‘It’s A Whole New Sales Environment Out There’
The press looks at the days events. “The confidence of U.S. home builders plummeted to the lowest level in more than 14 years in July as buyers canceled contracts and investors pulled back from housing, an industry survey reported on Tuesday.”
“Builders are getting ‘a little testy’ about their rising costs of borrowing to obtain land and higher prices of raw materials, said NAHB’s David Seiders. But interest rates loomed as the major threat. ‘One of the really front-and-center issues was the interest rate structure,’ said Seiders. ‘I’ve been trying to assure the builders that the Fed may go on hold now, or if (they do) anything more, (it will be) very little.’”
“In terms of historical comparison, the downward movement of the confidence index is essentially in line with readings from the 1994-to-1995 U.S. housing slowdown period, the NAHB said. However, a recent analyst report suggests that the downturn this time around will be uglier, claiming that a comparison to the 1987-to-1991 housing downturn (which was worse than the 1994 period) is more warranted.”
“Raymond James analyst Rick Murray says the inventory levels are more challenging today, on the basis of absolute levels of inventory (565,000 today vs. 358,000 in the late 1980s) as well as months’ supply of homes on the market (5.8 months today vs. 5 months then).”
“‘We believe that, based on discussions with our contacts, most cancellations today are legitimate buyers who are walking away from earnest money deposits out of fear of declines in home prices. Furthermore, we expect inventory levels to build even further in the back half,’ Murray said.”
The Sacramento Bee looks at the Dataquick numbers. “For the first time since the late 1990s, median sales prices for homes in Sacramento and Placer counties have slid into negative territory compared with the previous year. June sales prices dipped below last year’s levels in Amador County, too, reports DataQuick Information Systems.”
“Sacramento County, as the region’s biggest real estate market, saw collective median sales prices of new homes, condominiums and existing homes dip to $368,000 in June, down 1.3 percent from $373,000 in June 2005. That was the first year-to-year decline since October 1997, according to DataQuick.”
“Placer County registered a June median sales price of $452,000, down 6.2 percent from $482,000 in June 2005. The county’s last year-to-year price decline was in January 1998.”
And Business Week reports on the group. “Facing their toughest year in more than a decade, homebuilders are coming up with a blizzard of incentives to help move houses. ‘The new housing industry is taking a page from the automakers,’ says RL Brown, a Phoenix Real Estate consultant. ‘It’s a model clearance sale.’”
“Incentives are most prevalent in cities such as Las Vegas, Miami, Phoenix, and Sacramento that have enjoyed the sharpest price appreciation in prior years. They’re also using incentives to keep existing customers from canceling contracts.”
“If you’re thinking of buying a townhouse in the Los Angeles suburb of Alhambra, David Kao would like to talk to you. The salesman for Olson Co. still has 12 units in the Gateway Walk development to sell, even though they’ve been on the market since February.”
“Kao is selling a two-bedroom, two-bath townhouse for about $50,000 below what the company was getting for similar units last year. He’ll even pay the homeowners’ association fees for six months, roughly $1,800, or include a free 42-inch plasma-screen TV. ‘It has been a little slow,’ Kao says. ‘Everyone wants a little more.’”
“‘It’s a whole new sales environment out there,’ says Builder magazine editor Boyce Thompson. As the automakers have learned, once you start offering incentives, it’s hard to stop.”
“In terms of historical comparison, the downward movement of the confidence index is essentially in line with readings from the 1994-to-1995 U.S. housing slowdown period, the NAHB said.”
My major disconnect alert warning siren is going off. 1994-1995 was at the end of several years of 10% YOY declines in the LA basin area. How can HB confidence readings from the tail end of the last housing downturn be rightfully compared with now, when the party is only beginning?
actually, at 39, the home builder confidence index is 1 point below the nadir of the 94-95 cycle. We’re at the lowest level since December 1991 in the NAHB index (granted by just 1 point, but the trend is clearly falling off a cliff … you know, a nice “soft landing”)
and 91 was 2 years into the downturn- vs. less than 1 year
OT, but important. We’ve agreed there is a housing bubble, and it’s bursting. Some ask what to do. Will there be inflation or deflation? How do I protect myself?
