READING CURRENT MARKET TRENDS:
READING CURRENT MARKET TRENDS:
"THE 2011 VERDICT ON SHORT SALES AND OTHER REAL PROPERTY REPATRIATION SYSTEMS"
BY: J. ROBERT ECKLEY
AUGUST 1, 2011
© ECKLEY & ASSOCIATES, P.C., 2011
REPRINTED FROM “COUNSELOR’S CORNER”, Ed. 52
Current Circulation: 61,002 per Month
I. INTRODUCTION: THE BIG QUESTION FOR THE BALANCE OF 2011: “BETTER..WORSE.. MORE OF THE SAME?”
There “seems” to be market evidence that things are getting better; there “seems” to be market evidence that things are getting worse. Then there is that “gut feeling” that no one actually knows (or cares) what the hell is happening and this economic ship has no rudder and, worse, no captain. OK. Let’s be more scientific. The answer to this “better or worse” question depends upon a thumbnail analysis of what is fact and what is propaganda. And what is really at stake. With all the smoke and mirrors tossed in the way by those with “agendas,” it is hard to get to the “hard economics” these days and it does not seem to matter what state, city or what market zone one is in, there is always B.S. three feet deep to cope with. But let’s try.
II. SOME BREAKS IN THE FOG
In this issue I am going to do a demonstrative analyses of one of the larger markets the Author serve and is a part of: Phoenix. Yes, the Author also works in other markets such as metro areas in California, Nevada, Texas, Oregon and others, but with minor purely local variations the general economic story is the same in all of them. The numbered values may change by marketplace, but the forces and ratios, causes and effects are the same.
Let’s turn to a Phoenix analyses just to show how a market should be assessed:
First analyses, THE FACTS OF THE MARKETPLACE--how about a comparative tally to see from where Phoenix came over the last year and to where it has arrived(?):
Where the Phoenix Market Came From: Using ARMLS, CoreLogic® and other data sources, in June/July, 2010, of 10,000 home sales: 7,300 were regular resales between a seller and a buyer, 2,700 were new-home purchases, 82 were sold at foreclosure auction, 1 was sold by FNMA as an REO;
FAST FORWARD for where it has now arrived to June/July 2011: Of 10,000 home sales, 3,684 were regular sales, 540 were new-homes, 1,350 were sold at foreclosure auction, 1,255 were sold by lenders’ REOs, 2,183 were REOs sold by Freddy and Fanny, 1,822 on short sales, 401 sold by other government department REOs such as Veterans’ Administration and HUD.
The latest estimates say (in virtually every market from Oregon, California to Arizona) that August, 2011 was nasty on a mean average price basis (remembering that this figure is adulterated by including every sale, high and low, “forced” or voluntary). General statistics show it as flat and headed backwards by at least 1 point both on numbers and prices of resales. That could be an anecdote more to the historically poorer late summer sales season and Wall Street’s troubles in August (about 20% of investor’s general equity blew away in a week, with no recovery of those specific stocks, yet) and Europe’s eroding condition (Spain and Italy might join the ranks of bailouts and Germany and France announced they would not be inclined to bail them out as they did for Greece, Portugal and Ireland—some of these outfits owe the European Union and a lot of U.S. banks a boatload of money on their sovereign debt—all of whom would be gouged if it wasn’t paid). We need a few more months for this to settle out to separate out any trends that are specifically housing trends unattached to season or Wall Street.
But in some ZIP codes locally, the prices and rate of sales are increasing to the point where a 9-month supply of listings a year ago in the same ZIPS has dwindled to 9 weeks now, at most. Multiple back-up offers at higher-than-list-price are not unusual in these ZIPS. Those better trends appear for homes under $300K (but were only for those under $150K late last year and under $200K six months ago. This is no different in any of the markets. Once one eliminates the mud of general whole-market mean averages from the waters and views “nitch ZIPS” which are now moving north of the south-driven mass- markets, the gems under the waves start to appear. They are moving up and they have vigorous markets.
