Mid-term expectations

Home sales are projected to move in a relatively narrow range with a gradual upturn becoming more pronounced by the end of the year, according to the latest forecast by the National Association of Realtors. Lawrence Yun, NAR senior economist, said the market is relatively soft. "Overall housing levels are historically strong, but sales remain sluggish compared to the recent boom," he said. "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year.”

Existing-home sales are projected to total 6.18 million in 2007 and 6.41 million next year, in contrast with 6.48 million in 2006. New-home sales are forecast at 860,000 this year and 901,000 in 2008, down from 1.05 million last year. Housing starts are likely to total 1.43 million units in 2007 and 1.49 million next year, below the 1.80 million recorded in 2006.
The national median existing-home price should ease by 1.3 percent to $219,100 in 2007 before rising 1.7 percent next year. The median new-home price will probably fall 2.3 percent to $240,800 this year, and then grow by 2.6 percent in 2008.

"We continue to experience a temporary distortion in comparing median existing-home prices," Yun said. "Because the sales volume has shifted from many high-cost areas to moderately priced markets, we're not getting a true apples-to-apples comparison. When you look at other measures, such as this week's price index from Freddie Mac which is based on repeat sales, overall home prices are rising slowly."

"Buyers today need to have a traditional view that housing as a long-term investment is an added benefit to their shelter expense. If so, that investment generally will build a nice nest egg over time, especially if they use a traditional mortgage instrument that reduces debt," Yun said.
The 30-year fixed-rate mortgage is likely to increase to 6.6 percent in the third quarter and then hover at that level through 2008.

"Because of reductions in home sales and new home construction, the economy will expand at a subpar pace in 2007," Yun said. "As housing market conditions improve going into 2008, the economy will reach back to its growth potential next year." Growth in the U.S. gross domestic product is estimated at 2.0 percent this year, lower than the 3.3 percent growth in 2006. Yun forecasts GDP to grow 3.0 percent in 2008.

The unemployment rate is projected to average 4.6 percent in 2007, unchanged from last year. Inflation, as measured by the Consumer Price Index, is expected to decline to 2.5 percent this year, down from 3.2 percent in 2006. Inflation-adjusted disposable personal income is likely rise 2.8 percent this year, compared with a 2.6 percent increase in 2006.

Bank Owned Homes

You hear a lot about “bank owned” homes today. These are homes where the lender has completed the foreclosure process and has the actual title to the property. Lenders are not in the property management business, their intent is to sell the homes as quickly as possible for the highest price they can get. Most of the homes are listed with a local real estate firm and some will be auctioned through an auctioneering company.

Two weeks ago I had an out-of-area client call to ask about buying a bank owned home in El Dorado County. She went on Foreclosure.com and told me that there were 900 listed in El Dorado County. That was a surprise to me since the total number of listings in the county is 1,700. A visit to foreclosure.com’s web site revealed that they combined bank owned homes with short sales, defaults, for-sale-by owners and “other deals”.

So just home many bank owned homes are there around the region? If you combine Sacramento, Placer, El Dorado, Amador, Nevada, Sutter, Yolo and Yuba counties there are 661 homes that the banks own. That’s considerably more than the 92 all the banks owned in the region in April of 2006 but considering the number of homes in the region, the impact on the total market is negligible.

Across the state the banks own 5,500 homes. A year earlier they owned 1,100. I suspect that the regional and statewide numbers will increase throughout 2007 and then decline during 2008. Everything has a cycle.

I have seen a few bank owned homes. Many are in locations where I did not want to get out of my car. In areas that give different meaning to a “drive by.” If I were buying another investment property, I would not exclude bank owned homes but I certainly would not shop them exclusively.

Foreclosure Shopping

Several people have been asking me questions about foreclosures recently. My grandfather used to say, “With adversity comes opportunity.” I’m not sure he was thinking about the real estate market but several people are interesting in profiting from another’s loss. I suspect, however, more money is being made by the people and companies promoting, locating and how to buy a foreclosure, than by people who are actually buying and selling them.

A cottage industry has sprung up promoting buying foreclosures. Slick sales presentations disguised as “Free Workshops” or “Investment Seminars” provide us (for a fee) their secrets to making big bucks buying foreclosures. Who couldn’t use an extra “$10,000 A Month”, simply buying and selling foreclosures? Don’t we all want to discover “Hidden Deals and Big Profits?” Thousands of Internet sites are offering subscription services in locating “Opportunities” or selling their “Proven Ways to Wealth” “Don’t you want to become a Money Making Machine?”

Homebuyers have three opportunities when considering buying a foreclosure: The first is during the preforeclosure when a borrower goes into default. The second is at the foreclosure auction on the courthouse steps when the property is sold to the highest bidder or finally after the lender has acquired the property at the foreclosure auction and has listed the property for sale as an REO (real estate owned) or bank owned property.

Foreclosure shopping is a risky business and should not be attempted without the assistance of your team of experts consisting of a knowledgeable agent, home inspector and appraiser. There are no representations, disclosures or warranties when buying at a foreclosure auction. The purchase is “as is” “all cash” and “final sale.” Most foreclosed homes at some time have been previously listed and have not sold for a reason. Distressed properties and poor locations are usual characteristics with a foreclosure property. Attractive pricing may be an attempt to disguise or offset a property’s inherent faults.

A preforeclosure occurs after a borrower has missed at least one payment and the lender has filed a recorded notice against the property called a Notice of Default. The NOD begins the foreclosure process. Default notices are published regularly in the newspaper and can be obtained by subscription on and off-line and through data firms that track such information. When a borrower receives a NOD they have a few choices to make: They can catch-up any back payments, penalties and interest and reinstate the loan, sell the property and pay off the lender, negotiate with the lender for some type of work-out including a short sale, file for bankruptcy or ignore the situation and wait for the lender to evict them from the property.

Buying a preforeclosure or a listed bank owned property has advantages over an auction since it allows a buyer valuable time to perform a home inspection and research the title. Preforeclosure sellers may be more accommodating to a buyer’s request for repairs or assist with closing costs. When sellers are faced with the reality of loosing their home and their credit, they are more likely to take an offer that will salvage something of both.

Buyers should not expect substantially discounted home prices when considering a bank owned property. Often, lenders price a property according to the amount of their mortgage, attempting to recover their investment. In addition to federal regulators, lenders are pressured by their stockholders to sell their REOs at top dollar.

As with any investment, one should have a contingency plan when buying foreclosures. I call this, my “what if” factor. What if it costs more money than I have allocated? What if I can’t rent it for the payments? What if the property values drop further? Buying any investment has certain risks but buying a foreclosure I consider equal to bungee jumping or alligator wrestling. Another one of granddads favorite sayings was “Never play another man’s game.” He was opposed to financial situations controlled by others. Good advice when considering a financially distressed property.