According to RealtyTrac® foreclosures across the country are up over 55% in the first half of 2007. read That’s one foreclosure filing for every 134 U.S. households for the first half of this year.
The numbers are more startling for Nevada. Nevada reported a total of 25,208 foreclosure filings on 14,687 properties, more than double the number of foreclosure filings reported in the previous six-month period and nearly triple the number reported in the first half of 2006. This equates to one foreclosure filing for every 40 Nevada households.
BanteringBear
The coming tsunami of foreclosures will dwarf the current wave. These are the properties which will set the new comps, not those of the greedy, ignorant sellers with their fantasy prices. Imagine these terminal mls riders’ horror when the foreclosure next door sells for a few hundred thousand less than they’re asking. Whether they like it or not, that IS the new price. There is no need for capitulation on the part of sellers in order to get back to realistic pricing, as banks will happily unload at bargain basement prices, leaving the greedheads in the dust.
NAS
Guy,
Reality does bite. This is like a root canal without the pain killer.
Fasten your seat belts-turbulents ahead.
Mike Van H
Whoah one in 40? That’s pretty intense.
Reno Ignoramus
BB is right on. This is the first wave. This is the all the Voodoo crap loans made in 2006 to subprime borrowers. The Walking Dead who got a loan because they could fog up a mirror, and who defaulted after making one payment. The Walking Dead who were the last gasp of the REIC’s effort to keep the party going. We still have all the nothing down I/O Voodoo crap loans made in 2005 to Alt-A and good FICO borrowers who will tire of paying the $500,000 loan on their $375,000 house. There will be no quick execution. This market is going to bleed to death drop by drop.
We are years from the bottom. Years.
Marie
So, given all the bad news and predictions that prices will keep dropping, what are you suposed to do if you’re a young successful person, keep renting? Wait till 2010 to buy? I grew up dreaming of my own home, but now I wonder if I’d be a fool to buy?
Reno Ignoramus
Marie:
2010 is all of 3 years from now. If you are young, as you say you are, I suggest you sit tight for at least 2-3 more years. You can rent a nice house for a fraction of what it would cost you to buy today. Save the difference for a good down payment in the future. Prices today are still way out of whack to any traditional fundamnetals. For the median household income to buy the median priced house in Reno today, you have to spend about 6 x income.
Consider this:
Every month, 92 out of every 100 houses on the resale market do not sell.
There are YEARS of inventory in Reno-Sparks.
35% of all MLS inventory in Reno-Sparks is vacant.
The developers continue to build because the alternative for them is to cease to exist. Resellers simply cannot compete with developers in terms of concessions and incentives.
Foreclosures are mounting. The banks will not hold this REO forever. They will move it for whatever they can get.
How can any sensible person conclude the bottom of the market is near?
Marie, I am not anti-homeownership. I own two houses. But I am anti- home ownership at unsustainable prices that came about because of way too many people with Voodoo liar loans bidding up prices because “you can’t lose money buying a house in Reno.”
Sit tight. You will be rewarded for your patience.
Lindie
Marie, as a first-time buyer, unless you can buy a house at 3 X your income, put at least 10% down, and finance with an amortizing loan, yes, you would be a Fool to buy now. Now if you have bought into the REIC BS over the past several years, the idea of having to earn $100,000 a year to afford a $300,000 house is going to sound very strange to you. The REIC will suggest to you that if you make $100K, you ought to buy for at least $600,000. The realtors and the mortgage people and the title co. people all make a lot bigger commissions that way.
smarten
Marie wrote: “what are you suposed to do if you’re a young successful person, keep renting? Wait till 2010 to buy?”
I have a different recommendation Marie.
With all the vacant listings and what is rapidly turning into a rental housing glut, I say rent with an option to buy.
But here’s the kicker – don’t lock in the sales price today. Instead, incorporate a mechanism that provides for determination of that price sometime in the future – for instance, anytime up to three years from now. Something like you pick an appraiser; the seller picks an appraiser; and if they can’t agree amongst themselves on fair market value when you exercise the option, it is determined by a third party arbitrator.
If prices continue to drop you’re protected. If they haven’t dropped enough to your liking, no harm no foul – simply walk away. If prices [or long term mortgage rates] start to rise and you get scared, you can exercise your option prematurely [anytime of your choosing within the three year option period].
I understand this concept may be foreign to many realtors or sellers but think about it for a moment. What good is it for a seller to enter into an option to sell his/her property at an inflated unrealistic stated price? If fair market value is lower than the stated price three or more years from now, what makes the seller think the buyer is actually going to exercise the option?
Warning. Options to purchase are very, very difficult to judicially enforce. Typically, they don’t include all the terms and conditions necessary to actually buy/sell rendering them fatally “uncertain.” So make sure you have a competent real estate attorney [and NOT a realtor] draft your option.
