I recently was on a website that I subscribe to where Agents and Clients Blog and do Q&A sessions. The question posed on this particular Q&A asked in and agent to agent discussion was:
Some of my clients are asking about the possibility of a double dip housing slump. Thoughts?
There were many answers to this question, but I thought I would share my answer to this question on my Blog. I wrote:
Great question. I don’t think I can answer with a short answer other than; YES there will be a “double dip housing slump”. But, that feels so short so let me explain further why I am convinced. It is like the Butterfly effect of real estate which I can explain as I go.
You can watch the news but that is a bad idea. First, the news has motives. First they have to fill their coined “Death and Destruction” segment, which is the first 10 minutes of the news. This is where they talk about doom and gloom and get your attention. You will always see fillers about Foreclosures in this segment. However, days later, you may see a different story that talks about the market improving in the coined “Feel good” segment toward the end, this is because they have pressure to increase consumer confidence. Their stories are often based upon which segment has to be filled and what gets ratings or where the most pressure is. Hey, off topic, is Saccharin good for you or not. For at least a decade this debate has gone on in the news, don’t know which side it landed on. I use sugar so it really does matter to me, but it is an example of what I am discussing above.
Now, back to the matter at hand. The market will do a double dip housing slump in, in my opinion. To some areas, this will look like walking through the Valley of Death, to other areas it will simply feel like driving over a minor pot hole. An example of this is what has happened in parts of Aurora and North areas like Thornton. Homes in many of those areas have decreased in value 40%-50% from where they were at in 2005-2006. However, homes in parts of the West and South have declined but some areas have only seen it effect prices 1% - 5% and have barely felt it or even noticed. This will happen again.
Although, it is not going to be like a per se’ double dip, it will more look like a professional skier. They are going down hill and increasing speed, then they hit a jump, go into the air, do a few flips and the crowd applauds. We have seen this applause in areas that have seen slight appreciation especially during the first-time home buyer credit. But, just like the skier, after the applause is over, the skier has to land and finish the ride down the hill, although, his speed may not be that of what it was prior to him hitting the jump. That is the best way to explain how the market is going to slide down the hill until it reaches the bottom. And, to put it simply, our real estate market has not hit the bottom of that skier’s hill yet.
Why are we not at the bottom yet? Well, it is exactly like two others have pointed out in response to your question. First, you have the Shadow/Ghost inventory. These are REO properties that must be cycled through the system. They exist and anyone who has watched the NED list for enough years or even charted it will understand this problem. Simply put, back when the market started to crash around 2005, your NED’s /Foreclosure Sales and REO properties on the market ran at a relatively equivalent ratio. The Foreclosure sales got cleared out through REO at the same pace. In 2007, the REO’s started to lag behind because of back log and they could not keep up with the pace of the Foreclosure Sales.
In March of 2009, Making Home Affordable came into affect and banks were asked to stop foreclosing. If you were watching foreclosures, you would have seen a dip in NED/Foreclosure sales. It took the banks months to figure out this program that worked for very few people, so when they started re-initiating foreclosures it was upwards of 6 months to over a year later; Hence more back ups in the cycle of Foreclosure Sale to REO properties. There is a great article written about a year ago by (I believe) Standard and Poor that has a graph that shows what I am talking about. The bottom line of the report (and again this was written about a year ago) was that with the back log, at the currently rate of release, it would take approximately 3 years to clear out the Foreclosures (Shadow/Ghost properties) if the economy improved immediately and we had no more Foreclosures.
So, problem #1 is the market has an abundance of Shadow/Ghost properties that must be cleared out via REO sales. The banks are hurting the market with their current philosophy on how they dispose of the properties; maybe you have witnessed it. Lets go back to 2005/2006 for an example. There were REO’s and if you represented an Investor you would watch these properties. They were oftentimes, put on the market at a much higher price than they ever could sell. You knew the bank (via asset manager) would take an offer approximately 5%-10% under list price, but often times they really deserved an offer 20%-25% below the current list price. So, you would wait and watch. The price reduction would hit (one maybe two) and then you would quickly submit your offer within 5%-10% of the new reduced list price.
Now, how do the banks sell these properties now-a-days? Well, the property is listed at 20%-25% below market value. They have 10-20 offers (residential detached) in 24-48 hours. The property sells higher than list price, but still often times 5%-15% under fair market value. Listing the properties as low as they do then creating a feeding frenzy on the properties, attracts many investors, but often times eliminates Owner Occupants from being able to race out and see these properties and bid quick enough. So, it goes to an investor who is buying it at a price that will allow them an opportunity to make a profit where an Owner Occupant might have brought a higher offer but did not have the time or could not compete with the attractiveness of a lower cash offer. This property now becomes a comparable sale in the neighborhood and could effect the overall value of the neighborhood (especially if there are 3-4 of these in one neighborhood.) -- A side note, some of the REO asset managers have begun offering an “owner occupied only” bidding period but it may not help that much.
The problem with the owner occupied bidding period is that it probably will not have a whole lot of affect. Unfortunately, some (to most) of these REO homes have been vacant for so long (some up to a year or two) and they have been seriously affected by neglect. Now there are serious roof issues, structural problems, frozen pipes, vandalizing (I could go on and on)…now these properties are so deteriorated that only an investor will tackle the multitude of problems. This is cause by the banks taking to long to convert these properties from Foreclosure to REO. They will sell much lower than they would have if an immediate Foreclosure/REO transition would have taken place. Again, it does not matter; the property will still become a value for the neighborhood. An appraiser will add to a comparable a value for condition comparison/REO status, but if all you have is REO’s in a neighborhood… watch how the adjustment may still, unfortunately, lower your property value.
