LA Digs - Northeast LA Real Estate Blog

Foreclosure inventory is down nationwide (according to Corelogic’s National Foreclosure Report), and by almost 20% on a year-over-year basis.

What difference does this make to the value of your home, you ask? As the number of homes in distress goes down, the price of homes selling in your neighborhood is more likely to go up. This is one important piece of the housing recovery puzzle.

At the same time, buyers today are very well educated about the local real estate market. Did you know that you can find out what properties are in some stage of the foreclosure process on Zillow.com for free? As with many facts today, this raw information can lead people to some flawed conclusions.

If you look at Eagle Rock, 90041, on Zillow, you see a number of homes in some form of distress -- 82, in fact. These homes are what is called Shadow Inventory (properties that are in some stage of mortgage default.) Since there are only 17 properties currently for sale in 90041, this would seem to indicate that the Shadow Inventory is 4 times the current inventory. Doomsayers might say this means that if all or most of the shadow inventory came onto the market at the same time, it would have the effect of flooding the market with distress sales and would bring prices down. Therefore, they conclude, prices are depressed in Eagle Rock.

That’s kind of like saying if everyone who came to a traffic light suddenly decided to run the red light, we would have a whole lot of accidents and insurance rates would go up. Probably true, ifthat happened, but the idea of everyone losing their minds at the same moment is unlikely. The likelihood of all or even 10 of the 82 distressed properties coming on the market at the same time is also practically non-existent.

But some people like to look at the worst possible outcome. Many buyers are hoping that the housing market will continue to be distressed so that they can still jump in and get “a deal.” Many of these same buyers have been looking for a home off and on for several years and have passed up many “deals.” I have talked to a few of these people and many of their friends who have discussed how Joe Smith should have bought that cute little house on XYZ street last year when he had the chance because now he is going to have to settle for a much smaller house for the same money.

It is very difficult to know how much a home is “worth,” especially when you are a buyer in a multiple offer situation. It’s almost as difficult when you are the only buyer about to make an offer on a house. But ponder this: what would you be thinking about the deal you made on a house if you bought it 2 or 3 years ago?

Too much information can be a bad thing. If you are expecting all this Shadow Inventory to give you the opportunity to get a great deal on a house, you're going to be waiting awhile. The reality of today's real estate market, at least in Eagle Rock, Highland Park, and the surrounding neighborhoods, is that there is low inventory available to buy, there are multiple offers on most homes, and sales prices are typically going over the asking price. Yes, even that house that you think needs a new kitchen is getting multiple offers - because there are buyers who realize that they want to buy a house now, and the longer they wait, the less house they can buy.

Data released this morning by Standard & Poor’s show that the S&P/Case-Shiller national home price index declined by 4.2 percent in the first quarter of 2011, after having fallen 3.6 percent in the fourth quarter of 2010. The national reading hit a new recession low with the first quarter’s data and posted an annual decline of 5.1 percent versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels.
...From DSNews.com, your Daily Dose of Default Servicing News, May 31, 2011.

My response is, so what? What does this have to do with your home? What does this have to do with, say, the sale at 2030 Estes Rd in Eagle Rock (closed April 21, the highest sale in Eagle Rock since September, 2009, for $176,000 over asking)? In the first place, this is first-quarter news and we have moved on (and up) from there. In the second place, once again, we have to note that national home prices have little to do with local home prices.

So why should we care at all about this depressing news?

Because the common, everyday, not-in-distress, regular, homeowner who wants to move is influenced to wait.

For what?

For prices to “get better.” For the market to “improve.”

I posit that by waiting, homeowners are creating the very problem they seek to avoid. The fewer “regular” sales there are, the more weight is given to “distress” sales, which often sell for a significant discount off market price, which lowers the average sales price, which lowers the comparables that appraisers use to value a home sale, and so on in a self-fulfilling prophesy downward spiral.

We had 15 offers on 2030 Estes. That means that 14 buyers did not buy a home and went looking for others. Other “regular” sellers missed a bet by not coming on the market right after that. But it’s not too late! Some of those buyers are still out there looking...I know, I’ve seen them at other open houses. Plus there are buyers looking in different price ranges for other kinds of homes. Many buyers know that this is an amazing time to buy. They will pay fair prices for good homes. If you own a home and want to sell it, consider doing it now. Make your own good news and thumb your nose at DSNews and Case-Shiller!

How did Eagle Rock do with distressed property sales this year? It’s interesting. In 2009, there were 118 sales of which 17 were short sales (15%) and 45 were foreclosures (38%); so a total of 53% of all sales were distressed. The average sales price was $446,000.

