By ANDREW JEFFERY

This post first appeared on Minyanville.

Increasingly, US real estate is becoming a tale of 2 markets.

In low-income neighborhoods, overbuilt suburbs, and other areas besieged by foreclosures, home sales are through the roof.

Data released this week by MDA Dataquick, a real estate information service, show December 2008 sales in Southern California’s hard-hit Riverside and San Bernardino counties up a whopping 300% from a year ago. Southern California as a whole has seen transactions spike more than 50%, while pockets of the San Francisco Bay Area are showing similarly robust numbers.

Prices, however, continue to plunge.

Foreclosure sales are driving distressed markets, and since repossessions disproportionately affect lower-priced homes, data are being skewed downward. Record-low interest rates, bottom-fishing investors and relentless marketing efforts by the National Association of Realtors are all spurring renewed buying activity.

Lenders are so overrun with new business that Wells Fargo (WFC), which plans to cut over 10,000 jobs as it absorbs recently purchased Wachovia, is hiring hundreds of temporary workers to handle mortgage applications, according to MortgageDaily.com.

Meanwhile, buyers are on strike in high-end markets, and supply is creeping towards materially unhealthy levels.

Jumbo loans – those not guaranteed by the government via Fannie Mae (FNM) and Freddie Mac (FRE) – are nigh impossible to get, leaving would-be buyers of expensive homes in the lurch. Transactions are down in some of California’s — and indeed the country’s –  most prestigious markets, leaving a host of recently minted real estate millionaires wondering if they’re next to get stuck in the subprime slime.

Conventional wisdom among real-estate professionals is that these well-to-do areas are in “wait-and-see” mode. This attitude, while comforting to the rich, is dangerously naïve.

Transparent, real-time sales data is carefully concealed from the buying public by the country’s real estate brokers; it tells a very different story. In these illiquid high-end markets, inventory is building, forced sales are on the rise, and prices are starting to head south.

And contrary to popular belief, value drops aren’t just taking place in far-off exurbs where palatial Toll Brothers (TOL) McMansions litter flattened hilltops. Established neighborhoods — many close to job centers with top schools – are seeing home prices fall for the first time in decades.

These high-priced markets, particularly because of the troubles in the jumbo loan market, have become dangerously illiquid. In many neighborhoods, just a handful of homes are currently listed for sale. If one seller gets antsy, loses his job or otherwise jumps at a low-ball offer, the entire market can gap down. The new, lower price sets the bar at which potential buyers begin their negotiations, putting sellers at the whims of their skittish neighbors.

Due to dramatic appreciation during the boom, many wealthy homeowners are sitting on huge equity cushions. While not something they often complain about, this could encourage quick sales, as sellers don’t need to hold out for the absolute highest price like their poorer, more levered neighbors on the other side of the tracks.

All this adds up to an increasingly bifurcated market. The most distressed areas are currently going through the final, violent throws of a real estate collapse for the ages. The process could still take months to run its course and some communities, sadly, may never recover.

Previously strong areas, on the other hand, are just now beginning to feel the pinch. Many, after decades of unfettered appreciation, have a very, very long way to fall.

By RYAN TAYLOR

In this two part series, Cirios’ Valuation Guru Ryan Taylor offers an insider’s look into the nuances of investing in foreclosed homes. Please click here for Part 1.

As potential buyers embark on their search for a new home or a prospective investment, they are very likely to see at least one REO property. These buyers need to educate themselves on what an REO property has in store for them because avoiding an REO is often times unwarranted.

One of the first things a prospective buyer needs when looking at a property is imagination. In the case of owner-occupied sales, most buyers can visualize themselves in the property because someone lives in the home. Homebuilders like Centex, Lennar, Toll Brothers and KB Home have made their fortunes by staging homes with swanky furniture so it’s easy to envision life in their new home.

On the opposite end of the spectrum, REO properties are often times neglected by the bank that owns them and they are not nearly as welcoming.

Do not let weeds and trash in the yard, the lack of furniture or a pink bedroom distract you from seeing the property as your potential home.

Another attractive aspect of purchasing an REO is the ability to negotiate with the bank. This fact has become, and will continue to be, a big part of any REO transaction. In the early part of 2008, most banks were unwilling to negotiate for a variety of reasons, but as losses have continued to mount, the fear of the housing market falling further have forced banks to the negotiating table.

