, you have to approach the real estate market like a manical floor traders in some cut throat commodity pit. Move at the wrong time and get stuck. Wait too long and you're squeezed out.

[sunsetbeachguy]

Kim:

Cue Guns & Roses music...

Welcome to the jungle of a cyclical RE market.

[MyLessThanPrimeBeef]

Kim, the bottom may be V-shpaed for some neutral observer looking from the outside.

But if Tipler's Omega Point Theory of Big Crunch is correct, as the world approaches its end, Time slows down and slows even more the closer we are to the discontinuity point, so that people inside the universe experience the End of the World in infinite amount of time, might even become 'one with God' whatever that means....subjectively speaking of course.

Applying that to Southern California real estate, I suspect the would-be bargain snappers will have plenty of time to buy and will not be squeezed out as our real estate universe ends.

Only outsiders will be squeezed out, because they are too objective.

[Kim]

With all due respect, I think Mr. Tipller's theory is bullshit. He seems to leave the human element out of his equation. And yes, I'm a cynic, but I come by it honest.

The greed factor and/or desperation factor just shoots Mr. Tipler's theory all to hell. When the real estate market rebounds it will not be like a controlled burn - it will be a conflagration fueled by greedy speculators diving in on the spoils. That is my own personal theory based on my observations of the human animal. I too am full of shit. But I don't see how in the hell the rebound can be controlled with all of these people laying in the weeds waiting to make their move. It's not as if you can seperate people who just want to own their own home from the vultures. Working people who just want to buy a house to live in will be manipulated again into fueling a speculator's market. The vultures will ruin it for everyone and the same cycle will begin anew.

But I do appreciate your interpretation of Mr. Tipler's theory.

.

[sunsetbeachguy]

For the V shaped recovery proponents of RE markets, please cite one instance of a real estate market having a V shaped recovery.

RE doesn't trade that way, on the way up or on the way down.

[longdriver]

Woohoo, IE at 65% off, I'm gonna buy me a castle in Riverside!

I've already found a few properties listed at about 50% off peak prices. The newer tracts with the big 3000 to 4000 sq/ft homes are just getting hammered. Prices are dropping and dropping fast. Still a lot of denial out there though.

[John Bard]

Can anyone out there offer me some advice?
I'm from the UK, and have been living - and renting - in LA for a couple of years. I want to buy a home (with a proper backyard) and am cash rich ie I have a possible $300,000 plus I can deposit on a home. For work I need to live central LA - Culver City, Mar Vista, Hollywood, Fairfax etc. Can't get much of a mortgage due to low credit (as an alien!). So where/how do I go about finding a 2+2 or more for under $750,000? I know I should wait, but I'm getting pissed off with renting, we Brits are used to owning our piece of dirt!
Any ideas from all you smart guys out there?

[caliguy2699]

Martin - Yes, South Orange County is due for a correction as well. In fact, it's already happening - prices are well below 2006 and 2005 levels, and many are lower than 2004 as well. There's even a place or two out there that are below 2003 prices.

In fact, Lake Forest and Ladera Ranch (Mission Viejo) are brutal right now. They're looking at big time reductions in prices and sales volume.

[Mark]

Tough luck, John Bard. You can wait with the rest of us. Give me a break.

[Pat]

John Bard,
Give me the $300,000 and, uh......I'll call you back.

or you can use www.redfin.com like the rest of us.

[Jeremy (jemarqu)]

The market stayed really flat after the 90s crash for a long period of time. I think we are looking at least another 10 years before we are going to boom.

If by some chance 2010 sees most markets bottom then don't expect 2011 to have double digit gains. After the bottom its going to take awhile before we see momentum.

I would also be willing to bet that never in my life time will we ever see another real estate boom similar to the last 5 years.

[Raughle]

For the folks expecting a v-shaped bottom where prices start shooting up: I promise you one thing, if prices start to shoot up quickly, it will be a false bottom. False, because it will be caused by sidelined buyers making the exact same mistake of the past: thinking that if they don't buy now, they'll never be able to afford it. Then after that false V, it will be down, down, down.

We won't know the REAL bottom by reading this blog, because the real bottom will only happen when everyone is so sick of real estate that we don't read the real estate blogs anymore. The real bottom will be when our new fears of a tanking economy have replaced our smug euphoria over how brilliant we are for sitting out the housing bubble. The real bottom will be when we're in such terrible shape that people are leaving LA for colder climes while the rest of us gladly overpay for crummy but reliable rentals. The real bottom will be long after prices have stopped dropping and have gone sideways for so many years that inflation and sentiment have slowly chipped away at us until we we are completely numb to it. The real bottom will pass us quietly in the night, with no LA Times articles, no silly NAR pronouncements, and nothing but a litter of bankrupt lenders and builders in its wake.

