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Have The Banks Created An Artificial Market?

August 20th, 2009 categories: Benicia, Buying, Fairfield-Gr Valley, Foreclosures / Short Sales, Selling, Solano, Suisun City, The Economy, Vacaville, Vallejo, Viewpoint

This is the second and final part of this post. To read Part 1, click here.

Greedy BankerIn yesterday’s article, I talked about our expectations earlier this spring that hundreds of new bank-owned properties would come on the market shortly after the foreclosure moratoriums were lifted in early spring.

To date, those expectations haven’t come to fruition, which is bewildering, especially when most bank-owned homes continue to attract multiple-offers — sometimes with as many as 30+ offers on one house.

So the obvious question: have the banks really foreclosed on as many homes as we all suspect or have they refrained from foreclosing on all those who had stopped making their payments?

Solano County Foreclosures As Of 8-18-09Well, I did a little research through our public records database and, as the above chart illustrates, the answer to that question is that the banks indeed have been foreclosing with a fervor.

Right now, over 6,500 homes in Benicia, Vallejo, Fairfield, Suisun and Vacaville are somewhere in the foreclosure process.

That means the lender has either:

1. Recorded a Notice of Default — the clock starts ticking once the NOD is recorded, but it still takes almost 4 months before the bank can actually foreclose.

2. Recorded a Notice of Trustee’s Sale — these are what you see advertised under Public Notices in the newspaper. They’re recorded at least 3 weeks before the foreclosure occurs.

3. Already Foreclosed on the property — if so, the bank owns it and it’s now part of their “REO” (Real Estate Owned)  inventory.

So let me repeat what I said a moment ago: over 6,500 homes in the five-city Solano County area we serve are somewhere in the foreclosure process.

What’s more, 2,000 of those homes have already been foreclosed. Yet almost 60% of those (1,163) that are already bank-owned have never come on the market.

If you look at the chart, you’ll see that in Vallejo alone — where the inventory has dropped from 899 active listings in January to less than 225 today — even though there are only 82 active REO listings, another 566 existing REOs have never come on the market.

The complete city-by-city numbers:

  • Benicia — 86 Actives (17 REOs) / 37 unlisted REOs
  • Vallejo — 223 Actives (82 REOs) / 566 unlisted REOs
  • Fairfield — 213 Actives (46 REOs) / 316 unlisted REOs
  • Suisun — 58 Actives (12 REOs) / 99 unlisted REOs
  • Vacaville — 214 Actives (63 REOs) / 145 unlisted REOs

And keep in mind, that these figures ONLY INCLUDE those which are ALREADY bank-owned.

When you add in the other 4,500 homes which haven’t yet been foreclosed upon but are now heading down that path (with a recorded NOD or NOTS against the property), the current supply vs. demand situaiton just doesn’t make sense.

So then that begs the second obvious question: If there are so many unlisted REOs and such a demand for them in the marketplace, why aren’t the banks releasing them for sale?

And that’s a question that’s been puzzling most of us for the past three months. Once the banks resumed foreclosure proceedings after the moratoriums were lifted, we figured it might take a month or two before we’d start to see an influx of new REO listings.Pull Quote

Back in April, several REO listing agents told me that their asset managers prepared them to brace for a huge flood of listings come June. Well June is long-gone (as well as July and most of August), and to date, the flood that was expected has been nothing more than a slow trickle.

I’ve spoken to listing agents who devote their time exclusively to representing banks on their REO properties and even they are somewhat perplexed.

And so all of this leads me to conclude that the banks may be purposely manipulating this market to keep demand at a frenzied pace and to prevent prices from dropping again.

A year ago, if you were looking for a home, you had plenty of choices. And the banks who were selling REO properties were generally willing to credit the buyer for closing costs. Most buyers could generally expect to negotiate a price lower than the asking price as well.

The banks remember those days all too well. So now that they’re in a market where they’re getting 10, 20 or even 30+ offers just a few days after coming on the market, they’re feeling a sense of renewed power.

They’re probably also figuring that if they ride this bus a little longer, values will start to appreciate and they’ll eventually be able to reduce some of their losses on those homes they’ve already foreclosed on but haven’t yet put on the market.

A year ago, a bank might have waited three or four months to sell an REO listing and might have dropped the price $30,000-$50,000 along the way. They no doubt don’t want to return to those days.

So by keeping the inventory artificially low, they ensure that buyers will continue to compete with each other for those precious few REOs listings.

The big unknown, of course, is whether this is really all intentional. I suspect that it is, for the reasons I outlined.

The other unknown is: what would REALLY happen if the banks were to open up the floodgates and let the inventory climb?

Interest rates are low, first-time buyers all want to buy right away to take advantage of the tax credit that expires at the end of November, and many all-cash investors remain in the market. In other words, there are certainly plenty of eager buyers to eat up a healthy supply right now.

So I would think that the banks could unleash a decent supply of their current REO inventory and still keep the demand high.

If the inventory were to rise back to where it was three or four months ago, I’m sure there would still be plenty of buyers to lap up most of these attractively priced homes.

And even if the supply doubled in places like Fairfield, Vallejo and Suisun, my guess is that there would still be multiple offers on most properties. Maybe not 25 offers, but perhaps four or five.

That would help the banks reduce their inventory, satisfy a greater number of eager home buyers and still provide a market where prices could begin to appreciate at a reasonable pace.

My fear is that the banks will try to ride this out too long and that eventually, as the economy finally looks like it’s moving north for good, interest rates will rise and force many buyers out of the market. Or, stocks will soar causing many of today’s hungry investors to abandon real estate in favor of Wall Street.

And if that were to happen by the time the banks finally opened the REO inventory floodgates, we could find ourselves right back to where we were a year ago, with too many listings and too few buyers.

I’m hopeful that the banks will soon realize what a good thing they have going and bring many more homes to the marketplace.

But for the time being, my sense is that we may be living in an artificially manipulated boom market.

Further Reading

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This entry was posted on Thursday, August 20th, 2009 at 10:24 pm and is filed under Benicia, Buying, Fairfield-Gr Valley, Foreclosures / Short Sales, Selling, Solano, Suisun City, The Economy, Vacaville, Vallejo, Viewpoint. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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