Okay off of REO and on to Reason #2 you will see a “double dip.” Short Sales. I am a Short Sale Specialist, and I can guarantee you that I attempt to get the most for every short-sale I have listed, but that is not the mentality of all Short Sale agents. Ever see the agent that lists their property intentionally very low (there are classes out there that teach them to do that – it is totally the wrong approach but that is for another conversation.) Those agents’s aren’t seeking necessarily the highest offer on the property. You would think the bank would see right through this, right. Not necessarily. I have gotten offers on properties before that I thought had no chance of the bank accepting. I simply was waiting around for the bank to send me a counter to present to the buyer. Then low and behold…they have taken the offer!! I have been shocked when they do.
Bottom line, if you short-sale a property and you are not in pursuit of the highest offer possible, then you actually could be assisting with a double dip in the housing market. Short Sales also become comparables in a neighborhood. I would like to also note, that when I have an approval and the buyer looses their financing or walks on inspection, I do not immediately drop the price to what the bank will accept. I keep the property at fair-market value. I have been surprised how many times my second or third offer actually comes in higher than that initial offer and I am able to payoff more than the bank was expecting. This helps to maintain neighborhood values. But, other Short-Sale agents…when a deal falls…will immediately tell the world what the bank will take which then causes the buyer to bring exactly that offer…when they could have gotten more by just trying.
Then also another thing that affects Short Sale values, which become future neighborhood comparables, is Buyer’s agents who refuse to show Short Sales or talk their Buyers out of looking at them. If all a Short Sale property gets are bad investor offers then that is all we can go with. We beg, plead and grovel for realistic offers at fair values…but if the agents won’t show the properties then it will lead to the properties selling lower to investors and an overall market decline.
Furthermore, you have the “Must Sell” traditional sellers. They are in a “Must Sell” situation but are not a foreclosure/Short Sale (maybe they divorcing, having to relocate because of work, etc.) Watch these “Must Sell” traditional sellers compete with each other in a neighborhood. One lowers their price $5000, the other lowers their price $7,000 then the one who lowered their price $5,000 lowers it $5,000 more. Their agent has explained to them how many Buyers are shopping in the neighborhood, how much inventory is in the neighborhood (many times a 6-12 month inventory). The Sellers know their home is very similar to others in the neighborhood and they want to make sure the next Buyers pick their home and so the price dropping war begins. It is our jobs as agents to advise our client Sellers what the competition is doing. Then Buyers are savvy and work off of the “Gas for 2.98 cents philosophy” (if you don’t know what this is…I can discuss it some other time.) So, even though you are advising you client to reduce their price to compete with the other homes…in affect you are affecting the value of the entire neighborhood. The result is that not only is your Listing going to sell at a lower price because of the price dropping war but so will the other home(s); Hence, now 2+ homes affecting the value of the neighborhood. This whole price dropping war is an effect of the limited amount of Buyer’s in the market and has even more of an affect on properties in the $300,000+ and up price range.
Then finally, you have the Real Estate Butterfly effect, which is preamble by the move-up buyer. See, now a days, there are less move-up Buyers. When a first time Buyer or low price range Buyer buys a home and it is REO or Short Sale there is no move up Buyer so the next price range is affected. Then the lack of move-up Buyers in the next price range also affects them from being Buyers in the 3rd price range. So on and so forth.
The REO’s and Short Sales hurt the advantages that the “Move up” Buyer brings to the market place. Some of the worst hit properties are those in the million dollar plus price range. There are homes that I am personally aware of that were appraised at 1.2 million and 1.5 million just 3-4 years ago that are now selling Short-Sale or REO for $500,000-$600,000 (right now.)
The Real Estate Butterfly effect is simply that everything that happens affects everything else. The best way to explain it is to picture an earthquake. Where the earthquake hits…the immediate area feels the most impact and is hit the hardest. But, it does not stop there. As you go out to the next outer circle around that you find damage, but not as bad as the initial impact point. Then you go farther out, they may say they felt it but had no damage. Then you go farther out and they say they barely felt it.
Lets relate the Real Estate Butterfly (earthquake) effect to the million dollar homes I was speaking about prior. Have you seen the neighborhoods where you have a higher class areas (more likely more recently build than the neighboring areas), next to a middle-average neighborhood (nice but older), next to a neighborhood of town homes/condos. Of course you have. Now for example, when the upper range homes are selling between $600,000 -$900,000, the middle is at $300,000-$500,000 the town homes are at $200,000 -$225,000 and the condos are at $100,000-$150,000. Everything is great and makes sense.
However, everything stops making sense when your upper range (due to the lack of move-up Buyers) drops to $400,000 - $600,000. Your middle homes can no longer be worth $300,000 - $500,000, a Buyer would never go for that when they can go buy a newer larger home for $400,000! So, then your middle homes drop to $200,000 - $350,000. Well of course that now affects your town-homes. Most Buyers will not buy a town home for $200,000 when they can have a larger detached home for the same price. Anyway, you get my point. And it works both directions. If a condo sells for $75,000 that will normally have an effect on nearby town-homes, so on and so forth.
Then, in the Real Estate butterfly effect, you have to take into consideration the REO and Short Sale properties that are<