This post first appeared in the June edition of: Cirios Trends: Finding Real Estate Opportunities.

There is no ambiguity about the goal of current US government policy when it comes to housing: Prevent home price depreciation at all cost.

As such, this month’s State of the Markets was going to discuss shadow inventory, diving into the numbers to see just how long we’ll have to live with looming supply of bank owned homes. At current repossession rates (around one million per year according to Lender Processing Services), it will take around four years to work through all loans that are more than 90 days delinquent. Morgan Stanley agrees, pegging 47 months as the time required to work through the backlog of distressed loans. And those figures assumes no additional loans get added to that severely delinquent bucket.

Sobering stuff, and evidence that foreclosures are going to be a dominant market force for the foreseeable future.

But as we dug through the data, something wasn’t adding up. Many are fearful that supply will flood the market as banks push through foreclosures. Housing bears often cite this inevitable inventory spike as evidence housing is in for a second leg down.

This is a very valid concern, and in order to remain ahead of the curve, Cirios closely monitors real time foreclosure and new listing data, watching out for early signs of a supply shock.

Our antennae were tripped in April as Trustee Sale activity began to ramp up and repossession levels began rising. Nervously, we waited for the natural increase in listings that were sure to follow. It never came. It still hasn’t come. Something isn’t adding up.

When banks take back homes, the next step in the process is to list those homes for sale. But that wasn’t happening. Banks were foreclosing on more homes but the trail stopped there.

So we went to the tape. Since 2000, the average increase in new listing activity from April to May was 2.9% on the Peninsula and in the South Bay, while over in the East Bay, new listings rose almost 5.5%. During good times, the typical increase is a bit higher, while during bad times new listings in May can actually decline. In fact, they have declined in each of the past three years.

But this year, throughout the Bay Area, new listing activity in May plummeted relative to historic norms. East Bay new listing activity fell 15.8% while Peninsula and South Bay activity dropped 12.8% – both the highest on record. So what gives?

Without sounding like conspiracy theorists, we’d like to put forward the following, very logical thesis: Imagine you are the government. The tax credit expires, the economy starts to sputter, Europe begins to melt down, the Gulf is literally full of oil and the job market turns out not to be on the mend after all, and you have a stated policy of propping up home prices, what would you do?

We have all heard the old saying “Don’t judge a book by its cover.” This also applies to real estate. Just like a house that looks great from the outside could be a money pit, don’t assume that just because a neighborhood isn’t littered with For Sale signs, foreclosure activity is low. RealtyTrac.com is one of the best free resources available to evaluate the true health of a given real estate market.

RealtyTrac is the closest thing we have to a crystal ball when it comes to evaluating the direction of residential real estate values. While almost everyone knows about the foreclosure epidemic sweeping the country, and indeed California, few have a good sense of what’s happening on the street level. Realty Trac, by pulling information from some of the big real estate data and loan servicing firms, can help answer these questions.

While the site does offer a fee-based premium service, lots of useful information is available for free.

The non-subscriber can look at an area or zip code on a map to get the total number of distressed properties in that area. “Distressed” in this context means any home where the owner is delinquent on his or her mortgage by more than 90 days, at some point in the foreclosure process or the home has already been taken back by the bank.

To get started, type in a zip code and click “View Map.” Use the scroll buttons to zoom in and out.

The “P” symbol indicates that a borrower is more than 90 days behind on his or her mortgage. Foreclosure could be imminent. A neighborhood with a lot of these “P’s” won’t look distressed because the homes aren’t yet for sale, but this is one of the best ways to determine the near-term direction of housing prices because more often than not, Ps become Bs, raising supply and pushing down prices.

The symbol “B” indicates that a home is owned by the bank; the foreclosure process already complete.

Of late, a trend we have noticed is that even though an area may light up like a Christmas Tree on RealtyTrac, (ie, the area has a very high level of foreclosure activity) few homes nearby are for sale. This is indicative of a trend that is only barely percolating in the mainstream media: Phantom Supply.