Inflation is an expanding money supply, and deflation is a contracting money supply. Notice that I didn’t say anything about the rate. It is either positive or negative. It is impossible for the gov’t to put the rate of it’s expansion of the money supply in negative terriotory. Too far gone for that based on our debt. So if the gov’t isn’t going to stop expanding the money supply (even if at a slower rate), how the heck are we going to have deflation? There in lies the rub. It is the fractional reserve lending that will do it. It is money that is created in the form of credit that never really existed in the first place. That is how the banks make money. They literally take your money (in the form of interest) from the money they loaned you (that didn’t really exist in the first place). It has been going on for centuries, which, in my opinion, is what has led to the deep distrust of bankers.
So, as the value of homes begins to decline and people now need to bring money to close, they begin to take money from their bank. As this cascade continues, eventually the folks at the end realize there really wasn’t any money in the bank to cover all their loans (even Greenspan said there is a risk of crossover defaults or something along those lines…essentially the same thing). This IS where the contracting money supply will come from. Unfortunately, it was never money to begin with…just debt that essentially turned into money (almost like magic).
So, yes, the gov’t certainly won’t be burning $s/putting the rate of expansion in negative territory. They’ll still be adding money to the system. As banks come under serious pressure, the gov’t will be creating more hard dollars (if you will) to fill the negative rate of monetary expansion by the underwater banks (this contraction will be the credit drying up folks talk about as banks are going belly up). So we will have deflation, and then inflation as FDIC money comes back to the banks as their savior. Unfortunately, that will be massive monetary creation by our gov’t (vice banks through fractional reserve lending) that will make the dollars you’re holding virtually worthless.
It should sound very similar to the Great Depression. It was the exact same thing. Then, our money was backed by gold. Fractional reserve lending still took place, as banks created money through credit on gold they didn’t have. The gov’t was in a spot because they can’t create gold out of thin air. They think they have a fix this time, because it isn’t backed by gold. They can create dollars with no problem at all. Well, other countries have tried that, and it didn’t work either. So…for those who know there is a bubble and it is bursting, if you wan’t to protect your savings, think twice about where you are putting it to be safe. I hope this helps understand the issue. It certainly is tough to figure out, because no one who sets the rules will ever give you a straight answer. If they did, how could they take money from you (whether rich or poor) by doing nothing without you ever knowing. Now you do.
See Debt offset deflation article here.
http://www.gold-eagle.com/editorials_05/laird092305.html
OT but interesting to those who follow the Plunge Protection Team. This was posted at lemetropolecafe.com:
“The PPT waited until late in the day, as usual, to implement their patented HAIL MARY play to prop up the US stock market.
The DOW was plus or minus, yet roared up 52 late to 10,779. There may not be anything more obvious in the history of mankind than the existence of a Plunge Protection Team.”
I find this subject to be particularly frustrating and in my opinion, an impossible task. I’ve read just about every article on both sides of this debate and am no more enlightened than when I started.
http://www.321gold.com/editorials/saville/saville071806.html
C:\Documents and Settings\Bob\My Documents\FSO Editorials An Austrian Analysis of U_S_ Inflation by Krassimir Petrov, PhD 09-26-2004.htm
I would recommend the second post to read first. If I were held to make the call I guess I would say that we are going to experience a deflation scare shortly to be followed by serious inflation tactics. Since no one outside of the FED really knows what they are capable of with regard to monetization of assets, or how effective they will be when implemented, no one can really make the call on how this will play out with the exception that we clearly will not print ourselves into prosperity so I’d say the dollar will fall dramatically or collapse at some point in the next several years. To the point regarding plan B for the U.S., it is my understanding that in fact the administration is looking at an alternative to the dollar when North America is effectively combined into one trading entity circa 2010 if reports are correct(the Amero). http://www.humaneventsonline.com/article.php?id=15954
The ultimate endgame would be for one currency so that there is never another alternative for savers. That effectively makes everyone totally reliant on the “state”. Perfect, now back to breakfast. Oops, can’t eat now.