The data is closer at hand than one might imagine. Start learning how to use the strategic and statistical functions on your MLS programs. Look at the sub-menus. They can show you powerful and profitable market edges. A user-time-ratio from a local MLS pie chart indicates that simple MLS product look-ups and generation of some basic CMAs composes a bit over 90% of all MLS functional use. That means only a little less than 10% are using the submenu functions—where all of the economic analyses and market insights beyond “for sale” actually lie!
Get to and master those submenus!
The big buyers in the active ZIPS in California and Arizona are for the most part investors (everyone from one-by-one “fix-and-flip” people to U.S., Canadian, German, Persian, Asian and other investment persons or groups with very deep pockets) and the reasons are two-fold: (1) rents have tightened as the people who lose their home flock to rentals and as loan standards tighten--and thus the rent-ratios yielded from these under-priced sales and greater demands have high caps; also, (2) there is a high positioning in the current market for high capital returns in appreciation: In my example market--the average price to produce the median Phoenix home is still hovering around $150 per square foot. Reproduction cost is an “economic truth baseline”—if you are out of inventory and want it today, that is what it costs and it is not going down. At the height of the market, these same homes were selling for $250 and more a square foot—more than a rational markup—fueled for the most part but nothing more economically intelligent than “stupid loans in a stupid marketplace”.
Now for where the deflated and accordingly destabilized market has gone in July-August 2011 for this same Phoenix area: A used home in a regular sale moves for $112 per foot in today’s conventional market, $72 a foot on a short-sale, $61.50 if sold by the bank, Fanny or Freddy, and $57 a foot at foreclosure auction. When the market moves north again, as it will, the gap between these acquisition prices and replacement costs is so large at these discounted prices that the capital appreciation to be anticipated going from acquisition at $57-$72 a foot to resale nearer $150 a foot as inventory wanes is huge and has historically closed in an accelerated period of time as the “giveaway” inventory dwindles, the panic subsides and buyers wake up ready to buy once again “before prices get higher”. The new holders of this inventory do NOT have to sell for $250-plus a square foot or wait for a market filled with rampant stupidity (being one that may NEVER come back, anyway) to make bloody fortunes. The assets—starting from the bottom with all of the inflation and B.S. wrung out of them—still have no place to go but up. They can be resold well past acquisition costs and well under reproduction costs and still make a pile of dough for the investors.
When resale values in declining inventories climb to near production costs, the up-pressure eases because that is when builders can begin market-wise, new replacement inventories. It is that resumption of building that generates new and competitive inventories once again which will tend to decelerate (but usually not end) the upward march. Again, those investors who bought well under that reproduction cost will have sold off and taken their 100%-plus profits long before that deceleration level is reached.
NO DOUBT ABOUT IT. MAJOR FORTUNES ARE GOING TO BE MADE TOMORROW BY COOL-HEADED BUYERS (AND THEIR EVEN COOLER-HEADED AGENTS) OUT OF THE GIVEAWAYS SOLD IN PANIC TODAY.
Second analyses, THE DISINFORMATION IN THE MARKETPLACE—the national statistics generated by Case-Schiller, averaging the nation, continue to predict gloom and doom for California, Arizona—you name it-- while the local statistical matrix generated by CoreLogic® and the local MLS states that there has been slow and steady improvements in numbers of sales and prices when properly market-zoned. A Phoenix columnist and reporter, Catherine Reagor, who would always rather be the last word than right, called the “disparity” a “conundrum” to her in her Arizona Republic article of August 28, 2011. It’s only a conundrum to the uninformed, Catherine—those who do not understand that in real estate wide negative averages disguise and overlook large positive segments in the same statistical set. Some ZIPS were ALWAYS terrible—even in the “good market”, and they still are. And mass-market statistics produce statistically-compromised figures that are “right” about everything, but specifically accurate about nothing. Mix equal parts 24-carat gleaming gold with equal parts of brackish lead and one ends up with a nasty-looking grayish 12-carat paperweight, not good enough for jewelry nor bad enough for fishing weights. Mixing Boston and Florida comps with San Diego’s and Phoenix’s as do “national averages” produces very much the same useless lump.