And we won't know it, because we'll all be on TMZ instead, distracting ourselves with the latest foolery of some pop princess.

[farinhite_451]

Well said Raughle; pass the razorblades.

[TheProblemWithCaring]

"We won't know the REAL bottom by reading this blog, because the real bottom will only happen when everyone is so sick of real estate that we don't read the real estate blogs anymore."

Raughle repeatedly makes sense to me.

I like that.

[Tbone]

The best advice on investing I ever got was this:

"Look at what the herd is doing, and do the opposite"

When everyone was jumping into 401k madness, I bought real estate and everyone thought I was crazy. All those 401k's lost money when the stock market node dived. Then everyone thought, "I know, screw the markets I'll put money in real estate...and so went the frenzy for the last 5 years, home flipping TV shows and all. In the meantime, all the smart guys sold in 2004 and 2005 and were buying back into stocks while they were bargains while everyone else sunk their investment capital into overpriced McMansions in the IE. And now the markets are at all time highs. Now, everyone's selling. Foreclosures! 65% price reductions on the horizon! eeek! Its just like the terrorism mania, but now using the fear of losing your money to make everyone scurry around in a panic. All these people are looking at the rallying market and thinking, "Invest!" at the highest buy in prices EVER! Well, those same smart guys will be there waiting for you to buy their inflated stock and then go buy the distressed loans and distressed seller's homes. They might not be buying this very minute...but wait, the minute the market starts to look a little shaky, the herd will run right back at real estate...but too late again, the smart guys will be right there ready to sell them back.

Interest rates are low, and the dollar is weak which means money is cheap right now. If you see a house that's been reduced anywhere from 50-100K, you may be seeing a true bargain as the seller is probably motivated and nervous. Shoot them a qualified offer below their asking price and they will probably take it.

Bargain hunters, two very important facts to consider:

The inventories are at record highs and the sales transactions at record lows. If you're really paying attention to those two facts you may deduct that we are already at or very near the bottom. In fact this may even explain why the high end is still holding up and keeping median prices almost steady. People with cash are trolling the high end for motivated sellers and getting their beach pad or Bev Hills home for asking or lower. That definitely was not happening 2 years ago.

I think the true bottom is still about a year away, but I do think the recovery will be sharp. The lack of transactions indicates there are a lot of buyers lying in the weeds as someone put it. And to anyone holding Eoro's in their hands, Socal will never be cheaper.

[John T Watts]

Right on Tbone! I think you nailed it.

[MyLessThanPrimeBeef]

I know of a guy who made a fortune in Morrocan real estate, specifically in Casablanca, selling houses to fleeing Europeans with boatloads of Euros. He likes to hum a little tune that goes like this,

A house is just a house
A loan is just a loan
The fundamental things still apply
As time goes by

And what are the fundamental things?

A bottom is not reached on thin volumes.

No captiltulation, no bottom.

Round bottoms are prettier than V-shaped bottoms.

The Euro is going up vs. the Dollar becuase the Euroeapns are dumping American assets - including real estate, not a precursor to buying more American real estate. Remember BNP Paribas and IKB?

As for herd mentality - herd mentality is thinking there are only two asset types in the investment universe: stocks and real estate; in fact, cash, bonds, foreign currencies, commodities, precious metals are all viable alternatives.

Finally, think big.

Even if you have a house, think you want to buy one or two more. In that case, you want to see the market fall...and fall...and fall some more. I have a house. But I want to buy two more. So, every month when the numbers come out and show prices declining, I picture that I have made a lot of money by not committing to two buys the previous month.

That's power of positive thinking!

In any case, it's always about the fundamental things.

Just remember - lack of transactions = bear trap.

No capitulation demonstrated = No bargains to buy.

It applies to the stock market.

It also applies to the housing market.

It's still fundamental...as times goes by.

[MyLessThanPrimeBeef]

Raughle, just read your post.

Well done!

BTW, a Zen master once said, 'It is not until we forget that we understand.'

[Tbone]

MyLess,

I disagree with you on one of your points: Lack of transactions= bear trap. The bottom of the last slump in housing I witnessed back in the 90's was defined by capitulation and a very low level of transactions. When transactions started to pick up, it was already starting to get too late to get in the game. The buyers who bought at the very bottom did so when very few transactions were recorded as there were very motivated sellers at that point. The highest levels of transactions indicated the absolute worst time to buy when the market had reached its pinnacle. Sellers negotiate their price when the market is slow.

