Motivated sellers: Foreclosure sales feed 'vicious cycle'

Good piece of enterprise reporting tonight from The Associated Press: "A growing share of home sales comes from foreclosures, especially in states hardest hit by the housing bust, according to an analysis of data. In some parts of California lately, nearly half of home sales came from foreclosed houses."

USA Today headlines the story, "Growing number of foreclosure sales feeds vicious cycle."

More: "The growing proportion of foreclosure sales is both a symptom and a cause of worsening conditions in the weakest housing markets. Homeowners who aren't on a deadline to sell are yanking their properties off the market. That means the remaining inventory is increasingly held by banks eager to unload foreclosed properties at fire-sale prices rather than carry the costs on their books."

The AP's foreclosure analysis -- focusing on the third quarter of 2007 -- found that, in California, foreclosure sales accounted for 11.3% of home sales in 2007, up from 3.7% in 2006.

Hat tip: Cal didn't point out this story, but he has frequently pointed out the rising percentage of foreclosure sales in Southern California.
Photo credit: L.A. Times

Comments

[Cal]

I get a hat tip for talking too much ;).

For LA county in 2007 (I dont have Q1 numbers yet) the number of Trustee sales as a percentage of sales reported by Dataquick.

Q2: 11.6%
Q3: 20.3%
Q4: 34.1%

The number of homes going in default for LA County in 2007 (again, no Q1 numbers) as a percentage of sales:

Q2: 46.7%
Q3: 76.2%
Q4: 102.6%

The sales have been dropping and foreclosures and defaults rising so it is definitely a vicious cycle. One that can only be resolved by prices which move the inventory off the market quickly. I said back in November in reply to someone who said that those expecting a SFH for 325k were dreaming that I thought we would see those in 2008.. well I ran a search 10 minutes ago and found a bunch in the SFV already. Prices are really dropping quickly. REOs in the poorer areas are slashing prices drastically.

If people are smart and get all their ducks in a row (start saving, clean up their credit) they could see a tremendous opportunity for themselves within the next few years.

[sunsetbeachguy]

Hey Peter:

Not to be an angry Cassandra but AP and the LA Times are late to the vicious cycle story.

Check out this March of 2005 post at Calculated Risk.

http://calculatedrisk.blogspot.com/2005/03/
housing-and-trade-virtuous-cycle-about.html

Granted the post is probably too information filled for the MSM to make money from it, but I am just saying.

[formerlahomeowner]

How come prices are barely budging in my town (91354/91355)? Just browsed through ziprealty.com and the listing prices are still way above what most households can afford (~$500,00+). Where do I find these foreclosure sales?

[Producer08]

Gentlemen this sums it all up

"The entire real estate debacle is the fault of everybody that was involved. And it was all about greed and speed. The brokers wanted their commission. The lenders wanted their premiums. The borrowers wanted their homes."

- Rachel Dollar, a Santa Rosa attorney who represents lenders in fraud and other cases, February 2008

From a great article "Loans Built on Lies" in the Santa Rosa Press Democrat

[Deborah Foti]

Well, well, well, where ya been? We walked away from our home of twenty years in 1999. Only thing, I was mortified, sick, and suicidal over it. I have been treated as an outcast and had to resign from my position at my Almamater. I resent every infomercial promising help with I.R.S. and home lenders. Yet I'm with Condoblue, A business decision... Now I like that.

[Joseph... the Real Estate Guy]

In my opinion, and from what I see out in the field, METRO LOS ANGELES and it's SURROUNDING CITIES is going to escape the Onslaught of FORECLOSURES.

I don't see there what I see in Palmdale, Lancaster, Riverside, San Bernardino, Stockton, etc.

Los Angeles seems to very insulated.

Just my opinion.

[gary]

to producer08, nice try clown. but all the underwriters had to do is some math and say NO to the brokers. if the banks did there job none of this would have occurred. we are all not to blame when we have people paying $1800.00 a month to rent when they can own at $1500.00. its always the banks who control the money and the operative word was to control the money not just give it away.

[brad]

formerlahomeowner: That's right. You won't find many foreclosures on the westside (at least not yet). I believe Venice had a mere handful since 2006. Unless we see some ancillary pressure (besides the credit crises) some westside locations may remain fairly stable.