In 2010, we had 22% short sales (28) and only 12% (16) foreclosures of the 130 sales recorded (according to the itech Multiple Listing Service).  So 34% of all sales were distressed properties. The average sales price was $468,000. It’s good to see an improvement, but we certainly haven’t “bounced back” as many hoped that we would.

A big difference is that there were a lot more foreclosure sales in 2009 than in 2010. I credit the increase in short sales and resultant decrease in foreclosure sales to the change in lenders policies toward short sales. They became much more amenable to granting short sales.  I closed more short sales this year (3) than the year before (0), all of them listings.

It looks like we are doing a bit better in 2010 with somewhat more sales and higher average sales prices as well as fewer distressed properties sold overall. Another way to say it is that 66% of sales in 2010 were “regular” sales as opposed to 47% in 2009. It’s interesting to note, however, that the highest sales price in 2009 was over $200,000 higher than the highest in 2010. In my opinion, the reason there were more distressed sales in 2009 than regular sales was more because “regular” sellers wanted to wait out the downturn and sell later when the market recovered.  This year, some of those people either couldn’t or decided not to wait any longer to sell. Price is of key importance, as well as the perceived desirability of the property for sale.  Buyers are not as reluctant to make offers much lower than the asking price today, which is helpful when they are sincere offers that can be negotiated up. One of my sales this year started off with a $165,000 difference in offer vs. list price, and we eventually ended up at $65,000 less than asking.  With no predictions or indications of a quick return to prosperity in 2011, it will be interesting to see how sellers and buyers deal with that. I have noticed that the uptick in interest rates has encouraged an end-of-the-year flurry of business.

I was looking at the properties on Foreclosure Radar that are in default, checking on some properties that have been recently listed as short sales. I recognized an address I had visited several years ago to discuss selling it. At that time, the owner could have sold it easily and made a bit of money, but it wasn’t enough for her to do what she thought she wanted. We have talked about once every couple of years since then, but the last time I spoke with her, I had to tell her she wouldn’t make enough to pay off what she owes. Today, I saw that the property is in preforeclosure, scheduled for a possible sale at the end of the year. She may be able to drag the process out for several more months, maybe even years, but it doesn’t look like she’s going to be able to sell it “when the market recovers,” because she will owe too much in back payments, penalties and interest.

Once you fall behind, it can be very difficult to catch up. I can tell you several sad stories from the past few years. Each time, the owner could have sold it for enough to pay off the loans with a little bit left over to move and rent a place. But they “had” to have more. They “had” to be able to buy another house, or pay off all their debts, or something. But things didn’t go as planned, they slipped further and further behind, and lost it all—with the added bonus of having trashed their credit and made their lives even more difficult.

It is hard to face the reality of a bad financial situation. And the minute you fall behind in your payments, every scheme suddenly seems realistic. It’s a trick your mind can play on you, and it is made worse by every grifter who sees a chance to make some money off of your troubles. It is difficult to know who to trust. Since the notice of default is a public record, unsavory characters have an easy time finding people in trouble. Here is the advice you should heed: don’t ever pay anyone a fee upfront before they deliver on their promise of a loan modification or a short sale. It’s actually against the law for someone to accept such a fee.

But I also have some success stories to tell you. I helped several homeowners sell and move on before they fell behind in their payments, and a couple whom we managed to help right before the auction gavel came down. They didn’t get as much as they wanted to get. Some of them barely managed to pay off all their loans. But they are done and moved on. They may have regrets over what might have been or what they should have done earlier, but they don’t have that big “foreclosed” sign stamped in their memory to seal in the misery. And certainly, if they fell behind in their payments their credit suffered, but not nearly like it would have if they had lost their house in foreclosure.

If you find yourself in a situation where you need to change your real estate position, don’t let your emotions get in the way of what you know in your brain you need to do.

Here are some resources:

From the website www.YouWalkAway.com: Strategic default, also known as voluntary foreclosure is when the borrower decides to stop paying a mortgage even though they can still afford the payment. For many people who are upside down on their mortgage, the decision to strategically default is one that is difficult, but often times is the first step to financial freedom.

Wikipedia has an interesting discussion of the ethical issues at play http://en.wikipedia.org/wiki/Strategic_default. One notation from an ethicist states that the economy is essentially amoral.

http://www.city-journal.org/2010/forum0427.html. A really well-considered discussion with good ideas about how the banking industry could take some responsibility for helping to fix the problem:  “Zingales and Posner propose that lenders be required to give underwater homeowners the option of resetting their mortgages to the current value of their houses in exchange for giving the lender 50 percent of the house’s future appreciation. Enough with guilt-tripping underwater homeowners into holding on to their homes. Instead, let’s focus on equitable and practical solutions to the negative-equity crisis. The Zingales/Posner proposal would be a great start.”

http://www.strategicdefault.org/  Free advice.