Extraordinarily well put. This is the exact scenario I see playing out.
We will have inflation. It will be the govt/fed response to a deflationary crisis.
Paying attention we can catch this. You must be prepared to buy assets - gold - even houses - when the crisis hits and no one else has cash to spend or can qualify. Then the powers that be reflate and whipsaws the poor joe sixpack who just learned about saving again.
Watch for the deflationary crisis, which is something failing - probably banks, maybe FNM/FRE, maybe hedge funds, maybe even the Treasury - due to lack of funds and more importantly lack of ability to secure additional funding. Wait… wait until the panic is deep and broad. Then wait a little bit longer to be sure. You’ll have time. Then buy. Even borrow if you can.
Make sure it’s real stuff when you buy. Property is decent. Gold again. Stuff people will want and can hold. Better yet real productive assets that can be put to work when the engine slowly grinds into motion again. Stocks may take a long time to recover… though I believe, as I said earlier, that this too, shall pass.
And while you wait, be careful. Cash in CDs, for example… well, do you want to wait in line with 50 million other people for your check from the FDIC? By the time your check shows up the opportunity may have passed.
Trust nothing, least of all your government. Doesn’t mean you need to wear tinfoil on your head. But take that dollar out of your pocket. Go ahead. I’ll wait. Look it over… take a good look… do you see where it says what it can be redeemed for, and where?
Neither do I.
How about Beanie Babies?
Inflation - buy Gold
Deflation - buy Gold
Bull Market - buy Gold
Bear Market - buy Gold
I find your statements a bit confusing. First you say to wait till all hell breaks loose and then buy assets, houses, gold, etc. I’m assuming you mean to buy them with cash, for if the whole world is crashing and banks are failing I have no idea where one is going to borrow money to buy any of these things. Especially when you consider that most Americans are already in debt over their head. You suggest we cash in your CDs. Are you saying that we should put our money under our mattress? Why then should Joe sixpack save if he has to wait in line with 50 million other people to collect from the FDIC? If 50 million had to collect from the FDIC the entire world ecomony would collaspe. It sounds like the panic has already begun with the way your talking. There is no way this government or any other government will let this whole ecomony sink. They’ll cook the books like they always do and pass this mess on to the next generation to worry about. My suggest to the readers is not to panic and not to over react. Slow and steady always wins the race. This real estate market will correct itself in due time and interest rates will continue to rise slowly. I remember when the prime rate was 21%, my first mortgage was 18% and I survived. So, SAVE, SAVE, SAVE and for God sake don’t put your money under the mattress. Gain interest on it in CDs,remember slow and steady always wins the race.
Sorry if I was confusing or sounded overly alarmist. I’m not. I OWN CDs right now and I cashed out of my gold position awhile back.
I’m just saying… be WARY and don’t put all your eggs in one basket. Right now? CDs are fine. Just as long as “slow and steady” doesn’t mean complacent.
There is no way this government or any other government will let this whole ecomony sink. They’ll cook the books like they always do and pass this mess on to the next generation to worry about.
1. We are the next generation.
2. “XXX will never let YYY happen”. Famous last words. It just happened less than one century ago. That is the blink of an eye!
Be wary.
“how the heck are we going to have deflation? ”
But then, how does this ever happen? Hmmm…
“So, as the value of homes begins to decline and people now need to bring money to close, they begin to take money from their bank.”
The people won’t have enough in the bank to do this. they will just walk away. The FED will blow another bubble I’m afraid to bail out the big lenders, if it gets that bad. I don’t think the FED will bail out FB as you all like to call them.
I think the FED is raising rates now to have headroom to lower them if it gets bad enough. I don’t know what kind of bubble will pop up if this happens? Gold?
Yes, the party IS only beginning!
The level of denial by many property owners is still extremely high.
That pent-up reality will add enormous fuel to this rout as one poor sheeple after another finally capitulates.
“‘The new housing industry is taking a page from the automakers,’ says RL Brown, a Phoenix Real Estate consultant. ‘It’s a model clearance sale.’”
Not sure that is such a good page to take. Last time I checked, GM and FORD were teetering on the edge of bankruptcy.