The forces of supply and demand are very much at work in the local markets and will inevitably dig them out more than the wreckage done by all of the abortive “government support” programs out there, if so permitted. It is the NEGATIVE DISINFORMATION of the IGNORANT and UNINFORMED that has caused needlessly hasty market exits and stifled property repatriation. That will end when the UNINFORMED are corrected by events that will emerge in spite of them. In the meantime, the INFORMED are making a lot of money and positioning themselves and their clients for the further making of fortunes.
Third analyses, REMARKET VELOCITY. There is a vulture-fund-fed, product-hungry market out there but the product is not getting out quickly enough to meet it, being crippled through complex bank and government bail-out schemes that lack any market direction or target savvy. The one essential truth appears to be that the investor market buys what is available the fastest: The fastest 2011 resales (in this order) in ALL MARKETS are now as follows: (1) foreclosure auctions, next fastest are (2) REOs, only next are (3) short-sales and last are (4) conventional resales and (5) new builds. Preemptory single-track uninterrupted foreclosure resales repatriate property to the market twice as fast as short sales and four times faster than conventional resales. The redelivery time for product to a hungry vulture market has to be shortened and it is not happening through short sales, even when (and perhaps partly because) HAMP, HAFA, HOPE and others are now rewritten an average of once every 60 days.
Fourth analyses, THE ECONOMY—it’s not about better or newer government bailout programs, as all of the programs have come too late with too little and all have been wrong, misdirected and have contaminated the natural forces of marketplace supply and demand. The bailout programs have in sum done only more harm by their delays and dysfunctionality and there is no demonstrably advancing economic velocity shown by them over foreclosures that can be detected after 5 years of market experience. In states where most purchase money residential mortgages have no deficiencies after a foreclosure such as a good portion of the southwestern states, what is the real non-political and totally hard-core economic difference to the seller or bank between market repatriation through short sale or foreclosure? If there is a present market for the product and it is running out of inventory, as their appears to be, then it is the velocity of the repatriation that counts and government short sale programs stumble velocity more than provide it.
The general recovery only begins when all inventory is once again at play in the open marketplace and thus there is sense to getting it there as soon as possible. Endlessly dribbled-out short sales can actually derail that progress and have.
So much for supply. How about demand? It’s a little about JOBS but mostly about CONSUMER CONFIDENCE, expressed best and in tandem by increases or decreases in retail spending (which drives about 70% of the economy). Retail spending in most Metro areas of most states has actually been on the UPSWING even without job increases, meaning that the capacity to buy is there somewhat irrespectively of job increases—it is only the DESIRE to buy that appears the key to the kitty. Reticence is a fleeting whim that could change to a passion to buy in a heartbeat and when it does, watch what happens to prices and how fast the gaps between acquisition cost and replacement baselines close in Analyses 1, above. That’s when the big bucks are going to be made in short order by today’s smart players.
Fifth analyses, THE WEAKEST OWNERS ARE GETTING ALL OF THE PUBLICITY and its SCARING THE REST. Our resale market is composed of three current owner-components: Those who are happy with their properties and do not want to sell; those who would like to but do not think now is the time; those who are financially weak and must sell or lose the property and probably would have had to do that anyway due to their own in-built financial defects. Amazingly, the latter component is the SMALLEST part of the owner community (about 1/3 of it). It is just that those in that third are getting the most publicity. Not everyone is a “down-and-outer.”