My thoughts: The question “can they afford to make their payment?” is key. For example, it would obviously be a strategic default if you bought a house with 20% down, a good 30 year fixed loan at say, 5.5% interest, and you still have the same job, your family is fine, you have $20,000 in savings and nothing has changed except your $500,000 house is now worth maybe $400,000. You may not like that fact that your house is now worth less, but you can clearly continue to pay for it.

But say the same situation has one change: you were laid off from your job and the best new job you could find pays 60% what your last one did. You are spending some of your savings—not a lot, every month just to pay the bills. You could change your spending habits and squeak by. Do you bail?

Or try this: Same issue with your job, but you could take on an extra job and be fine, or save yourself the time and trouble and walk away.

Think about these scenarios within this same situation:

There are 5 other families on your street that are experiencing similar issues

There are 3 foreclosures on your block that are boarded up and overgrown with weeds

At what point do you draw the line?

Dear Tracy,

Every now and then when perusing the homes for sale in the area I’d like to live in, I see a description that states it is a Fannie Mae HomePath property.

What exactly does this mean?  Does it make the buying process any different?

Thanks,

Home buyer

When a property is a HomePath property it means that it is (a) a bank-owned home owned by Fannie Mae, and, (b) the buyer of the property is eligible for the Fannie Mae HomePath mortgage program.

As you may know, Fannie Mae is the largest lender in the United States.  Fannie Mae currently has thousands and thousands of homes on their books due to the large number of recent foreclosures.  In an effort to help banks liquidate their Fannie Mae REO inventory, Fannie Mae came up with the HomePath program.

The HomePath program gives lenders and buyers less stringent finance requirements, which is great because more buyers can actually qualify for a loan.  Another great thing – you can get a HomePath mortgage for owner-occupied OR investment properties.  Fannie Mae also has a HomePath renovation financing program for those distressed properties that need a little help before they’re ready to be lived in.

Going the HomePath route makes the home buying process different for a few reasons:

1. No appraisal is required.


2. You can make a down payment of as little as 3% of the purchase price.


3. No mortgage insurance is required (therefore, less up-front cash from buyers and lower monthly payments).


4. Credit score requirements are more flexible.

So, the million dollar question – why would a lender agree to such a loan?

Well, Fannie Mae is offering a couple of incentives to lenders who process these loans.  First, loans can be sold back to Fannie Mae, so lenders aren’t holding the loans in their own portfolios.  Second, the more loans a lender makes, the more fees it generates for originating and servicing the loans.

I know what your next question will be – with all the cash investors snatching up distressed properties in the area, is it even possible to get one of these properties with a HomePath loan?

I’m not going to tell you that it will be easy, a lot of the time if a bank can get cash, they’ll take it.  But!  We are actually in escrow on a HomePath property and, except for a delay in opening escrow because it has to go through the Fannie Mae channels, everything is going smoothly so far (knock on wood).

My big advice for going into escrow on HomePath properties is to fully exercise your due diligence – get that property inspected thoroughly!  These banks don’t know a lot of the details on the condition of the property, and they rarely will do repairs before the close of escrow.  So do your homework and really understand what you’re getting into.

For more information and a database of HomePath eligible homes, visit www.homepath.com.

Remember when Alan Greenspan, former chair of the Federal Reserve, talked about the irrational exuberance in the stock market? You might not, because the quote is from a speech he gave all the way back in 1996!

Hmm, where is that "shadow inventory" we have heard about for so long?

do I ever even stand a chance on your listings? Obviously, you have many of the best listings in the areas in which I'm looking, and I'd like to try to find a way to be more competitive.

Well, I now see that we should definitely undergo the loan process in some manner right now, because no matter how excruciating we find the process to be when we represent our clients, it is about 100 times more excruciating when we have to go through it ourselves.

I was chatting with someone the other day who mentioned that she had sold a property in another state recently, but just found out that her income taxes are going to take about a third of her profit. Someone had told her she could transfer the gain into purchasing a different property and defer the tax. All true, but, unfortunately, the transfer of property has to be done in the right order to qualify for the tax deferral.

This maneuver is called a 1031 Tax-Deferred Exchange. There are many good sources for information on the details, including the Internal Revenue Service, which is where you should start: http://www.irs.gov/newsroom/article/0,,id=179801,00.html.