Three more recommendations. First, include a provision that you are responsible for payment of the landlord’s real estate taxes [this DOESN’T mean you have to pay his/her taxes in addition to fair market rent. Just reduce the amount of rent per se to reflect the taxes you are responsible for paying]. This way you may be able to claim a real property tax deduction at the end of the year [although I am not 100% certain on this – check with a tax professional].
Second, make sure you record a notice of existence of option to purchase the property. If the world is not on notice of your interest in this property and your landlord decides to sell it to someone else, your recorded interest will take priority [although it will not take priority if your landlord stops making payments to his/her lienholders of record when you record your notice, those lienholders will have to give you notice of any default or sale (providing you with sufficient opportunity to protect your interest)].
Third, don’t think you have to make inflated rent payments applying some amount towards your down payment. A one time $1 or other fee in addition to the lease represents adequate consideration for your option. But of course if you want to pay something more each month and have the excess applied to your deposit, you can [although you can accomplish the same if not more by making an equivalent payment each month into a segregated savings account IN YOUR NAME]. But remember if you’re paying something in excess of fair market rent to your landlord and you never end up exercising your option, you’ve basically thrown away the excess.
Good luck Marie!
Gina
Guy, how does this break down between Vegas and Reno? Got any data?
Smart Money
I wonder if Diane still thinks we are at a bottom? Or has she changed her mind?
NVMojo
Well, we were going to buy this summer but I think we are going to wait until next year now.
So now I have to spend the next 4 weekends looking for a decent rental as we are rather tired of the incompetent people running our apt. complex over in Sparks, lease is up.
I like the advice listed above about a lease option deal and what things are important. Thanks for posting. It may just come in handy for us this month.
In the meantime, let’s eat popcorn!!!
BanteringBear
A lot of the properties in foreclosure are fraudulent deals in which the “owners” never intended upon living in, let alone paying for, the homes. With all of the cash back at closing deals, straw buyers, bogus appraisals, etc., it’ll be years before the authorities, and the industry as a whole, make sense of what has happened. The scope of this bubble is absolutely breathtaking. The following is a link to an article which highlights a scam in the Atlanta area. It’s a fairly decent, albeit short read for anyone interested in understanding how and why prices got so out of hand.
http://tinyurl.com/2djdqb
Lindie
But BanteringBear, it’s different here. This is Reno, and we are special. Surely there were no bad flippers here. Surely there was no fraud here. Surely there was no collusion here. NO sir, not here. Reno is a Hidden Jewel, and nothing like that happened here. We are immune to all those things here, and our market and foreclosures are different.
Sean
Is there anyway to tell the percentage of homes coming on the market that are REO, short sales, forclosures, etc. From the listings i get sent daily it seems that 40-50% of the new listings in the area’s i’m watching are either a short sale or bank owned property.
Grand Wazoo
From today’s NY Times:
Keep Your Eyes on Adjustable-Rate Mortgages
By DAVID LEONHARDT
Published: August 1, 2007
Two years ago, when the housing market was roaring along, I called a mortgage broker on the West Coast and asked for some help. I told him that I wanted to interview some recent home buyers who had taken out an adjustable-rate mortgage — one of the big drivers of the boom — and he was nice enough to pass along a short list of names.
One of the buyers was a business consultant in her 40s. She told me about her charming new house and the fact that she expected it to be a good investment, even if it had cost a bit more than she wanted to spend. Then I asked about her adjustable-rate mortgage.
“I don’t have an adjustable rate,” she said.
Confused, I called the broker again to see what was going on. A little while later, I got a sheepish e-mail message from him explaining that her loan did, in fact, have an adjustable rate. She just hadn’t realized it.
Now, I think this was an honest misunderstanding in which the broker believed that he had explained the terms of the loans more clearly than he had. And the mortgage ended up being a good one for the buyer anyway: she recently decided to move to a new area and sold the house before her rate jumped.
But the fact that this confusion could have occurred neatly captures the ridiculous state of the home buying business in 2005 and 2006. The fallout is going to last a long time. House prices will need years to work off their irrational values, more people are going to lose their homes and Wall Street can probably look forward to some more nasty surprises.
In fact, the mortgage meltdown has arrived at something of a turning point. So far, most of the loans gone bad were among the worst of the worst. Some were based on outright fraud, either by the lender or the borrower. In many cases, buyers were never going to be able to make their monthly payments and were instead banking on a rapid appreciation in home values.
But the pool of people falling behind on their house payments is starting to widen beyond this initial group, and adjustable-rate mortgages are the main reason. Starting in the spring of 2005, these mortgages began to get a lot more popular, largely because regular mortgages no longer allowed many buyers to afford the house they wanted.
They turned instead to a mortgage that had an artificially low interest rate for an initial period, before resetting to a higher rate. When the higher rate kicks in, the monthly mortgage bill typically jumps by hundreds of dollars. The initial period often lasted two years, and two plus 2005 equals right about now.