Any prospective buyer should ask to be compensated for closing costs and request money for needed repairs. While banks may not give you everything you ask for, with a little negotiating and the recognition that you, the buyer, are in the position of power, buying an REO can save you thousands of dollars.

Probably the most beneficial aspect of purchasing an REO is that the buyer has an opportunity to buy a home that they can turn into their perfect home. Adding your personal touch will not only add personal value to the property, but also monetary value.

In a market where there are very few willing and qualified buyers, most homes that are purchased are turnkey or move-in ready. The majority of buyers are not interested and/or do not have the time to work on a “project”. While these people are getting a very nice home, they could have saved money by seriously looking at an REO property. The money they saved on the purchase price could have helped them upgrade the home to their own taste. Let’s face it – everyone has their own taste and would like nothing more than to have a home that has their own personal touches.

One of the biggest deterrents from an REO purchase is the potential work that needs to be done on the property. You name it and it could be broken, destroyed or missing. REOs come in all levels of disrepair, which makes having a trusted inspector (and a contractor in most cases) go through the home with you crucial to knowing that you are getting what you paid for. There is nothing like saving a few thousand dollars at the closing table and then having to turn around and pay for a new roof and new plumbing system. It can almost always be assumed that the property has been neglected by the bank so be sure all aspects of property repair have been thoroughly reviewed and included in any offer.

The other big risk is the supply of REOs in the property’s immediate neighborhood. The general rule is the more REOs, the worse the potential value declines could be in the near (if not long) term. As unsold homes sit on the market, buyers demand lower prices and neighborhoods become less desirable.

Just because you have found an REO that is in good shape and priced at or around your budget doesn’t mean it is a good buy right now. As you have read numerous times on this site, the real estate market is in for more pain. One of the main reasons for this is that banks are facing increased pressure to liquidate these properties and raise cash, so they are listing their REOs for less than anything else on the market.

This practice is one of the biggest drivers of the declines infecting most of the country, and the primary reason foreclosure prevention efforts are such a high priority in Washington.

Buying a home in a declining market can be a very risky financial decision and everyone needs to be aware that property values could decline by another 25%, if not more, depending on the area. At the very least, prospective buyers have to see themselves living in the home for 5 years. Even though living in the same house for a long time sounds like a great idea now, if you have a 5 year old and a 7 year old and are considering a one bathroom house, do you really to want to share a bathroom with them when they are 10 and 12? And maybe more importantly, are they really going to want to share that bathroom with you?

The final piece of advice I will offer regarding an REO purchase is you should always have an understanding of the true value the home. This is of course, no easy task to figure out.

If there are quite a few REOs on the market listed at $100,000 above their real value, even receiving a discount of $30,000 on the list price means you could still be overpaying by $70,000. List prices are simply what a seller wants, and often bears little resemblance to the actual market price.

On the flip-side of that coin, many banks will drop the list price of their REOs dramatically after they have been on the market for 30 or more days. If you see a home listed for $500,000 and your property valuation provider tells you it is worth $450,000, you should not be afraid to offer $450,000 for the property. If you wait for the list price to come closer to $450,000, you may miss out on the opportunity. When sellers drop their list price, the home immediately jumps on the radar screens of Realtors and investors — this can often create a bidding war that may drive the price up above your target. In addition, it’s hard to argue for closing cost incentives if you’re willing to pay more than the list price.

The supply of REOs is only increasing so do your homework and do not be afraid to make an offer on one of these homes. You never know when you could get a great deal.

By RYAN TAYLOR

In this two part series, Cirios’ Valuation Guru Ryan Taylor offers an insider’s look into the nuances of investing in foreclosed homes. Please click here for Part 2.

From Beverly Hills to Detroit, the term REO is quickly becoming part of our country’s vocabulary.

REO, or Real Estate Owned, refers to a property that has already been through the foreclosure process, was unable to be sold at a public auction and has reverted back to the bank. For most of us, the previous sentence is a gross over-simplification and requires more explanation.

Similar to many aspects of life, we are skeptical of things we don’t understand. Since most potential home buyers are unsure of what an REO is, they tend to shy away from even considering REO properties that are for sale. More often than not, this “fear” is unjustified because an REO property does have value, and can prove to be a great investment for those willing to do their research.

Foreclosures, while an unpleasant part of the real estate and mortgage business, have jumped to the forefront of the country’s current economic predicament.