[Keith - Upside Down Walk Away]

There is a misconception that banks sell homes at fire sale prices. They don't. That's why they are sitting on such huge inventories of repossessed homes.

The banks are actually pretty witless when it comes to figuring out what to do. I have seen negotiations first hand in which banks will turn down offers at one price level, only to reduce the list price to less than that price level a little while later. They are not aggressive. They are not well informed.

There was an article in the Modesto Bee on this subject that I wrote about here: http://letitsink.blogspot.com/2008/01/going-
once-going-twice-sold-to-nobody.html#links

Basically it said that even though the banks were cutting opening bids on foreclosed homes, that of approximately 1400 homes in a three county area that went to auction, only 17 got any bids at all. That means that even though the banks are cutting prices, they are so clueless as to what the value is that they sold only 1.5% of the homes at auction. That is not the sign of fire sale prices. It also tells you that people trying to sell you "Get Rich Quick on Foreclosure Homes" formulas are probably scam artists. These numbers indicate that if you are buying at foreclosure auction, you are probably the biggest fool in the crowd.

[CD]

_formerhomeowner_
Foreclosure.com gives foreclosure by zip, NOD and tax lien and bankruptcies. Realty track will do the same too.

[TakeFive]

Cal wrote:

"...the number of Trustee sales as a percentage of sales ..."

Interesting. When we see headlines that "sales are 50% below last year", does this include trustee sales?

Seems like these should be excluded. If my car gets repo'd, that doesn't get added in to the monthly auto sales numbers.

[sfvrealestate]

"How come prices are barely budging in my town (91354/91355)? Just browsed through ziprealty.com and the listing prices are still way above what most households can afford (~$500,00+). "

Formerlahomeowner, what the stats don't tell you, and nobody on this blog does either, is that the foreclosures and short sales are heavily concentrated in working class areas like Palmdale, Lancaster and Compton, and not middle class areas like your zips. I can tell you this because I look at the County Recorder's Notice of Defaults/Trustee sales every week. Yes, the number of short sales are increasing in the more middle class areas, but $500k+ IS the short sale/foreclosure price.

Peter, how about a post about the LAT story on foreclosed renters?

[jb]

Our congress is super busy interviewing baseball players - Is this what we pay them for?

Why not expose all of the fraud, go after bank heads who intend to walk with tens of millions of dollars in severence packages after reaping hundreds of millions of dollars with fraud-ridden housing schemes - and are now rats fleeing the sinking ship.

[waitingitout]

Maybe a little off topic, but I've noticed something really strange lately on the Yahoo Prudential MLS listings over the last week, and wanted to know if anyone had also noticed or had any idea what's going on.

For instance, if you plug in all SFH, Condos or MFH in Los Angeles between $0 and $1 million, you get just 5 listings since Feb 1 and only one in the last 11 days. They USED to be there, they're just not there anymore.

Properties I had been tracking in certain zips have disappeared en masse - many of them only recently listed, but others from November & December.

The skeptic in me says that desperate agents are pulling their listings within a week or two, maybe to give the impression that demand has picked up? Or could it be something as innocuous as a glitch on the site?

[Fourth Generation]

For people who bought properties well over their heads and those hoping to make a quick buck flipping there should be no relief. You play the game and you lost, though luck buddy. Prices will keep on falling until income and price come to a normal balance and people can again purchase properties at reasonable prices. Mainly people will be able to afford homes instead of investment properties. And that market although slow is a long term stable one.

[Brian]

Dear IR,

This is off-topic but I am wondering whether this issue has been addressed before on the blog. Senator Dodd has proposed creating the Home Ownership Preservation Corporation, utilizing federal funds as "seed" money. Following its initial funding, the corporation should essentially pay for itself.

My basic understanding of the program is that it involves using the seed money to purchase mortgage backed securities containing at-risk loans. As these loans have a high risk of default, their value is substantially less than the mortgage amount itself. Once acquired by the corporation, the loans could be "re-worked" and sold back to the original borrower at a steep discount and with new loan terms (i.e. a fixed rate).