Woohoo! Junk Bonds and Pink Sheets for everyone!
The RE industry, unlike the auto industry, probably does not have 40 years of union pension obligations hanging over it.
“Kao is selling a two-bedroom, two-bath townhouse for about $50,000 below what the company was getting for similar units last year.”
That must make last year’s buyer feel really great. Is there any guarantee that prices will not be another $50K lower this time next year?
That must make last year’s buyer feel really great. Is there any guarantee that prices will not be another $50K lower this time next year?
You are being optimistic! I’d say another 50K off by Christmas the way this whole Ponzi scheme is unwinding!
Good thing last year’s buyers didn’t buy with neg/am loans and put 20% down instead, otherwise they’d be in deep poo.
No, but you will have to ask the bank.
Must feel real good to be labeled as a bagholder. Their own dam fault for being ignorant and greedy.
Used to do some purchasing work for this company in OC. Strange culture, they don’t care too much about the employees. They just laid off 40 people last month and combined 2 divisions into one. I bet they’re not done yet.
“Placer County registered a June median sales price of $452,000, down 6.2 percent from $482,000 in June 2005. The county’s last year-to-year price decline was in January 1998….Placer County saw 36 months of double-digit increases over the previous year, rising from $297,000 in December 2002 to $515,000 last December.”
Placer County is down about 12% in six months. Look out below.
Placer county is a mess because of the ponzi scheme in housing.I hope the market corrects 50% here.
shows the lag going up(or down) by 98 the economy was boomin
Oh well…. lets not forget the Nasdq was down 15% in 6 months time… then another 15% then another and another…. but you cant live inside a stock certificate….LOL
‘One of the really front-and-center issues was the interest rate structure,’ said Seiders. ‘I’ve been trying to assure the builders that the Fed may go on hold now, or if (they do) anything more, (it will be) very little.’”
I was home for lunch and watched Mr. Seiders interviewed on Bloomberg. I really thought he was going to cry. When it came to talking about rates, he was pratically begging, pleading to Bernanke not to raise rates. I thought he was going to start offering Ben sexual favors right there on Bloomberg.
LOL! some of your comments are hilarious..
My latest unscientific poll went something like this…about 6 months ago, I was asking people (who were aware of the turnaround and had sold their property) what they would do then…they almost all said they were going to rent for ONE year, let the prices drop, then buy a home. I’ve just checked in with these peope, 6 months into their good plan of renting or waiting, and ALL of them haved moved up to or beyond TWO years before deciding what to do. One couple was so pleased with renting and saving, they weren’t sure if they would ever buy again.
Renting is the new black.
Catherine
How is the property in Prescott doing these days? One of the girls I play golf with bought a place up there about 1 1/2 years ago and plans to sell in two years at a profit. I keep trying to talk bubble to her buy she will not listen.
Piling up like dead pine trees.
Well, I’ve learned there is no talking to people who are living in the future…they have an idea in their head (usually favorable to themselves) and no amount of factual warnings do any good.
And be careful playing golf…smog warnings tomorrow in Phx!
The company I work for has a branch in Prescott so I get up there a couple of times a year. In February it was obvious that there was a glut—there were for sale signs everywhere. I’m going up again next month—can’t wait to see what it’s like now.
Renting is the old black, and the new financially savvy. Buying is the new black.
i rent for cheap. i make a decent wage. i have interest income.
i still come up with zero bucks at month end. life is expensive.
how do people do it with a $4,000 nut on top of that?
(rhetoric button off)
Home equity gains!
It feels real good renting at this point. I split with my grilfriend over all this crap. Needless to say I hope she loses her @ss on her 400k condo.Pretty soon I will be heading back to arizona to enjoy the rental life for awhile longer.
Sounds like true love! =-)
Don’t know that answer. But the stress has gotta be just about unbearable. Really, at the end of it all, does a person lay there taking a dying breathe and say, “man, I’m glad I struggled for years to pay that mortgage for that house!”
Unfortunately, neg/am loans don’t work that way. The more you struggle the deeper you get. Or as those quaint souvenior shops in Amish country like to say…The hurrier I go, the behinder I get.