Here are some excerpts that show why you need to plan ahead to carry out one of these transactions:

"It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable.

"One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete.

"You can not act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) can not act as your facilitator."

For those of you who like question and answer formats, here is another good site: http://www.1031.org/about1031/faq.htm. And here is the answer from them concerning my friend's situation:

"Q - If the taxpayer has already signed a contract to sell the relinquished property, is it too late to start a tax-deferred exchange?
A - No, as long as the taxpayer has not transferred title, or the benefits and burdens of the relinquished property, she can still set up a tax-deferred Exchange. Once the closing occurs, it is too late to take advantage of a Section 1031 tax-deferred exchange (even if the taxpayer has not cashed the proceeds check)."

A good real estate professional is like a good doctor. If you have an ongoing relationship with a doctor, and you tell her you are thinking of climbing Mt. Everest, she can probably let you know if it's a good idea. If you suffer from emphysema or some other breathing problem, she could either tell you it's too dangerous for you, or that you can change your medication and make it possible. The caveat is, you have to consult with your professional before you do it, not after.

If you are contemplating a real estate transaction, you could talk to your tax professional, your real estate professional, or your legal professionalbut why not start with the one who won't charge you for the consultation? You might think that simply selling your property should be a simple decision, and maybe it is, but as in this example, it could turn out to be costly.

Let's look at some numbers on this beautiful almost Spring morning:

We have a very energetic market in Northeast Los Angeles. In Eagle Rock 90041 since the beginning of the year, almost as many properties have closed escrow as have been listed. When you add in pending sales, you can see that we are quickly selling off the inventory. The sales numbers are moving almost as strongly in the other two zip codes which include all of Highland Park, Glassell Park, Mount Washington and Sagamore Park. At this rate, low inventories could continue throughout this year. Since this is a supply and demand business, if the demand keeps up at this rate, we will continue to have multiple offers and some increase in prices.

From the Combined LA/Westside Multiple Listing Service

The questions are:

• Will the demand keep up?
• Are first-time buyers driving the market?
• Will they put on the brakes when the tax credit goes away on April 30?
• What are your thoughts?

remember that these are figures for the entire state, not your local market.

It seems like I'm always saying that here at last is the straight story on the real estate market, but it's always true! Last year, 2009, there were 121 sales in Eagle Rock, zip code 90041. Here's the interesting part: 60% of the sales were distress sales, that is, either short sales or bank-owned properties. Now, in 2010, we had 9 sales in the first month and 55% of those were short sales or REOs (bank-owned). While the foreclosures were scattered out fairly evenly over the last year, I noticed that the short sales that actually closed escrow tended to happen later in the year, and in January, 5 of the 6 distress sales were short sales. This is in line with the government's efforts to help people avoid foreclosure, modify their loans and then approve a short sale if the loan modification didn't work out.

What you can't tell from the Multiple Listing Service is that a lot of the normal sales were under duress as well. I know personally of several divorce sales and a few properties that had to be sold quickly before the owners were unable to make any more payments due to job losses or failed businesses.

 

In other words, very few people who didn't have to sell did sell. But look at the graph and table for the year from 12/08 through 12/09: it's obvious that we did reach a bottom in the first quarter.I think the dip in November was not another bottom, just an example of my point about distress sales. Notice on the table how few properties were selling at the end of the year--because of holidays, because of perception of the market. If you take the dip in November out, the market was steadily higher than earlier in the year. And note that the year over year prices were up, which is much more meaningful than the dramatic 1-month changes around November.

What's going to happen this year? My crystal ball is still on backorder, but so far this year I have talked to a lot of people who want to sell and many who want to buy. From the energy I'm feeling, I'd say the first quarter of the year should be very active. In most years past, the first quarter is sluggish with sellers talking a lot about going on the market in the spring, but not getting around to going on the market until May or June. Buyers want to take advantage of the federal tax credit programs with their April 30 deadlines, and more and more sellers are saying they are ready to sell even if they can't make what they might have in 2007. This promises good things to come.

Check out this blogpost by Sean O'Toole, CEO of Foreclosure Radar.

http://www.foreclosuretruth.com/blog/sean/time-for-troop-surge-on-the-front-lines-of-the-housing-crisis/ 

If you look at his website and his past blogposts, you see a thoughtful, intelligent person who has studied and understood more of this real estate market than most. I know that I have done what he suggests, talked to people who are in trouble with their mortgages, and I've tried to help them find solutions. Unfortunately, if they are in real trouble with no equity, I can't help them effectively because they have to negotiate with their lender--and that, as Sean eloquently points out, is where the trouble lies.