The end result could be two neighbors who purchased homes at the same time, one using traditional loan finance principles and the other using some sort of high-risk loan (2/28 ARM, payment-option ARM, etc.) having vastly different mortgage obligations. In the end, the "responsible" borrower would have a greater mortgage balance, most likely much greater, than the "irresponsible" borrower. As someone who has sat out of the Southern California market for the past four years, I think that this program encourages risky behavior and is a slap to the face of citizens who acted responsibly. Further, it institutionalizes irresponsible (and most likely) fraudulent behavior. It is also symptomatic of our society’s general inability to take and/or assign responsibility for our individual actions.

At a minimum, I would hope that any program involving the use of federal funds uses fraud screening as a threshold requirement for participation in the program. In addition to the moral hazards discussed above, “forgiving” fraud in the mortgage application process is an even greater affront to those who played the game fairly.

The bottom line is that most people facing foreclosure in the current market need to be foreclosed upon. Keeping someone in a home they could not afford but for fraud creates great moral hazard and delays the necessary correction in prices we are beginning to see in the market. The irrational demand created by fraud and risky loan originations is the main cause of the run-up in the first place.

I was wondering whether Senator Dodd or anyone who purports to support the program has addressed the fraud issue. I would be very interested to find out; however, I am assuming that they would not automatically exclude those who lied about their income. Lastly, an on-line petition objecting to this program and/or a lack of a fraud screening might be helpful. Thank you for taking the time to consider this issue.

[lefty]

they can be 100% foreclosures and it doesn't matter; available inventory is the number to look at! and who wants to live in riverside anyway?? if you want into the best places, which is the L.A. metro area, do it today while the most homes are available!!

[aldo818]

formerlahomeowner,
I'm just guessing, but the people that I have known in your area tend to be better off than most. On top of that, Valencia is just a nicer area to raise a family which would also make it more desireable.

Those two factors would probably keep the prices higher than most areas.

I think that all areas will see a decrease depending on each one's demographics and distance from jobs.

Makes sense, no?

[are they crazy]

Gary - what is with blaming the banks? Are we really going to go down the road of saying the public needs to be protected from itself? No one was forced to buy a home or take a loan. Do you forget what it was like not so long ago with everyone bragging how expensive a house they bought, how much they had refied out of their house, how much equity they had? The public played the game and lost and now want to blame the banks. And to add extra chutzpah, they want to complain now that banks have tightened standards. What happened to the great ownership society where we all manage our financial fate because we don't trust the government? I guess that's only valid until we screw up and then it's the government's fault for not protecting us from our own stupidity and greed.

[Cal]

TakeFive :"When we see headlines that "sales are 50% below last year", does this include trustee sales?"

Trustee sales are excluded. The trustee sales are shown in a separate report by DQ posted monthly on foreclosures. We might have a point in 2008 where the number of sales going back to the bank exceed the number of private party transactions. That would be incredible.

[MyLessThanPrimeBeef]

jb, I agree with you. They should investigate why the dog did not bark.

In fact, Congress should investigate why it didn't investigate the mess 3 years ago.

As the Romans said, 'Quis custodiet ipsos custodes' - who will guard the guards?

[ProblemWithCaring]

Peter, how about a post about the LAT story on foreclosed renters?
Posted by: sfvrealestate

Due to the type of lending and fraud currently fueling the foreclosure cycle, the so-called "foreclosed renter" phenomena is concentrated in smaller multi-family buildings and therefore, not really a SoCal issue.

Most of the F--ed Borrower's in SoCal are F-ed on their primary residencies.

For an real estate agent, though, some nice heartwringing stories of people on Section-8 getting tossed out of rental space they never owned, with returned deposits they never paid, plus "cash for keys," must sound like, both a needed distraction from and a salve for all the horrendous housing news...Unfortunately, sfvrealestate, those stories inevitably come with a mention of the F--ed Borrower who ultimately is the truely foreclosed.

So no rest for the weary!

[sfvrealestate]

Wow, Problem with Caring about Anything But Money, let them eat cake, right? But did you actually read today's page 1 LAT article about foreclosed rental properties? "The California Apartment Assn. estimates that as much as a QUARTER of all foreclosed single-family residences are occupied by renters." That's a lot of people on the street.