Simple……HELOC’s
Watching this recession build, is like watching the fog roll in… or the sun set. It may seem like nothing is happening minute by minute, but think back and compare with the atmosphere a few months ago, when the first ‘maybe a soft landing coming’ style articles appeared. There is a change… and it’s becoming more undeniable, that this permenantly high plateau is a sloping one.
And then suddenly the phantom of Alan Greenspan appears from the fog, to scare to death the little children with all their debts.
LOL!
“‘We believe that…most cancellations today are legitimate buyers who are walking away from earnest money deposits out of fear of declines in home prices.’”
—
“Kao [will] even pay the homeowners’ association fees for six months, roughly $1,800, or include a free 42-inch plasma-screen TV. ‘It has been a little slow.”
If homebuyers are so spooked as to walk away from thousands of dollars of their own deposit money just so they don’t get burned, then why in the hell would they hang themselves for a measly 1800 bucks or a television set?
Mr. Kao’s “incentives” are about as enticing as a lollipop and a free pen.
A TV financed for 30 years (or more) necessitating higher property taxes, and higher title insurance too at closing.
I just drove past chandler fasion center mall in chandler, az and noticed the new high rise condo construction site “Elevation Chandler” was a ghost town. I found an article from june 26th referencing the construction halt.
http://www.azcentral.com/arizonarepublic/business/articles/0626biz-cr-elevation0626.html
Is this the late 80’s early 90’s RE market coming back to AZ? I remember whole neighborhoods of unfinished houses with chain link fences around them….They sat that way for 3 to 5 years.
That thing is dead in the water. Chandler was about to force the developer to secure the place, because there’s been no activity for so long. Honestly, if the walls were up they’d have homeless people living in it by now. The developer originally stated that financing was in place to complete the project, then backtracked a couple of weeks later and said financing was “in the final stages of being secured,” which isn’t quite the same thing. I bet the condo portion gets dumped and the hotel just takes the whole building. Either that, or it’ll sit there for a couple of years and then they’ll just push it over. Channel 12 sent a reporter out there last week to ask mall shoppers what they thought of it, and one guy bluntly said “It’s no place I’d want to live.” Of course it isn’t—it’s no place ANYBODY would want to live. Who the hell wants to live in the middle of a mall parking lot?
Hey, the view of Best Buy is unsurpassed…
I have 2 guys I work with who are getting all excited about some sort of flipper group/pyramid scheme where you join up the the leanders and realters (they are part of the group) in a no loose deal.
I keep telling them (but they are not listening) to at least think about the worst case scenerio and make sure that you have some sort of plan in case it plays out badly.
Everyone seems to think that if the prices drop, it will be just a quick blip and then they’ll just keep on rising again. People only seem to be thinking of the best case stuff…not considering the risks.
The guy pushing this scheme drives an old heapy car and took him 5 years to save for his honeymoon after he got married. Not the kind of guy to take financial advise from.
One topic not being discussed much is the assumption that rental cost is going to remain the same or possibly decline over the next few years. Another possibility is that rentals will be in scarce supply and the cost of renting could rise significantly. Leases are typically one year and if landlords sense a rising market they won’t be interested in extending them to two years. This could provide some downside risk to selling if the plan is to wait out the downturn and it takes five or more years.
Banks won’t rent properties they intend to sell. We may end up with a lot of uninhabitable housing overhang on the sell side and not enough supply for the rental market.
Another possibility is that rentals will be in scarce supply and the cost of renting could rise significantly.
Not gonna happen. See previous threads on the new-fangled crzae called “repartments”. It may SEEM to some in high-density areas (L.A., SF Bay, etc.) that rents are trending up, but this mostly reflects FB’s ASKING rents in their ever-escalating commitment (desperation) to hang onto underwater properties in vain hopes the market will “turn-around” soon. As renters in CA know, rents are not going up significantly, and are actually flat to falling in most areas, while the inventory is already markedly improved and getting better by the day –again, thanks to FBs.
Leases are typically one year and if landlords sense a rising market they won’t be interested in extending them to two years.