Savings and money market accounts are now bulging with money—more than at any time in recent history. There is a pile of bored money out there getting less than an average of a ½ point yield per annum. That money has remained suffering such poor returns for one and only one reason: The owner or manager of it has no market-confidence. There is no confidence for two reasons: (1) the one with the dollars has heard negative things about the market which are true (see below for instances about the stock markets) and (2) the one with the dollars has heard negative things about the market which are false (such as the media or agent disinformation noted above which actually concerns only the relatively smaller, always-doomed-to-fail portion of the marketplace, anyway). Smart owners of money would be doing what the vultures are doing right now--buying; smart agents would be ACCURATELY advising them to do that and informing the other 2/3rds of the market which owns that money (but is not as smart without agent help) about the above feeding frenzy both now and to come and would be organizing vulture funds for that other 2/3rds to take advantage of it RIGHT NOW! Query: Are YOU sending any investment boats into this gulf of economic opportunity? As always in making money, is all about timing. Those who strategize where the Sweet Spot is and get to soonest..win.
Sixth analyses, AN UNDER-ESTIMATION OF THE STUPIDITY FACTOR. We are not here because real estate has failed to deliver the goods as a viable economic asset. It has, does and will. We are here because of the irresponsible banking and borrower practices and generally bizarre economic behavior of the last 10 years. “..Just say ‘charge it’..” became the national mantra and that was always a prescription for financial suicide. It worked a bit for those with money in the bank and steady income until that was inevitably gone or overwhelmed by profligacy. It didn’t and never will for those with neither. What killed the market was the people and their irrational practices (or malpractices as the case may be), not the asset. Thus, it is not the property we need to wash out of the system or castigate as an investment as much us we need to wash out the stupidity of cheap and easy money for those who never could and never will be able to responsibly handle or arithmetically afford it (but will sure as heck grab a wad of it when lenders are tossing it out the teller’s cage in bushels). After advising in about 3,500 foreclosure, modification, short-sale and related cases over the last 5 years, this Author can authoritatively say that in 90% to 95% of the cases, the culprit behind the distress was not so much the decline of property values (that came later as a RESULT and not a CAUSE) or even lost jobs. It was “exuberant” appraisals, kleptocratic credit practices and glutinous over-borrowing from the get-go. In a large majority of the cases, the failure was in the cards the day the loan was signed for reasons having nothing whatsoever to do with either the particular property or real estate as a sound investment if put on a coherent program of acquisition. Even an elephant has limits to the weight it can carry. So an asset or a portfolio—no matter how strong--has limits to how much and what kind of debt it can bear and for how long. Overload it and it can’t get up and even if it does it soon tips over from imbalance and exhaustion.
III. IS THAT A TSUNAMI OR A SHORE IN THE DISTANCE?
THE ECONOMIC CONCLUSION: The market is full of doom and gloom and more than a little bit of it is the product of highly motivated lies, with the rest being for the most part just plain unrepentant ignorance. After a more enlightened review, focusing on the more ZIP-specific data and separating out the chaff of the never-done-well and never-should-have-been-in-this-equation ZIPS from Puerto Rico to Nome in the context of analyzing a local market, the local gloom simply is not justified. It turns out that it is the lies and stupidity which are hurting us and property assets more than the truths.
The fundamentals of supply and demand are intact and need a chance to work. But the government programs put there to accelerate the market re-assimilation of property have thus far been so befuddled, inarticulate, inefficient and market-ignorant—let alone led by the wrong entities--the banks who had the largest hand in causing this maelstrom -- that they have deepened and prolonged what could have been a far more adept and timely recovery. One solution would be to go back to executing the intent of TARP at its inception—for the government to appraise the loan collateral to actual value for those borrowers who were underwater and then buy the mortgage down to affordable balances and rates. In this way, it was reasoned by the original TARP creators, the banks got the money they needed, the mortgage balances were reduced to amounts that were then well-secured for the future and the borrowers got the resulting debt and payments they should have had for their actual financial status and actual values in the first place (had government-ignored lender-perpetrated credit dysfunctionality not disastrously intervened). This was to save the deep familial and community devastation of borrowers having to move out and tear their families, households and whole neighborhoods apart as we see now. It was designed as a “Win-Win” and wasn’t such a bad idea. Somewhere, that economic train was politically derailed by Big Banking to produce what we have today—the banks get all the Manna and, where there is anything left at all after their deep dip into it, are then trusted by the government to dribble out the small remaining change to borrowers. The Bank gets to tout its new-found “fiscal conservatism” (for everyone’s pockets but its own) as the very market that Banks were even chartered by government to fund with all of it dies of capital starvation.
