Which do you want first, the good news or the bad news? Let's start with the good news. We're at the tail end of a wave of subprime resets that has lifted foreclosures to record highs this year. And as the surf goes out, it should help builders forced into an uneven fight with foreclosures, which for all their problems enjoy an unbeatable price advantage.
The bad news, and this should come as no surprise to an industry that takes one blow after another, is that we have a second wave of approximately $200 billion in resets that could hit our shores within the next year. These are on Alt-A mortgages and Option ARMs, taken out by investors and homeowners to buy homes during the boom. Many will start to reset in 2009.
This second wave is only about one third the size of the subprime surf that clobbered the industry during the last year. Still, some analysts are saying that the Alt-A and Option Arm mess, along with lingering problems from subprime mortgages, may be enough to keep foreclosures at current levels next year. On the optimistic side, Rick Sharga, vice president of marketing for RealtyTrac, speaking at a Zelman & Associates investment conference in Dallas today, believes foreclosures may decline next year, after an uptick in the first quarter of 09. "If we got a 20 percent reduction in 2009, that would be a good year," he told the conference.
As we go into the fall and winter months, though, competition with foreclosed homes is likely to intensify. In August, one in every 464 households received a foreclosure filing. Filings increased 8 percent during the month, led by a big increase in bank repossessions, or REOs. RealtyTrac counts more than three quarters of a million properties in its active REO database. That equals 17 percent of the inventory of existing homes for sale reported by the National Association of Realtors in June.
At current levels, there are more foreclosed homes than new homes sold in this country. RealtyTrac expects that this year 25 percent of all sales will be foreclosed home sales, and those homes are selling at a deeper discount to the market. RealtyTrac's data base also shows that foreclosed homes sell at a 31 percent discount to today's prices, compared to 23 percent the previous year.
Builders speaking at the conference emphasized that there's only so much you can do about competing with REOs. It helps when buyers are working with builders to build their home from scratch rather than buying standing inventory. Jeff Mezger, the CEO of KB Home, emphasized the importance of letting customers select from among thousands of options in a design center and in effect build the home of their dreams.
Without a doubt, "foreclosures are part of the downward pressure on pricing," said Ara Hovnanian, CEO of Hovnanian Enterprises. But Hovnanian pointed out that many foreclosed homes may have mold or other maintenance problems. They may not have warranty coverage. And you may have to wait to take occupancy.
Richard Dugas, CEO of Pulte Homes, pointed out that the impact of foreclosures is very localized. Some states, such as California, Florida, Arizona, and Nevada, have been harder hit than others. But even within those markets, it comes down to individual neighborhoods that have more than others. But no matter where they are, Dugas concluded, "We can't afford to compete against foreclosures at 40 percent to 50 percent off."