Foreclosures will finally find the market Making predictions regarding the most volatile housing market in American real estate history is no easy task. However, we believe five major stories will dominate industry headlines in 2012. Here are our projections:
Sales Will Surge In 2011, a lack of consumer confidence in the overall economy dramatically impacted the housing market. Buyers were afraid to make a purchasing decision on any big ticket item. Economic conditions will continue to improve throughout 2012 and consumer sentiment will solidify. Once that happens, home buyers will realize that, as MarketWatch.com said at the end of last year: “Now could be the best time in history to buy a home.” As prices continue to soften and mortgage rates remain at historic lows, study after study will show that all the industry ratios (such as those listed below) heavily favor homeownership over renting.
- Home price-to-income
- Home price-to-mortgage payment
- Rent-vs.-own housing expense
The iconic financial news sources (WSJ, Bloomberg, Forbes, Fortune, etc.) will begin to impress upon their readers the financial advantages of purchasing real estate as both a great long term investment and as a hedge against inflation. As positive media coverage increases, potential purchasers will see the opportunities that exist and will act upon them. We believe that the increase in home sales will be more than 10% and may approach 20%. Another reason sales will increase is because the inventories of distressed properties which sell at substantial discounts will balloon in the first half of the year.
Foreclosures Will Finally Find the Market The ‘shadow inventory’ of foreclosures which has been growing since the robo-signing challenges of late 2010 will finally be introduced to the market. Real estate professionals will tell you they were surprised at the limited number of foreclosures that became available in many markets across the country in 2011. Though delinquency rates have been declining for the last two years, there is still a tremendous backlog of properties that are in the foreclosure process. Now that the banks have addressed many of the paperwork challenges that caused courts to put a hold on foreclosures and the settlements associated with this issue are coming to a resolution, the flow of REOs (real estate owned by banks) is about to explode. Some states have been systematically liquidating their foreclosure inventories (examples: Nevada, Arizona and California). These states will not have the influx of foreclosed properties that certain states will. Other states forced banks to delay the foreclosure process for over a year. These states will see a major increase in distressed properties entering the market in the first half of 2012 (examples: New York, New Jersey, Illinois). Distressed properties sell at discounted prices. They will impact the housing values of the non-distressed homes in the area.
Prices Will Tumble As more and more foreclosures come to market, there will be greater downward pressure on the values of houses in the region. Foreclosures impact values of non-distressed properties in two ways: 1.) They will eat up some of the buyer demand in the market. 2.) They will impact the appraisal on ALL transactions in the area. When a home buyer decides to purchase, price is a major component in the equation. Every buyer wants to make sure they are getting an excellent deal especially after what has taking place over the last five years. Foreclosures, on average, sell for approximately a 40% discount according to RealtyTrac. These distressed properties might not be in the same physical condition as the non-distressed properties. However, at sizable discounts, many purchasers are more than willing to do the necessary repairs. Every buyer who buys a distressed property is one less eligible buyer for the other homes. Less demand in a market with an oversupply of houses for sale means lower prices. The number of foreclosures in an area also impacts the bank appraisals in the area. We recently interviewed Chip Wagner, a third generation appraiser and an industry icon. He explained: “If a specific market area has a low amount of distressed listings and comparable sales, it is likely there is little impact on property values, and we may be seeing appreciation taking place. A ‘low amount’ would be under 10% to 15%. In market areas where there is a high amount of distressed market competition, typically greater than 1/3 of the market, this distressed competition has to be analyzed as this is the new ‘norm’ for that market area. Buyers active in that area are looking at all of the competing properties and making their purchase offers and buying decisions based on all of the information available to them.” An increase in foreclosures will have a negative impact on values. This will cause more homes to be underwater.
Short Sales Will Skyrocket As mentioned above, we strongly believe that home prices will soften through at least the first half of 2012. Falling prices will force more homeowners into a position of negative equity. CoreLogic, in their December Negative Equity Report stated that there were 2.4 million homes with less than 5% equity. Analysts are projecting depreciation percentages anywhere from 3.6 to 13 percent. Millions of additional homes may be underwater by June. Negative equity is one of the triggers that cause people to strategically default on their mortgage obligations. If this happens, there could be an increase in the number of foreclosures. However, we predict that banks will take preventative measures which will help many of these homes avoid foreclosure by easing the requirements in the short sale process for both homeowners and real estate professionals. The short sale process has already been streamlined as evidenced by the continued increase in completed short sale transactions quarter-over-quarter in 2011. The process will be further simplified and banks will aggressively recruit the help of real estate agents to assist homeowners in fully understanding their options. The short sale business will be a major piece of many agents’ business this year.
True Professionals Will Prosper Just as war identifies the great generals, the challenges mentioned above will identify the true industry professionals in real estate and mortgaging in 2012. Those who have invested the money, time and energy to truly understand what is happening and why it is happening will separate themselves from their competition and do very well this year. Those who take that next step of learning how to simply and effectively communicate the market to their clients will be seen as industry leaders. These experts will dominate their markets.
Steve Harney has been chosen as one of the Top 100 Most Influential Leaders in Real Estate by Inman News and has appeared on Fox Business News. He is the founder and chief content provider for www.KCMblog.com.