Phantom Supply measures how much inventory is sitting on bank balance sheets, but is yet to be released out onto the market. Banks are reticent to sell all the homes they have in inventory, because flooding the market would push already depressed prices down even further. For more on Phantom Supply, please read: Keepin’ It Real Estate: The Stabilization Fallacy.

A final note about RealtyTrac is that their data is far from all-encompassing. It should used to compare areas relative to one another, not on an absolute basis.

This property is one of the many, many, many small condos for sale in Orange County. Santa Ana is centrally located next to what used to be the center of mortgage lending in this country, which has quickly turned into the center of a whole bunch of unoccupied commercial space.

All kidding aside, condos like this one are starting to make a lot of sense to buyers considering whether they should make the jump from renting to owning. This unit is nothing to write home about in terms of amenities, is not near the beach and the nearest Starbucks is more than a mile. That’s an eternity for Southern California.

But — at around $1000 per month after mortgage payments, insurance, taxes and HOA dues, it’s not a bad deal. The trouble, of course, is whether your $130,000 investment could quickly become a $100,000 investment, or worse. Sure, you may be paying less to own rather than rent — a market characteristic many cite as bottom-inducing — but if you’re losing $10,000 per year in equity, who cares?

This property is a short sale, and thus more complicated to buy than a foreclosure, and there’s a ton of similar supply nearby. That being said, activity is picking up as buyers are dipping their toes back into the market at new, lower prices.

Address: 2511 West Sunflower Ave, T15, Santa Ana, CA 92704
Status: ACTIVE
List Date: 3/14/2009
List Price: $139,000
Cirios Value: $130,000
List Price vs. Cirios Value: +6.9%

For a complete Cirios Valuation, click here for our CLEAR report, or on the image to the right.

Have a home you’d like Cirios to use for our next House of the Week?

Make a comment below!

This week’s House of the Week redefines the term “over-listed.”

While the house does have a number of things going for it — large living area, good curb appeal and a nice open layout, it’s just priced too high. But, like many sellers in the area, this one is yet to come to terms with the reality that home prices have dropped, even in middle class areas with good schools. The home is bank owned, and the bank is getting lousy market information from the listing agent.

Schools are very good in this area, but the subject’s street — close to the local middle school — is a bit run down and has several other properties listed on the same block. While the other houses are inferior, the a buyer would still need to put a solid $15-20k into this house just to make it livable, not to mention the kitchen needs serious attention. This fact is not mentioned anywhere by the listing agent, who, based on the comment we mentioned in the original post, doesn’t even appear to have been to the property.

This is a story we see all too often: Banks listing properties too high, with barely attentive listing agents. Unless the seller drops the list price significantly, this house will sit on the market for a long, long time.
Address: 1660 Duvall Dr, San Jose, CA 95130
Status: ACTIVE
List Date: 2/9/2009
List Price: $665,000
Cirios Value: $525,000
List Price vs. Cirios Value: 21.1% over-listed

For a complete Cirios Valuation, click here for our CLEAR report, or on the image to the right.

Have a home you’d like Cirios to use for our next House of the Week?

Make a comment below!

Ocean Beach, or OB, is located just north of the Point Loma Naval Base in San Diego. OB is about as far from Laguna Beach as a Southern California beach town could be. It’s grungy, dirty — it’s awesome. Apart from the main beach, where crowded, competitive SoCal surf is personified both off the pier and out at the Jetty, cliffs and quiet streets wind their way south, as the largest kelp forest in the world (yes, the world) hangs around just off shore.

Northern OB is home to small houses and apartment complexes, about as cheap as you can find a few blocks from the beach. Head south or up the hill and the homes get progressively larger, more expensive and the median age of the inhabitants rises in kind.