After a bank determines they can no longer depend on a borrower to make their mortgage payments, it begins the legal proceedings necessary to repossess the house. In California and other states where trust deeds are the preferred instrument for securing home loans, the foreclosure process usually culminates with a Trustee sale, where a lender-appointed representative puts the home up for public auction. These sales take place at the local court house, which is why you sometimes hear foreclosure sales described as occurring “on the courthouse steps.”

The lender will typically provide the trustee a minimum bid amount, and if no buyer shows up with the requisite cash, the home reverts to the bank and becomes REO.

Tight credit markets and falling stock prices over the past 15 months have created an environment where the vast majority of properties that enter the foreclosure process eventually end up REO. Even savvy investors, burned by the steep home price declines of recent years, are reticent to bid aggressively for distressed properties. As a result, banks are inundated with these homes, most of which are in extreme levels of disrepair. Banks have never had to deal with so many REO properties at one time and are ill equipped to manage their growing inventory of homes.

The supply of REO properties greatly outweighs the demand, and banks often can only sell them at fire sale prices. Their reluctance to realize further losses leaves these homes neglected, clogging up the real estate market with unsold and unattractive inventory. As long as economic conditions continue to deteriorate for banks, the number of REOs will remain high.

For prospective buyers — and indeed anyone who owns a home — it is essential to become educated on how to understand the current and potential value of an REO property.

The fact of the matter is that recessions create opportunities for those willing to do the work and research. Purchasing an REO property as either a home or income producing property can be a great investment. However, there are numerous pitfalls and market timing continues to be important as home prices continue their slide.

In the second article in this two part series, we will examine the risks involved in purchasing an REO property either an owner or investor.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Constrained supply, continuous demand and wealth beyond imagining: There’s a reason New York City real estate is the most expensive in the country.

Easy lending, a weak dollar and gobs of Wall Street money pushed already sky-high Manhattan property values into the stratosphere during the housing boom. Now, finally, after the rest of the country has succumbed to the housing crisis, the city that never sleeps could be facing a real-estate crash of its own.

According to Bloomberg, commercial real-estate transactions plummeted more than 60% this year; lending has dried up and buyers have backed off. Despite all the fundamental reasons for New York real estate to remain strong, it’s Pollyanna-ish to believe it will remain an island of calm in an economy deteriorating by the day - especially when the epicenter of the economic calamity can be found at the southern tip of the island.

Tuesday, Toll Brothers (TOL) CEO Robert Toll issued a dour outlook for Manhattan property prices: “Up [till now], New York City was a nice stand-alone, and a beacon, but it has now joined the ranks of the rest of the country… I would expect the financial business in New York to probably lose 100,000 people.”

Toll went on to explain that “The foreign market, which supported in large measure the pricier condos in New York City, is not there in force as it was… what with the euro going down in comparison to the dollar lately, and with their own economic crisis.”

And when New York City real estate goes, it goes big.

The last housing slump in Manhattan began in at the end of 1987 and lasted for nearly 10 years. During that time, according to data compiled by quadlet.com, prices fell 40%. Adjusted for inflation, they tumbled almost 60%.

The New York Metro area is poised for a similar fall. According to the S&P Case/Shiller Home Price Index, home prices have slipped just 6.9% in the last year, compared with 26.7% in the Los Angeles area, 27.3% in San Francisco, and 9.8% in Chicago.

As the housing slump spreads into previously strong markets, these pockets of strength are starting to crack.

The longer credit markets remain under duress — and when firms like Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) are laying off ever more employees in their ongoing cost-cutting efforts – the deeper the slump is likely to be. A strengthening dollar and floundering economies around the world will continue to keep foreign buyers away.

What goes up, must come down.

Click here for the results of this House of the Day.

Today’s property is located in Stanton, CA a suburban neighborhood smack in the middle of Orange County.

(Click to enlarge image)

Home Details:
- 8511 Chanticleer Rd, Stanton, CA 90680
- 3 Bedrooms
- 1 Bathrooms
- 1347 square feet living area
- 0.17 acres
- Built in 1956
- “Recent” sale 2/27/1987 for $120,000

Property is not currently listed, no description available.

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From time to time, Cirios Real Estate posts a home listed in California as its “House of the Day.” We then post a valuation assessment completed by our team of property value experts. We encourage our readers to post comments and participate in a discussion about the home’s value.

Cirios Real Estate has no buying or selling interest in any of the homes we evaluate, they are posted here for the benefit of our community. This analysis is a broker’s opinion of value and is not to be construed as an appraisal.