And why would that be a BAD thing for me? They can “sense” all they want –big increases ain’t happening. Actually, the shorter the lease, the better for me. I travel “light” and can gladly hopscotch from one FB pergraniteel palace to the next, saving increasingly more money on rent, while getting more with each move.
The renter mentality is based on location, they all seem to think if they have to rent, why not be close to the most expensive housing in any city. If the old real estate saying “Location, location, location” holds, and that there will be a whole new breed of renters that will not buy overpriced housing, and new renters who just lost their houses to foreclosure, but like the neighborhood, rents will rise in high demand areas. I am tracking one Type A apartment complex close to a new hospital in an upscale neighborhood, and the rent for a comparable 1 bedroom in a lesser neighborhood is a difference of $100 a month. And they are renting.
If the banks won’t rent it, the squatters can move in.
That’s right. Back in the Great Depression landlords would let you live for free if you’d only agree to heat the building. My grandfather went through the depression and lived in such an apartment building in NY. The landlord was grateful that the rent free tenants were heating the building and keeping the building up. No squatters in this building. I agree that rents are going down. I sold my house back in January and plan to sit this bubble out. It take up to 2 to 3 years. May be longer. I’m in no rush. Just keep saving.
It has often been discussed. Supply of housing, period. It doesn’t matter whether people end up owning it or renting it… we are overbuilt and prices of both will fall.
Furthermore, it is very easy for renters to move in together or for a homeowner to open up a back bedroom. Rents on the way up are quite “sticky”.
I think that will happen in coastal areas were shortages of housing still exsist, shortages of housing that a normal wage could afford.
Ventura County had a very tight rental market last time I checked a couple months ago.
This BS theory about rents going up has been disproven many times on this blog by the collective wisdom here, as Feep has pointed out - its supply and demand, and there is a hell of a lot of supply out there.
Unfortunately where I live (Southeastern Virginia) the rents are still being pushed upwards. I just got a lease renewell on my commercial space, and I’m going to tell them I’m going to pull out of it due to what I see as an oncoming recession. Also my home rent, it’s pretty far up there. Some people tend to blame it on the Navy, they give housing allowances of some type, and the local rents tend to be locked to those figures. And those figures put a pretty good strain on the normal wage earners.
Bubble town for sure. Lame job base, 100%+ increase in housing values over the past few years. Tons of properties for sale. Housing tracker doesn’t do it justice, since the local MLS is private and many of the mouth breathers here don’t use realtor.com or other online resources.
This time next week 900k. Turkey Day (11/23) 1 million.
mid may was 799,000
6/10/06 was 836,471
6/14/06 was 840,935
6/17/06 was 846,120
6/20/06 was 850,317
6/22/06 was 855,892
6/24/06 was 860,647
6/29/06 was 866,037
7/01/06 was 858,675
7/09/06 was 870,854
7/11/06 was 882,239
7/13/06 was 886,055
7/14/06 was 890,896
7/18/06 today 895,022
http://www.ziprealty.com/maps/index.jsp?usage=search&cKey=74rbwvlk
Banks won’t rent properties they intend to sell.
I don’t doubt banks don’t “want” to be landlords. However, I’m equally sure they don’t want to be proud owners of cash-hemmoraging vacant floppertowns, either. The market determines what happens to these properties, and whatever produces the greatest ROI for the banks will determine what use these homes are put to. If this means slash prices to sell quickly, then banks will price them to sell. If this means renting them out, or selling them to someone interested in renting them out, then they will become rentals.
Any bankers out there care to back up or challenge this?
I’m not a banker, but as a past buyer of foreclosed properties I can tell you the foreclosures will sit vacant until a buyer is found. Its far cheaper for the property to sit than hire property managers and deal with renters when you main goal is to dispose of the properties as quickly as you can at a market value. Plus liability issues and paying HOA dues and taxes, no way a bank has the manpower to deal with it.
I’m of the opinion that banks will sell, and take their losses. Or else, an entirely new expansion will occur in the area of property management. All the out of work RE agents will be fixing toilets in the homes they sold to people who couldn’t afford them–that would be justice.