Absent an immediate Justice Department campaign to sue all of the lenders for unsafe and unsound banking practices and move to imprison their top executives or to simply take all of the most rapacious lenders over in an RTC-like program such as that which provided a rapid recovery in the ‘80s (where the government does not pay TARP billions to shore up the banks but simply seizes all of the Bank assets by forfeiture), this destructive and ever-down-spiraling regulatory paradigm is not likely to be reversed. There is too much “back-room mojo” against it.
As the Reformers used to say in resignation about gangland Chicago in the ‘30s when it was the crooks who ran things through networks of bribes to the courts, city officials and the police, “’The Fix’ is just too deeply in to tear it out.” And, like those same crooks used to retort to the Reformers over the smoke of their $100 Cuban cigars “and in any event just where do you think you are going to get the judge, official, or cop who will pass up his lucrative bribe from us to do that for you? A rescue administered by those who caused the grief or who are paid by the crooks to protect the crooks just isn’t going to happen, so don’t wait for it anymore.
Thus, an examination of what is likely even after the devastation of disinformation, stupidity and vice must be turned to. And still, amazingly, as noted, the data from that examination is not that grim if one accepts that the early 2000s were the seller’s heyday and the next decade will be the buyer’s. This shift is not a “tragedy that must be somehow prevented at all costs” as what seems to be the political thrust now. It is just the Yin and Yang of all markets, all economies. They didn’t come up with the term “Bulls and Bears” for nada. In all markets and market moves, somebody wins and somebody loses and money changes pockets, accordingly. The key to profit is to know when to change market-side teams and to be able to do so without misplaced remorse over having left the last one when the time was right to do so.
The purging of dead property back into the marketplace by short sales is one way to get the product back into productive market inventory as long as it is done quickly, so that it does not continue to erode values with its own resolution sluggishness which only shows down a recovery as it slowly drags whole neighborhoods and values ever down. That snail’s-pace process has not worked and dynamically effective steps for speed-ups in the same failed process have not happened and won’t. Modifications were supposed to be faster, but they are slower and even less effective (and lenders hate them because they do not get as much government, investor and mortgage insurance indemnity for them as they do for short sales—they just have to go through them as a “demonstrated mitigation effort” to qualify for the larger, later indemnity funds). All of those avenues are so politically hobbled that they are doomed to the same failure they have shown so far.
Spoken as a “Dutch Uncle” who coldly calls it according to the hard data and not according to one’s glands, the figures show that foreclosures or deed-backs with resales would be economically faster and more friction-cost efficient, would get assets back out in the market and find the bottom quicker for an earlier recovery but this is not happening either due to the government bail-out programs that mandate months of paperwork and processes or to the sheer unpopularity of asking the public to bite the hard but inevitable bullet of forfeiture. For the most part, the foreclosures have been on properties where no programs or indemnities are eligible or which are in such terrible condition or in such miserable ZIPS that short sales won’t work. Yes, some of them are also the end-result of borrower work-out programs that did not work—but most of those failed programs did not work for the very same inherent reasons: The property, comparatively to the contemporary market, was a roach. Foreclosures should increase now that a number of Bank support programs are drying up, secondary markets are requiring originators and assignees to hold at least some financial stake in each loan sold, large banks are cost-cutting and mortgage insurers and other indemnity sources are going broke—making no cash for the lender to wait for--but likely will not at a fast enough pace.
All of this confusion and delay related to burying yesteryear’s dead is a pity, because the buyers (now only the super-savvy ones) exist and they are gobbling up this marketplace as quickly as recast product (through foreclosures and REOs which are gone in days, weeks and sometimes hours to the piddling pace of short-sales) can be delivered. If it was a faster liquidation pace, prices would go up as inventory depleted, the bottom was found and the economics of recovery thus began.