Our subject is a new home, built in 2008, with a small lot as a result of a lot split. MLS denotes the home a condo, but it is much more of a cottage than a true condo. There aren’t a ton of true single families around the subject, as the area is spattered with apartments and condos. This makes the subject desirable, if small. However, the market for small homes and condos is very slow right now in OB — lots on the market, not much selling. Prices are falling. REOs are inching upwards, further hurting property values.

The list price of $625,000 is aggressive, but based on the price the builder likely paid for the land, the cost of the tear-down and the lot split, plus the new construction, he or she probably doesn’t have a lot of room to lower the price and still make money. It will be very telling to watch if, and when, the owner bites the bullet.

Address: 4844 Coronado Ave, San Diego, CA 92107
Status: ACTIVE
List Date: 11/10/2008
List Price: $625,000
Cirios Value: $550,000
List Price vs. Cirios Value: 12.0% over-listed

For a complete Cirios Valuation, click here for our CLEAR report, or on the image to the right.

Comments? Have a home you’d like Cirios to use for our next House of the Week?

By RYAN TAYLOR

New homes sales reached record lows in January as transactions fell 10.2% from a month ago to seasonally adjusted annual rate of 309,000. This annual rate is the lowest in the history of the reading which the government started in 1963. The median sales price for new homes also fell by 9.9% to $201,000.

The sobering reality is that jobless claims are now the biggest driver of the falling homes sales. When this downturn in housing began in 2005, creative financing had allowed people with jobs to buy houses they could not afford. But even if incomes and employment were still at those 2005 levels, that same buyer pool would not be around to buy up houses at today’s “cheap” levels. Buyers at those prices no longer exist for  three basic reasons:

1) They are still trying to stay in their current home by acquiring a modification for their loan.
2) They have been foreclosed on and their credit score is below 700.
3) They no longer have a job so they cannot afford to buy a home even if they wanted to.

These facts are especially bad for new homes sales as most new developments are located far away from job centers. Since foreclosures are now prevalent throughout the country, most people are deciding to buy homes closer to their places of employment so they can avoid the long commute. Furthermore, most of the areas that are in close proximity to job centers are more established and are generally viewed as a better investment.

Those buyers looking to purchase homes in areas with new homes for sale have quite a few properties on the market to choose from. REO properties are becoming more popular purchases because they are frequently cheaper. As modifications become more prevalent, buying an REO in a neighborhood with few “For Sale” signs will be seen as less of a gamble because most struggling homeowners will find it easier to receive some mortgage relief from their servicer. Additionally, these buyers are avoiding new developments because there are not enough other buyers to suggest that the development will acquire the prosperous feel that is often advertised by the homebuilders.

Those who do have jobs can afford to be selective and, as a result, will most likely choose a home in an established neighborhood that is close to job centers. This home will rarely be a new home.

Until a publicly traded homebuilder is forced to liquidate their portfolio of homes, new home sales will remain at historically low levels.

By RYAN TAYLOR

The National Association of Home Builders, or NAHB, released its confidence numbers for February this morning and the reading unexpectedly rose to 9, up from 8 in January. 8 is the lowest level the index has ever reached.

This surprise increase is not exactly a reason to start popping champagne and celebrating the bottom of the market for new homes: Sentiment is not deemed positive until it climbs over 50, so we have a long way to go before it is time to be optimistic.

“The market for new single-family homes remains very weak at this time,” NAHB Chairman Joe Robson said.

While the NAHB is rarely as misleading as the National Association of Realtors, these comments are far from reassuring. The basic reasons for the increase in the sentiment were increases buyers traffic and the blind hope that the $789 billion stimulus package would help turn the economy around.

“Looking forward, we are certainly hopeful that the newly passed economic stimulus bill, which includes some favorable elements for first-time home buyers and small businesses, will have a positive impact that will help get housing and the economy back on track,” said Robson.