More thoughts on my chosen profession:

As I reflect on my year in real estate, 2009 has certainly been a challenge. But last year at this time, it was even more frightening. Would I ever sell another house? My notes from December, 2008, show that was a real concern to me. To relate back to what Sean wrote, I did feel like the best thing I could do was to be as helpful as I could. I wrote about the government programs in my blog, I took flyers around the neighborhood, I met with people to discuss their options even though they couldn't sell. But I felt powerless in most cases to effect positive help.

In hindsight, it looks like the real estate market in our area bottomed out in the first quarter of this year, so I was truly facing a very dark time ahead. But as I looked around at other people going through that dark time, I could see that I had a huge advantage—I am my own boss and no one can lay me off but myself.

Imagine how vulnerable employees feel, not knowing if they will have a job next week. Even public employees are feeling the pinch with unpaid furlough days, frozen wages, pay cuts. It may not be easy to go out and sell another house, but at least I have that possibility in my day.

I have a full-time assistant and I have a family and a household to support. This has been both a burden and an inspiration to me through these difficult times. As my income was drastically reduced, I had to make a number of budget adjustments, but I always felt it was very important to make sure I kept my employee. Imagine how tough it is on a person who relies on an individual person for their livelihood. I have seen many Realtors decide that they can’t afford their staff anymore. Is that a really wise economy? There is the saying, “If you don’t have an assistant, you are an assistant.” If you spend your time doing administrative jobs, when are you going to go out there and do your real job, which it to make deals? The temptation is really strong to spend a lot of time on administration since it feels like work. But it’s not our work. Not if we are really doing what we need to do.

When the market is so difficult, it’s really easy to decide any effort you make is useless and you might as well not try. But with an assistant to keep busy and a family to support, I went ahead and got out there and looked for deals. The key to success is to be there the moment the decision to buy or sell real estate happens. If you are back at the office filing your paperwork, how will you be there with the buyer or seller?

What if we were out in our neighborhoods helping people get to the truth about what they really could and couldn't do with their homes and providing them with achievable options?

Let me emphasize how we need to look at these graphs and charts in terms of your own property: if you bought a house in Highland Park 2 years ago, just because the average price went down 44% doesn’t necessarily mean that your own house went down that much.

This is the first of my end-of-year reflections on where we are and where we’ve been and why do we do this anyway?
I have lots of caveats about the following statistics. Note that the source is called Trend Graphics. These are generalizations, trends, an overview of what the market has done over a period of time.

For those of you who want a better understanding of how we got into this global economic mess, National Public Radio has several programs that have podcasts you can read, watch, or listen to that summarize and define a lot of the terms we see tossed around in the news today. They posit some non-accusatory and intelligent explanations both of how financial systems work and where things went wrong. I'm not saying I agree with every word, but I think it's well-balanced and worth absorbing. Knowledge is power. Check it out at:

This American Life

How Stuff Works:

Planet Money:

Help for Homeowners

As I was canvassing the neighborhood last week, I encountered a couple of people who said they were "upside down" in their mortgages, had tried to contact their lenders with no luck, and didn't know what else to do. Here at last is real information with phone numbers, websites, and rules gathered by the California Association of Realtors. 

Mortgage Workout Programs for Homeowners
The following information is intended for REALTORS® and homeowners seeking information on existing mortgage workout programs.  In general, the loan modification programs on the chart and consumer information sheets (see links below) are intended for primary residences only.
 ^.HOPE For Homeowners (H4H)

^.Countrywide Financial (Bank of America)

 

^.Citigroup, CitiMortgage

 

^.JP Morgan Chase & Co.

 

^.IndyMac Federal Bank, FDIC

 

^.Federal Government Loan Modification  (Participants include: Fannie Mae, Freddie Mac, Federal Home Loan Banks, Hope Now participants, Department of the Treasury, Federal Housing Administration and the Federal Housing Finance Agency, and Wells Fargo.)

 

Mortgage loan modifications typically are handled on a case-by-case basis. Homeowners having difficulty meeting their mortgage obligation or interested in finding out more about a loan modification program should start by contacting their lender. Prior to calling a lender or loan servicer, homeowners should have the following information available:

 

^.Loan number

 

^.Income information and documentation

 

^.Most recent mortgage statement

 

^.Bank statements

 

^.Letter demonstrating financial hardship

If you want help with this, or if you can't access the website or the links, call or email me and I'll either email or snail mail you the relevant information. NOTE: It is illegal for people to charge you a fee upfront for helping you. I am offering information as a public service only. The fewer foreclosures in our neighborhood, the better the neighborhood will stay.