June 2010 Market Update

Forget what you hear on the news from news casters who may not even own a house, much less know anything about real estate, the market has turned the corner and headed back…… Here is why……

1st, all markets are driven by supply versus demand whether it’s a car or a house or a pair of designer jeans, increase either the supply or the demand individually and prices change one way or the other. The market went up in 2004 because the existing resale supply was eaten up due to new home builders having no inventory as a result of 911. When the market had corrected its self in late 2005 and should have leveled off, the media and real estate agents who had no idea why the market went up in the first place said keep buying, it’s going to the moon! The market then dropped because new home builders had over built and overpriced, along with the resale market, and so builders decided they would drop prices to move inventory. Everyone then realizes the market was done, and the buyers that bought homes with the idea that they were going to make a huge profit by the time their adjustable rate loan adjusted were unable to even break even. These type loans created huge numbers of foreclosures and lenders started doing fire sales to dump the houses. Hence, an increase in supply and drop in demand as buyers are now afraid of a falling market. You also have to keep in mind that the media and real estate industry feed the fall way longer than needed, just as they fueled the increase above what it should have been, out of ignorance. The way it worked was lenders had houses they gave to agents to sell who kept undercutting the competition until prices were way below what they were years before the up market started, this forced private owners to compete with the repo’s to sell. That kept adding to the foreclosures and lenders kept reducing prices until lenders started to wise up and decided they could rent back homes and take other steps to reduce the number of homes on the market, hence less supply, and due to low interest rates and investors wanting to take advantage of really low prices, an increase in demand.

2nd, there is something called a short sale which effects the numbers of available homes in a different way. How it works is a seller either can’t make the payment because they lost their job, got transferred or the loan adjusted to a higher payment and they find they owe more than the home is worth. The lender can either foreclose or agree to short sale the home. In order to qualify for a short sale the seller must show they have no way to come up with any money to offset the loss and cannot receive any money at close. They may possibly also be given a 1099 income for the loss which ups their tax bill. In short, the seller has little motivation to short sale in most cases and some sellers use it to stall foreclosure and stay in the home rent free for many months. Even if the seller is honest, a short sale can easily take 6 months to close escrow and the lender can back out at the last second or ask for more money etc to close. Most buyers do not have this kind of time frame to close on a home they intend to live in and are starting to pass on these all together, which again reduces the supply number.

3rd, a number of agents who specialize in selling bank repo’s are unreachable or unwilling to give any information to buyers and their agents, hold offers for long periods of time, then send a rejection as the property was actually being sold to someone while a better offer was never presented for one reason or another. This type of bad business example has lead agents to possibly avoid dealing with several repo agents and again reduce the available supply being shown to buyers. An example is, a buyer I started writing good offers for last November finally got a home this month when he decided after numerous bad experiences, he would no longer look at repo’s or short sales and only deal with owners. Another buyer after delays dealing with repo’s decided the same thing and both also realized they didn’t have to take the home “as is”. Again, a shift that reduces supply. However, while repo’s are becoming a smaller number of the total market, they are still popular and some buyers even see the “pain” in dealing with one as a “demand” incentive to keep going for the next one.

4th, loan interest rates are at a all time low, the government just finished giving huge tax credits to buyers and prices are so low that ownership is way cheaper than rent, hence demand is up. There is also a pent up demand from people who have waited for the market to hit bottom before buying and there has been a huge increase in FHA type loans which are now easier than conventional loans to qualify for. At the same time sellers who bought long ago and have equity in their homes see this as a good time to sell and upgrade while that “bigger” home is still affordable. So how does all this information affect the price of homes? If we talk about entry level homes (the kind I personally buy for rentals) I have seen an increase in the last year and a half of over 50%!!!!! (The little fixer upper I could get for $50K in January 2009 is $80K today which is still less than what I was paying in 1999, 5 years before the up market). If we talk about something upper end custom, we have to wait for the seller of the little house to make a step up and that seller to step up so while the downside is done, the upside will come back slower than the starter homes (just like in 2004). To demonstrate my point I checked the total residential properties in the MLS a couple days ago for a client and found there were 24,049 residential properties, HOWEVER, 12,724 of that number were contingent sales!!!!! This means ½ of the property showing on the MLS is under contract AND that doesn’t count the number of properties that are in pending sale! I then took out the contingent’s and asked for only houses (no condo’s etc) and the number drops to 8,875. I then took out the short sales, because as stated above not something I recommend, and the number drops to 5,053 total for sale in the entire valley! I then took out the repo’s and the number went down to 3308, which means only 1,745 homes for sale in the valley are repo’s which is less than 20% of the homes for sale. Realizing this is all price ranges including the most expensive homes for sale I decided to see how many were in the typical 1st time homebuyer or “typical buyer” price range, that is the market that represents the most popular price and found only 1762 available that were not short sales and 778 that were neither short sales or repo’s! I also figured the same criteria for houses under $100,000 and there are only 283!!!!!! These numbers represent about the same numbers as were available in 2004 that started the buying frenzy! This is also a dramatic turnaround from when it seemed like every house for sale 2 or 3 years ago was a repo instead of less than 20%. This is why every buyer I have worked with this year has been competing with several other buyers on each home we made offers on…… SUPPLY and DEMAND! So what about the next wave of foreclosures we hear about on the news? I think that lenders have gotten wiser and will not dump homes in bulk on the market again (if there is any wave) and coupled with what appears to be a turn in the economy in general along with tougher penalties for people who walk away from homes they can afford, the next “wave” on the news, will be more like a ripple than a wave. In addition to penalties for walking away from a home you can afford (delinquency judgment) lenders are also going after people who strip the homes (selling garbage disposal, built in appliances etc) or destroying them (holes in walls, plumbing damaged etc) during foreclosure. Also lenders are offering “cash for keys” if you leave the home neat and clean as an incentive to do so.

This leads to my last point. A lot of our current foreclosures were from buyers who were upside down or had no equity, taking advantage of the low prices (that took away their equity in the 1st place) and buying a home while telling the lender they were going to rent their existing home out. Once in the new home, they stop making payments and let the other home foreclose. New guidelines for lenders require at least 30% equity in your existing home and ability to qualify for both homes full payments in order to get minimum down on a 2nd home. If the existing home has little or no equity you will have to place at least 20% down on the 2nd home to show you are honestly going to keep both. Lenders on FHA loans also require minimum fico scores to be approved for a loan. I also believe that while loan modifications have been mostly a “myth” instead of reality, with numbers of foreclosures slowing down we may see more of them actually being done in the future. In summary, if you have money to invest in real estate, I believe now is the time to do it! If you are looking to sell a smaller home in order to move up at today’s lower prices, now is the time to do it! If you have a large home and don’t need to sell it and can wait a couple more years for the market to come back, do it, however if now is the time to retire and get out of the big home with lots of equity, you can offset the low market by buying rentals with some of the equity and offset the loss with added income. If you want details on my ideas, call me, as this news letter covers only highlights of the market and how this letter relates to any individual, may or may not fit a typical item outlined above. And for the attorney’s out there, this letter is for my readers benefit only and does not necessarily represent the actual value or investment potential of any particular piece of property and is a guide based on my 29 years of writing about and analyzing the Vegas market. All numbers are from local MLS statistics on the date I pulled them and can change daily (3 houses entered contingent status in a couple minutes while I was pulling the numbers).

Sincerely, Jac Lindell
Realty One Group
(702) 362-0827 Direct
(702) 595-6937 Cell