In a more muted recessionary environment, we believe the $8,000 tax credit offered to first-time home buyers would have a significantly positive affect on demand. However, the economy remains quite weak and we believe most first-time home buyers are going to have a hard time buying homes since so many either A) no longer have a job or B) have seen their wages curtailed.

Finally, new home sales will continue to be hurt by the ever growing prevalence of REOs on the market. Given the fact that numerous banks are keeping many of their REO properties off the market, we do not foresee competition from REO properties being eliminated in the foreseeable future.

Buying a new home remains a risky proposition.

By RYAN TAYLOR

Friends are people you can trust. They will come pick you up when your car breaks down. They are there to pick you up when you are down and there to celebrate when something goes right. Friends are the most valuable thing you have.

Friends do not try to hurt, deceive or manipulate you. (Bernie Madoff is not your friend).

If you bought a house in 2008, most likely your Realtor is not your friend. Almost every single person who bought a house in 2008 now owns an asset that is worth less than what they paid.

Did your Realtor at least tell you that you were making a poor short-term financial decision? Probably not, because he or she is not obligated to do so.

Realtors are not motivated to help make you a good financial decision; they are motivated to create a transaction and earn fees. If President Obama is outraged over Wall Street compensation packages then you should be outraged over Realtor commissions.

And while Wall Street may not have much of a choice about their bonuses for the foreseeable future, there is something you can do as a potential home buyer to protect yourself from making a big mistake when making the biggest purchase of your life.

Ask the right questions and demand the right answers.

Here a few questions you should ask your Realtor and the answers that are adequate and answers that are concerning:

With economic conditions continuing to deteriorate, why do you think this is the right time to buy, as opposed to 6 months from now?

Wrong Answer: Interest rates are at historical lows and sales are up, so we are near the bottom of the market.

Right Answer: Property values are not likely to rise in the next six months and in most cases it is not worth the risk to buy a house now as opposed to six months from now. However, if you have been waiting for this particular house to come on the market for a few months because it is in a well-maintained neighborhood with good schools and an abnormally large lot, it may be a good time to make an offer that fits comfortably within your budget.

What is the value trend over the last three months for properties like the one I am looking at?

Wrong Answer: Sales are up more than 100% year over year. With the increased demand, values are going to be on the rise or are already on the rise.

Right Answer: Allow me to find you 3 comparable sales from the last two months that will show you the current market trend. In addition, I will find you three comparable listings that also give you an indication of what others are asking for. Please realize that listings are very negotiable and so do not necessarily represent the value of the homes they are attached to.

When you are prospecting for homes you want to show me, how do you determine what to show me and what not to show me?

Wrong Answer: I only look for properties that have been listed within the last 30 days. Anything that has been on the market for more than 30 days must have some problem that makes it very undesirable. I also do not look for REOs as they have been neglected and are frequently sold “as-is”.

Right Answer: I apply the criteria you provided me and look at everything that is listed in the school district and city you are interested in. Personally, I like to show some homes that have been listed for a while because I know they are not generating as much interest as some of the new properties. This way we can avoid bidding wars and potentially find a truly motivated seller.

In addition, I enjoy showing REOs because I know banks continue to be strapped for cash and they are willing to negotiate over everything from closing cost incentives to repairs. Finally, I do show short sales but I realize that most end up becoming REO properties, and you as a buyer will most likely get a better deal on a home when it is REO rather than a short sale.

Please provide me with a few closings you are most proud of over the last year that you believe were really good deals for the buyers?

Wrong Answer: I got a great deal for a couple in October where they got a $5,000 closing cost credit. I also helped one of my friends get a home that they bought for $35,000 below list.

Right Answer: There are a few deals I am proud of and I will put together a report for you detailing the price the buyer paid, the closing cost incentives granted by the seller and what their home is worth now. Furthermore, I will have an independent valuation firm run values on these homes so you know you can have an unbiased opinion of value.

If you receive the right answer on your questions, you may just have a friend in the real estate business.