[Quasi X]

I'm tired of all you cynics and crybabies who think every single realtor crawled out from under a rock. Yes, there are dishonest realtors, just like there are dishonest lawyers, dishonest businesspeople, dishonest athletes, dishonest politicians, etc. etc. However, my wife is a realtor and I see how hard (and honestly) she works on behalf of her clients, both buyers and sellers. Sure, some transactions are easy and everything goes perfectly, but more often than not, her transactions are more akin to escorting her clients through a minefield. Believe me, my wife works very hard for her commissions and deserves every penny she gets. So, for those of you who are so willing to sling the vitriol at realtors, be sure to save some for the banks and the unscrupulous corporate entities who are the real villians in this housing mess.

[sunsetbeachguy]

Quasi X:

Say I have a bunch of turds in one hand and a bunch of raisins in the other.

I mix them up, is it any more appetizing or do you just enjoy picking turds out of raisins?

Do you like the risk of getting a turd instead of a raisin?

[Quasi X]

Sunsetbeachguy,

Turds and raisins? What the h--- is that supposed to mean? Speaking of turds, though, perhaps it's time for you to pull your head out of your a-- and start judging people as individuals rather than categories.

[Michael]

-Quasi X

Sunsetbeachguy is right. Your wife is the exception to the rule. So what?

Real Estate Agents, generally speaking, are some of the most underhanded self serving individuals buyers and sellers are forced to deal with.

Tricks include:

1) Pulling listings from the MLS to re list them later as "new".

2) Putting "SOLD" signs in McMansions or condos that have been sitting idle for 11 months.

3) Using appraisers that give the 'right' values.

4) Using skewed statistics to 'lie' about the market.

And lets not forget ever proverbial "now is always a good time to buy Real Estate". A Realtors job is to smile at your face and separate you from your money.

The Internet is changing things. I can't wait for the day buyers and sellers deal direct and cut these arrogant, overpaid middlemen (and women) out of the picture for good. They are just in the way and in most cases exist only to inflate the price and stuff their pockets with commission. Commission, that in most cases, YOU will be paying off for the next 30 years.

I am wrong here?

[Joseph... the Real Estate Guy]

Michael,

You are totally wrong!

If we follow your logic, we need to eliminate attorneys, politicians, doctors, accountants, police officers, and whatever profession you are in!

You have all kinds of scenarios in the mix.

*Good and knowledgeable agents.
*Incompetent//Innocent agents.
(Just like inexperienced brand new doctors)
*The unethical/dishonest/greedy (Maybe 10%?) just like any other profession.

Prices are set by: Supply and Demand. (You need to take some courses in Economics 101)
In other words, when you have 50 Buyers wanting the same property, what do you expect a Seller to do?
Sell it at a discount? Would you do that?
You sound like a "Disgruntled Postal Worker"(Sorry Po People)

Coming soon:
www.asktherealestateguy.com

[Michael]

Joseph,

You must be a Realtor. I've never quite understood Realtors are called 'Real'tors. Clearly there is nothing "real" about them. Hehehe.

Joseph. There are dishonest and or inexperienced people in every occupation. Yes. You are correct about that fact. However lets look a little deeper shall we? In some occupations there are clearly more dishonest people than others. And my assertion is that in Real Estate (generally speaking) there are more dishonest Realtors than not. I belive many people would agree with that. After all who better to survey than those who have actually had to deal directly with Realtors?

You claim I am "totally wrong". However, I am not.

Lets start with hanging "SOLD" signs on unsold units. And continuously re-listing units on the MLS. Do you deny this is general practice for Realtors? Both tactics are used to create a psychological effect on the buyer. The first is an outright lie. The second easily borders as a "dishonest" tactic. And these two tactics are only the tip of the ice burg. Cherry picking "good" appraisers, home inspectors, working with "good" Mortgage Brokers who will look the other way are all to the benefit of a Realtor.

Ethics are shouted and touted in Real Estate class but, generally speaking, in reality, are not followed. Why? Because everyone wants to get paid. Thats why.

Good Realtors are master sales-people who can seem to rationalize anything to their own benefit.

Are you a Realtor Joseph? 8)