I think for properties held by the “stronger hands” who have invested and can afford to pay the bank $ on a monthly basis will hold on for dear life and push rents as much as they can. Think doctors and dentists who invested in RE as flippers. If you are in a market that has had flat rents for a number of years, I think you can expect rents to go back up to the trendline.
I just don’t think that a “$750,000″ condo will ever be competitive with a garden style apartment in places like LV and San Diego. The bank would rather sell for $400,000 than rent it out for $2,000 per month (if they can get that) and deal with management hassles and costs while their property is being used.
I think repartments could add supply to the market, but in the end, this is bringing apartments back onto the market that were there before. Most new supply of housing was either single-family, or higher end condos, but because of construction costs, not as many new apartment projects.
Here’s the important point–in high population growth areas will absorb any short term supply of repartments from both growth and people who lost their homes to foreclosure. Any glut of repartments or cheap houses will be temporary.
They will not rent them out. After all, it’s not their money.
The thing you have to remember about bankers is that they don’t care because they are not managing their own money. Most bankers are wage-earning bureaucratic functionaries that manage money for impersonal hidebound institutions. They only do what they are told, and no one has told them how to deal with REO property.
So they will do nothing until they receive their instructions, which will be a long time coming. Meanwhile, the properties will sit empty.
Banks don’t care, but I think individual flippers do. Remember, renting is part of the pipe dream: “well if I can’t sell it for my high price, i’ll just rent until the market bounces back!”
Nevermind that this won’t cover the costs, they’ll rent for awhile until the bank takes all. Also, the condo glut will certainly help rental mkt. We are seeing some price rises in rents a bit here in NYC, but mostly at high end of mkt. Boro rents are fairly stable. Can’t wait till all the condo projects in brooklyn repartment!
Banks are not made up of creative, tenacious people. The CEOs maybe, but from the VP level down they are filled with people that like to follow precedent. Managing rentals does not fit their business models.
On top of that, it’s just not part of a bank’s corporate charter to manage rental property. They are lenders. They want to assets sold off.. so that they can get the money back and put it into their reserves and re-lend for a 20x multiple. Holding real estate impacts these reserve requirements, because it is “dead money” from an accounting standpoint.
Banks go to great lengths not to become landlords. The feds do their part to reinforce that position. I have seen 300k properties reduced to 70k to make them go away. Banks becoming landlords will not happen in any scenario. A lot of times they won’ even take on new tenants in large commercial properties.
There are banking regulations that prevent banks and S&L from holding certain % of homes. With a bust will come fire sales.
Pennies on the dollar.
The blog consensus seems to be “fire sale: yes”, “banker-landlord: no”. Lots of super-cheap property coming on the market at deep discounts is just as good or even better than lots of cheap rentals. Either way, as many have said before, net result: more deep-discount housing coming our way soon.
I’m a banker, albeit a UK one.
The answer is you are both right and wrong. The vast majority of banks will sell either the asset or the underlying debt itself at a discount as soon as possible. They will increase their provisions line and take the hit.
The wise ones (and this includes my bank) will sit on the assets and buy the discounted debt, rent them out if appropriate or keep vacant if not, and wait for recovery. My bank made huge amounts by doing this at the end of the last recession.
The comment below by someone that banks are not dynamic is correct - we are VERY unusual in having a fully staffed problem debt department experienced in work out issues. These guys have done very little for a few years, but are ready and waiting to go.
Then again, we have scale in comparison to the fractionalised US banking sector.
Regards,
Loafer
floppertown
I really like that. In a sarcastic, wry sorta way. If someone were going to write a book about this whole thing, that would be a great title.
“Welcome to Flopperville Estates, I’m Stucco Canyon, your tour guide”.
MjM
Any bankers out there care to back up or challenge this?
Not a banker, but have first hand experience from the 1990-1995 “downturn.”
Banks tend to sell repos for what they have it for on the books. Anything less is a negatvie on the balance sheet and the stock holders start grabbing pitchforks. It’s all business to them.