And to address your other point, no capitulation = no bargains. Have you seen the dramatic price reductions and auctions going on?

[MyLessThanPrimeBeef]

Tbone, you may be right about not seeing the kind of heavy volume in real estate that we see at stock market bottoms.

Now, does heavy volume mean people are selling or does it mean people are buying?

To answer that, you need to know if we're correcting or if we are in a bull market, even though in theory, the number of buyers always = the number of sellers (unless you have 1 buyer buying 100 shares himself alone and 100 sellers selling 1 share each, but you know what I mean).

When the market is weak, heavy volume means people are selling. When it is reacing all time highs, it means people are buying. And you will make money being a contrarian when you buy with high levels of transactions - when eveyone else is selling.

Now the illiquidity of the real estate market means that we will continue to see prolonged low levels of transactions, without the classic catharsis. But the bargains are to be had at the end of the long period of low levels of transaction than at the beginning, if for nothing except to avoid having your capitals tied up in zero return investments for years. That's the nature of the beast. Check out Raughle's post.

[ddot]

I have been checking out the open houses at several new downtown loft developments, and the consistent pitch that I get from the sales staffers is that the resetting of the Subprime ARMs and record foreclosures will only affect "lower" income/ sub $700,000 properties. According to these agents, anything higher will survive this onslaught because the vast majority of higher priced property owners didn't finance with ARMs but with convential fixed mortgages.

I would be interested to hear everyone's thoughts on this analysis. How will this subprime disaster affect the high end, especially in regards to these new developments going up all over DT?

[ProblemWithCaring]

Although I like the way Leo Nordine come across (“I hope I am wrong. But I am not wrong.”), I find it hard to trust realtors now-a-days. Leo is good at telling this blog what he thinks, but not so good at getting that point across to his apparent clients.

I have been watching housing prices in Northern LA in the 90032/31 area code since January. The schools are atrocious there, of course; the yearly median income is below $40K; membership in gangs like MS-13 and violence is on the upswing, but listing have been holding steady or showing only modest reductions. Sales have been few and far.

Right now Leo has an REO listing in that area, at 4947 RENOVO STREET for $350,000. The listing language is confusing to say the least:

http://tinyurl.com/2ocfbh
“Back on market D.F.T. @ 399K! Reduced 69K!* Newly renovated 10-07. Really cool character house on beautiful street. Good curb, sits above street level, raised foundation, big yard. Super bright w/ big windows, remodeled kitchen & bath, new paint, carpet, etc. In move in condition. Good Monterey Hills area. Permits available for 3 bed 2 bath addition (1304 sq ft. Total house would be 2075 sq ft). This is a steal. See private comments”

I have no idea what all of that Realtor Talk is actually supposed to mean, but Zillow has the house listed at 774 square feet.

So Leo’s REO discount is a whopping $450/ square feet for a “move-in” ready home in El Sereno, when houses blocks away in better neighborhoods (like Lincoln Heights, the hills above Cal State LA) are languishing on the market at $324/sf. http://tinyurl.com/2w7dtu

Yea, there is a disconnect. And it’s starting with realtors who communicate with housing blogs and not their clients, the banks that own these overpriced homes.

[Bob Ballew]

Once I asked an old experienced very wealty Jewish real estate investor for his advice on investing..He replied, "Always leave yourself a back door to get out"....:) In Riverside, CA, your backdoor is the 3 hour freeway impasse toward the ocean....folks, the name of the game is still location, location, location..only buyers who couldn't afford anything else moved inland into the mass produced tracts with no master plans for transit, schools or avoiding fast food joints on every available corner..they bought into their own destruction..The only thing I would ever buy inland is a vacant corner lot to resell to McDonalds....Now, what would "The Donald" do? (besides declare bankruptcy for the writeoffs) He would be looking for bargains when things hit bottom...Even at bottom, Riverside isn't a bargain unless you can't afford anything else..stick to ocean close property and you will survive the down rides quite nicely...as the Donald says, "You can make even more money on a down market" BUT...it has to be in the right location...friends thought I was crazy for paying 905,000 for a Park Estates property in Long Beach when the market doomsayers forcast the market was crashing...Two years later, the home next to mine just sold for 1,250,000..homes here went up, not down...My only "genius" attribute is picking (yes, I will repeat it) LOCATION...I will look at a hundred properties before making an offer on one..I am selling my big boat (a negative cash flow) and putting the cash into positive cash flow units, as apt building prices are starting to drop...Why? Because vacancies here are 3 percent compared to 5 percent in surrounding areas...everything goes in cycles...you just need to read the signs correctly and find the right LOCATION....:)