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Empirical evidence that real estate is nowhere near recovery mode

While statistics about real estate appear to be improving, distressed properties are the concrete blocks tied around the ankles of American property owners and we are not experiencing a recovery yet, even in light of slightly improving indicators.

Positive signs for real estate – not so fast

In some markets around the country the inventory of real estate for sale, especially homes, has been significantly reduced of late. Buyers are racing to participate in bidding wars spawned by multiple offers on ‘killer’ deals.

I suppose in some of those markets what’s happening is organic in nature. However, it’s my studied opinion that may not be the case for most, if not all of ’em experiencing this phenomena.

Why this phenomena is taking place

The reliable facts can be found entering, leaving, and inside the foreclosure pipeline.

Add up the following:

Homes already lender owned.

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Homes in the pipeline — Notice of Default served — process started.

Homes 30-180+ days late in payments — No NOD served yet.

Homes significantly ‘upside down’. Worth WAY less than loan balance.

Homes listed for short sale that never sell, ending up on the REO pile.

This is where it gets dicey. Who knows how many homes all that amounts to? I don’t. Ask those who’ve been keepin’ track, and there’s still significant disagreement on the ultimate number. However, they do seem to fall into a range.

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4-6 million homes.

Let’s use the low end here. The temporary backup in the pipeline is due to many outside forces, including, but not limited to the legal problems in the judicial foreclosure states, and banks dragging their feet for their own bookkeeping reasons. This is a minor hairball in the pipeline, not years of tree roots gumming everything up semi-permanently.

In other words, this too shall pass

When it does, there are gonna be folks all over the country wondering what on earth possessed them to not only voluntarily enter a bidding war in this economy, but pay far in excess of the asking price! I hope for their sakes I’m wrong about their specific  market, and they didn’t overpay. It’s my view this is but a bump in the road.

What makes it galling, is that so many first time investors will be sucked into it. Much like the bottom, which according to so many, has been reached several times in the last several years. There are still San Diegans not speaking to me. Not cuz I pleaded with them not to invest in 2007 — ‘at the bottom’. But that 18 months later they not only hadn’t believed me, but were down roughly 10%. Sometimes the only thing worse than being wrong, is being right.

I pray that I’m wrong

I pray I’m wrong about this — on so many levels. The problem remains. Those 4-6 million homes ain’t goin’ away. When the pipeline is cleared, the clog removed, we’ll be back to looking forward to a recovered real estate market. It should be an interesting look back in around 3-9 months.

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The mistake that might be in play here, is that the fundamentals haven’t changed. Sure, reduced inventory is a fundamental. But, if said inventory was reduced as a consequence of a short lived ‘hairball’, then the fundamental never really changed, did it? Not from where I sit.

Again, I pray I’m wrong, and hundreds haven’t wasted their hard earned investment capital cuz ‘the worm has finally turned’. It ain’t anywhere near turning — that is, in my opinion.

4-6 million homes is what some call empirical evidence of a yet ongoing real estate foreclosure issue.

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Written By

Jeff Brown specializes in real estate investment for retirement, has practiced real estate for over 40 years and is a veteran of over 200 tax deferred exchanges, many multi-state. Brown is a second generation broker and works daily with the third generation. With CCIM training and decades of hands on experience, Brown's expertise is highly sought after, some of which he shares on his real estate investing blog.

39 Comments

39 Comments

  1. Joe Loomer

    March 5, 2012 at 10:16 am

    Jeff, I always enjoy your no-nonsense take on the real estate industry – whether I agree with it or not. I think the interesting “look back” won’t be in 3-9 months, but rather in 2-3 years. Getting this inventory through the pipeline is going to be a measured, deliberate process designed to both keep the impact on non-distressed properties to a minimum (although and further value loss can’t be definded as “minimum”), and to prevent the basketball in the garden hose effect. The Federal Government isn’t done with legal action either – the bond issue is still out there and there will be further settlements with the financial sector over the ranking and bundling of those secondary market securities.
    It’s going to be a 2-3 year bump along the bottom before a serious up-tick.

    Navy Chief, Navy Pride

    • Jeff Brown

      March 5, 2012 at 11:39 am

      Hey Joe — Good to hear from ya. I agree with you. When I said it’d be interesting to look back 3-9 months from now, I was ONLY referring to this current bump in the road re: the temporary halt in foreclosures. I wasn’t talking about the overall recovery of real estate.

  2. Al Lorenz

    March 5, 2012 at 12:33 pm

    Jeff,
    Just a ray of sunshine this morning, aren’t ya!

    Actually, I would argue you are talking about a “static” look at the system. There are going to be additional disruptions to the market, from rising gas prices, rising taxes, tax law changes, the upcoming election, middle east uncertainty and what eventually happens to financial markets due to Europe. Yes, the clearing of the hairball (as you call it) in the foreclosure process will change the current market.

    We could have natural disasters that hurt the market too. The tsunami in Japan hurt consumer confidence last year.

    Of course, there could be good disruptions too. Those aren’t quite as easy to list.

    There was a little bump up in 2010 with the Home Buyer’s Tax Credit. Some folks called the bottom before that too.

    The takeaway? Potential sellers who are waiting thinking prices are going to improve in the short term might well be mistaken. I see more signs that show the wait could still be another 5 years or so than that prices are going to go up significantly in the shorter term.

    I suggest a more present approach to the market. If you want to sell, and people are out there buying and bidding things up, by all means, sell.

  3. Greg Lyles

    March 7, 2012 at 1:53 pm

    I run the market stats for my area of Atlanta each month. On average, 50% of all sales are distress sales. Those distress sales have a negative impact on valuations of homes surrounding them. When that happens, owners equity is diminished. When that happens, more owners find themselves closer to the negative equity position. Then more distress sales. Until consumer confidence improves dramatically, the interest rates could be zero and we’ll still be stuck in the same cycle.

  4. bficker

    March 11, 2012 at 4:31 pm

    I agree with this whole premise. CoreLogic just came out with some numbers for our local area; that we would APPRECIATE 1.3% this year. If you are like me, and it sounds like you are, then that number is probably on the wrong side of the zero. So if I tell people to wait, and CoreLogic is right, and they bought next year, then they MAY spend an extra $2300 on a $200k home. But what if I’M right? What if this hairball gets cleared? What if the election gets wrapped up and there are not political reasons to pressure banks in to not foreclosing as quickly? What if our market drops another 10% (which is completely possible)? Why take that risk?

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