We also have a strongly regulated banking industry that is not allowed to carry non-performing loans like the Japanese and Chinese banks. These write-offs affect the reserve requirements. Things will get tight. Liquidity will be at a premium, and they will sell for the offer auction.
It’s hard to say what will happen because of this. Your guess is as good as mine. I’ll be watching carefully, as usual.
I do remember a co-worker living in a unit that was foreclosed. The bank did tell him to make the rental payments directly to them, but only for a few months. Then it was moving time.
Everyone repeat after me… Banks do not manage rentals. Banks do not manage rentals. Banks do not manage rentals.
Got it?
Agreed Mozo Moz …”Banks do not manage rentals “. Banks sell foreclosed property . Banks and Sav.& Loans are not in the rental business .
Banks tend to sell repos for what they have it for on the books. Anything less is a negative on the balance sheet and the stock holders start grabbing pitchforks. It’s all business to them.
Selling off repos for the full book value (amount owed on mortgage(s)) is going to go from difficult to practically impossible in the years ahead. That is unless BB cranks up the printing presses & helicopters enough to really get inflation going. Too many FBs simply owe too much. That report everyone’s been quoting today shows a third have less than 5% equity at TODAY’s prices. Ouch.
Better start investing in pitchforks, I guess.
Here’s a Naples broker who appears honest and has good data:
http://www.naplesinsider.com/CurrentReport.htm
Wow, is he actually a realtor?
I bet he gets the cold shoulder from a lot of his fellow RE peddlers, but I have to say that if I had, just had, to buy a place in Naples right now, that’s the kind of guy I’d deal with. Although I might not agree with him that this could be a good time to buy, I have to say that he’s really done his homework.
His analysis of which sellers are even able/willing to sell at fair value is excellent, as is his re-cap for buyers and sellers. Interesting bit:
If you are looking to buy real estate solely for investment purposes, then you need to be very selective in your search. Opportunities might exist, but for most investors you will need to proceed cautiously.
Hee hee! In general, when you see language like that, it means DON’T DO THIS, YOU FOOL!
Completely off topic, this morning while getting ready for work a DiTech add ran across the TV, advertising some sort of low monthly payment loan. The example they used on the computer generated screen they had on the TV was on “ELM STREET”….just too funny, I had to share.
I wonder which RE Shill gets the title of Freddy Krueger…p
more OT, but have to just vent on this long island listing so you all know the crap they are trying to pass off as decent housing here - check out the open house notes too, some nerve to call this an “auction”!
http://tinyurl.com/hqpu3
“Open House “Auction”.Offer In Writing W/Prequal.H.O. Has Right To Counteroffer/Refuse Any/All Offers”
Can you believe those taxes?
No wonder LI inventory jumps 50 houses PER DAY. Even at the bottom of the cycle, it STILL won’t be worth ownership.
That tax rate isn’t any worse than what lots of people up in the DC area (specifically, check out Montgomery County, Maryland) are paying every year on a similarly valued house. It works out to a bit below 1.6% per year. Of course, that does add $620/month to the mortgage payment… ouch! When you think of it that way…
..Just heard on the news that Pensacola NAS was being re-alligned so they estimate losing 1000+ high paying jobs avg. of 100k. Seems the already flooded market on the panhandle will possibly see a few more signs in some front yards…
meant to say it is a confirmed closure…I think there were alot of prayers last week …to no avail.
When do the CAR #’s come out?? Friday afternoon??
my apologies if this was posted elsewhere; I’m out of town in training this week. BUT, the Dow Jones Homebuilders Index ($DJUSHB) has officially managed to crash 50%, two days EARLY of its one year anniversary of its peak at 1115 on 7/19/05.
Well, okay, technically it closed within 8.5 CENTS of exactly a 50% decline. I would consider that “close enough”.
There may be a PPT on Wall Street, but nothing will stop the plunge on Elm Street. Friends and relatives thought I was crazy for “suggesting” a 50% correction in RE prices here in Central California. I’m beginning to think I was being conservative.
OT……but interesting to read.
http://www.cableworld.com/cgi/cw/show_mag.cgi?pub=cw&mon=071706&file=financehousing.htm