The steady rise in foreclosed homes reentering the resale market has not yet had a significant impact on lowering home prices except in those states, such as Ohio, Colorado, and Michigan, where foreclosure activity has been rampant. But as lenders "own" more foreclosed inventory, they and their investor partners are likely to get more proactive and flexible about disposing of those houses, which potentially could put more pressure on sellers and builders in certain areas to reduce their pricing, say real estate brokers and foreclosure tracking services.
While foreclosures represent a minuscule portion of America's housing stock and are a serious problem in only a handful of states, their increasing numbers have become symbols for lax, and at times predatory, mortgage lending practices that the housing and banking industries are now paying for. Foreclosures.com estimates that, through July, the number of homes lost by owners to lenders in foreclosure proceedings exceeded 300,000 units, a jump of 24 percent over the same period a year ago. In California during those same months, banks reclaimed 37,800 homes valued at $15.3 billion, according to ForeclosureRadar, which tracks every foreclosure in the Golden State. ForeclosureRadar also found that in June alone, 16 percent of all houses for sale in California were foreclosed properties. At a recent trustee sale in Phoenix, banks acquired 697 of the 806 properties being auctioned, says Connie Green, the owner/broker of Realty Solutions there. Moody's Economy.com predicts that lenders will acquire a total of 2.5 million foreclosed homes this year and next.
Right now, there seems to be plenty of buyers for these properties. But as more real estate owned by lenders or banks, better known as REOs, circulates into the market's bloodstream again, lenders are in a Catch 22 situation, in that the resale of these homes could be hamstrung by credit restrictions that banks are imposing on all mortgage loans. In addition, industry watchers say investors that financed all of these bad mortgages in the first place are preventing banks from accepting steep price discounting that could make these homes more attractive to potential buyers.
"Our clients, who are brokers and agents, tell us that banks are still extremely difficult to work with," says Sean O'Toole, ForeclosureRadar's founder. "They aren't discounting and are still trying to get the same prices as in 2005. So there's a lot of inventory still sitting unsold, not moving." Keith Wolf, president of Winfield Realty in Illinois, which handles REOs for several lenders including Wells Fargo (through that bank's Premiere Asset Services unit), says his inventory of foreclosed homes has doubled from last year. "Banks are in denial about market conditions," Wolf says. "No one is willing to slash and burn yet. They will bring prices down gradually until they get the absorption they want."
Banks still funnel the bulk of their foreclosure resales through mortgage brokers that specialize in REO properties, which for the most part aren't popping up on multiple listing services. As of Aug. 6, only 1,409 of 54,699 homes for sale in Phoenix were listed, according to Bob Rucker of the Arizona Regional MLS. "Only a small percentage of foreclosed homes ever make it onto MLSs," says Walt Molony, spokesman for the National Association of Realtors.
But the sheer volume of foreclosed homes reentering the market is beginning to overwhelm brokers and banks, whose systems weren't geared up to process this much activity. Wolf says his company has been turning away business in Chicago's inner city because he's getting plenty of REO transactions from the suburbs. Consequently, auctions - which historically have been the last resort for banks trying to unload REOs - appear to be gaining in popularity. "The banks can only hold onto so much," says Mike Seger, a broker associate with Re/Max Towne Square in Jefferson, Ga., which is seeing more local auction activity, especially in Atlanta where there are 100,000 unsold houses on the market, or a two-years' supply. ForeclosureRadar estimates that 6,991 of the 38,241 homes purchased in California in June were bought at auctions. RealtyTrac, the leading online marketplace for foreclosed properties, whose Web site gets 3 million unique visitors per week, is planning to launch an online auction service within the next 45 days. "When all of this shakes out, you're going to see a whole different series of relationships in selling real estate, and the platform will be electronic," predicts Rick Sharga, RealtyTrac's vice president of marketing.
Indeed, secondary mortgage lender Fannie Mae has initiated a pilot marketing program with Foreclosures.com. It also just completed its first auction of 50 homes in Colorado. "Moving this [foreclosed] inventory is a concern, and our primary desire is to limit our losses," explains Gabrielle Harrison, Fannie Mae's vice president of REO sales. "The type and condition of the properties are changing, and we have to look at other methods." Brokers will continue to be Fannie's primary conduit to resell these homes, and the lender last year began outsourcing the management of REO sales through third-party companies such as Atlas REO Services. Fannie Mae plans to conduct more auctions, too, but mostly in markets "that are just starting to turn," says Harrison, such as California, where it will hold its next event.
It remains to be seen how all of this activity affects the prices of foreclosed homes or for-sale homes. Right now, brokers and auctioneers aren't offering many bargains. Alexis McGee, president of Foreclosures.com, calls auctions "bonanzas for banks, not buyers." David Webb, co-owner of Dallas-based Hudson & Marshall (H&M), one of the country's largest auction houses, says his company got about 90 percent of the prices it wanted at a recent auction in Las Vegas. H&M also just auctioned 3,000 homes in Detroit, where the return on many homes was more like 40 percent. "The good stuff is still selling well, but there's simply too much inventory on the market," says Webb, whose company is preparing to auction 400 homes in Atlanta next month, with most of that inventory to be priced from $175,000 to $200,000.
Tommy Williams, chairman of the Tulsa, Okla.-based auction house Williams & Williams, which sells 1,000 homes at auction per month and whose close rate is 85 percent, believes that banks will make price concessions on REO properties eventually, especially when monthly carrying costs for an unsold, empty home can run 1 percent of the value of the house. But Williams also notes that two factors - the condition of the home and the condition of the neighborhood - would continue to dictate price more than anything else.
O'Toole of ForeclosureRadar recalls Elizabeth Kubler-Ross's book On Death and Dying, which identifies five stages of grief, to describe the state of REO sales today. Banks right now are at Stage 2, anger, blaming everyone but themselves for their foreclosure plight. "But at some point, they'll move to Stage 3 - bargaining - and start discounting prices" to move their REO'd inventory. That, in turn, will inevitably produce Stage 4 - depression - and then, finally, Stage 5: acceptance. Those price reductions will probably be steeper than what's going on at auctions today. "At some point, even a 10 percent discount is not going to be enough to sell these homes," says Celia Chen, Moody's Economy.com's housing analyst.
But neither O'Toole, Chen, nor any other source contacted for this article thinks foreclosed homes will ever balloon enough to tip the scales of resale or new-home pricing nationally. However, they do expect some significant market-by-market variances. "The bad spots are California, the industrial Midwest, and parts of Florida, where foreclosures are going to create downward pressure on pricing," says Chen.
Wolf, the Illinois broker, thinks banks have more to worry about on the pricing front from the public builders that are scrambling to liquidate massive amounts of unsold inventories and have more flexibility than lenders do to drop their prices to meet demand. "Most people still prefer to buy a new home, and when the price of new construction comes down, that's going to push down prices of existing homes," says Wolf. If big builders do start slashing prices and don't exercise more control over their production of new houses, reselling foreclosed properties could be tough sledding, especially if, as McGee of Foreclosures.com anticipates, the number of foreclosed homes continues to peak after the housing market bottoms out.