THE REST OF 2011: Barring a complete stock market collapse--which is at this point a 50/50 proposition and likely depends a lot more on what happens in the staggering European Common Market and in U.S. budget deficits than domestic consumer trends, here is the forecast:
For sellers and their listers, expect “just about the same” for the rest of 2011. Expect more fruitless efforts to streamline HOPE, HAMP, HAFA, 2MP and the other GSE programs.
For buyers and buyer-brokers, understand this market to be the best “buy signal” for longer-term players there has been in the last 30 years or will be for 20 more after it has played out as it ultimately will. What will recover this market will NOT be the government or bank programs. It will be the buyers (assumedly advised by savvy agents)—first the investors and later followed by the end-owner/occupiers as rents on these properties get higher than house payments to buy them. Don’t forget that sometimes the best product for an investor is not just what is in his or your back yard. It might be a town, county or state away, so know the market numbers further than a mile from your desk. Investors want the best deal they can get, not just the best deal on your block. And with proper local broker association, agents can co-broke across state lines. They can even co-broke across national lines. They just need to analyze the numbers to find the marketplace and then follow the licensure rules and the laws of the jurisdiction to get to it.
One Caveat to 2011-2012: A fly in the ointment: End-owner-occupiers may not materialize as quickly if Congress passes some IRS changes limiting the deductibility of owner-occupier mortgage interest on the mean average home. Such a proposed Act is already out there getting passed around. Notably, it contains no such limit for investors, which means if it is passed, the investors will get even more gravy than they can now—they will own it all, run up rents until the tenants squeak…and get all of the deductions for it that homeowner/occupiers can’t. Hard to believe such a bill could politically pass at a time like this, but even the shadow of it out there can stifle owner-occupier sales.
And, finally, a big P.S.: The multi-family housing world, especially Big Buck mega-apartment complexes is moving well and for many of the above same reasons. So is top-grade commercial as long-term-player and Big Tenants are using the skewed values and cash-thirsty times to buy their own buildings and roofed facilities or expand.
The above analysis was anecdotal to Phoenix and used its property values and market forces as examples, but the same principles can be applied in most coastal and major western Metro areas right now. The bottom line truly appears to be “do your homework one ZIP at a time” and “don’t try again what failed last time expecting a different result”. It’s OK to be nostalgic about “the wild, crazy market of yesteryear where even morons got rich without even knowing why,” but it was that very dysfunction that got us here and, besides, it is dead history. We can learn from it , but the mandate is not to repeat it. So now let’s dust ourselves off and get started with “Plan B”. That means let’s recast our yesteryear economic agenda for TODAY.‘Nuff said.
BIO FOR J. ROBERT ECKLEYJ. Robert Eckley is a multi-state real estate and banking attorney, successful litigator, popular writer, educator and national speaker with an immense personal and professional involvement in forefront issues over the past three decades. He has been a keynote speaker at NAR® National Conventions (receiving a perfect presentation score) and many state Association conventions which have honored him with top ratings. He has established precedent at the Supreme Court and co-founded transactional laws, rules and forms that guide practitioners today. He has been a licensee and/or Realtor® or Realtor® Affiliate for three decades, 5 years of which were with the Beverly Hills Board, 10 with the Phoenix, Scottsdale and Portland Associations, now a member of the North San Diego County Association of Realtors®, was named to numerous Commissioner's Advisory Committees, received a host of leadership and instructor awards, is a CCIM® Affiliate, testified in Congress against the due-on-sale clauses in 1982, successfully fought the clause in state and federal courts, fought against all and defended a half dozen state and nationally chartered banks and thrifts, and has received leadership awards and honors from former California Governor and U.S. President Reagan and former Arizona Governor and now head of U.S. Homeland Security Janet Napolitano, to cover just a few of the miles he has gone. He is a “been there, done that” type who is often as entertaining as he is practical and enlightening! See more at eckleylaw.com . To be on his “Counselor’s Corner” monthly hotline e-mail to firstname.lastname@example.org or call (602) 952-1177 or out of the Phoenix free dialing region 1-800-999-4LAW and ask to get on the hotline!