The peak month for the resetting of mortgages will come this October, according to Credit Suisse, when more than $50 billion in mortgages will switch to a new rate for the first time. The level will remain above $30 billion a month through September 2008. In all, the interest rates on about $1 trillion worth of mortgages, or 12 percent of the nation’s total, will reset for the first time this year or next. A couple of years ago, by comparison, only a marginal amount of mortgage debt — a few billion dollars — was resetting each month.
So all the carnage in the mortgage market thus far has come even before the bulk of mortgages have reset. “The worst is not over in the subprime mortgage market,” analysts at JPMorgan recently wrote to the firm’s clients. “The reason for our pessimism is that loans originated in late 2005 and all of 2006, the period that saw peak origination volumes and sharply decreased underwriting quality, are only now starting to reset in large numbers.”
It isn’t hard to figure out what will happen when buyers who were already stretching to afford a house are faced with suddenly higher payments. Many will manage. They will cut back on other spending, or they will refinance their mortgage and get a new one they can afford. Others, like the buyer I interviewed two years ago, probably planned all along on selling their homes after a few years. For them, the artificially low initial rate was a no-lose proposition.
But there are also likely to be a shocking number of people who lose their homes. From 1994 to 2005, some 3.2 million households were able to buy homes thanks to subprime mortgages or other such loans, according to an analysis by Moody’s Economy.com. About 1.7 million of them will probably lose their homes to foreclosure when all is said and done. More than half of the homeownership gains from subprime mortgages will be erased.
The flood of those homes onto the market will further depress house prices. So will the newfound conservatism of mortgage lenders, which will make it harder for tomorrow’s buyers to get a mortgage. (Thank goodness.) The S.& P./Case-Shiller index of home prices covering 10 major cities has fallen about 3 percent since its peak last summer. Two or three years from now, JPMorgan predicts, the index will have fallen 15 to 20 percent. Adjusting for inflation, the decline will be worse.
The big unknown is whether the housing bust will cause a recession or a bear market. Most people who have looked closely at the mortgage market argue that the answer is no and that the damage will be contained. Subprime loans still make up a distinct minority of the mortgage market. Over all, only 3.4 percent of mortgage holders are currently behind on their payments. And as Victoria Averbukh, a former mortgage analyst at Deutsche Bank now teaching at Cornell, points out, “The housing market is still a limited portion of the U.S. economy.” Consumer spending has slowed recently, but is still fairly strong. Corporate balance sheets and the job market seem fine.
Rationally, the argument for optimism is pretty compelling: the economy’s strengths do look big enough to overcome its weaknesses. Yet even many of the optimists confess to an uncomfortable amount of uncertainty. There has never been a real estate bubble like the one of the last decade. So it’s impossible to know what the bust will bring, especially when there are still so many mortgages that are about to get a lot more expensive.
2sleepy
What do you guys think about the impact of this on other segments of the economy? I personally know several (otherwise rational) people who have spent the last 7 years buying cars, boats, furniture, doing home renovations, landscaping, etc. all with their ‘equity’. Maybe I’m the only one with such stupid friends, but I tend to think this is a broader problem and well…if I owned Home Depot Stock right now I think I would sell it.
smarten
I submit there’s more to concern yourselves with than simply the home mortgage debacle.
It’s called secured real property taxes.
Now I’m no expert in Nevada ad valorem taxation but it’s my understanding real property taxes are supposed to be based upon some percentage of assessed valuations [my understanding is up to 3% yearly]. The problems are:
1. Those valuations don’t adjust yearly;
2. Assessed valuations are nowhere near their real valuations; and,
3. The percentage of valuation for tax levying purposes is no where near 3%.
Instead, valuations are no where close to reality; they are “adjusted” every 4-5 years; and, the percentage of valuation is artificially hovering at about 1%.
Given it has been close to 4 years since assessed valuations for Washoe County last adjusted, I think the next adjustment is just around the corner.
Even at today’s “depressed” median prices, current valuations are substantially higher than 4 years ago. Consequently the next time assessed valuations adjust, they’re going to increase; and, markedly!
To make my point, take nearly any property on the MLS and determine its assessed valuation for ad valorem tax purposes. Now compare that value to the property’s asking sales price. I’m betting you’ll find a very large discrepency.
So what does this mean to you the real property owner? Real property taxes for the entire county are about to increase big time [I’m guessing 100% or more]. And once they increase, property owners are going to be stuck with the consequences until the next readjustment 4 or so additional years down the road [even if property values decrease during this period]. And unlike your friendly financial institution, Washoe County will not be so accommodating to “short” the amount of taxes you owe.
Although no one likes more taxes, they can be rationalized when they’re based upon the equity we hold in real property. But if that equity depreciates while our property taxes are increasing, the effect becomes identical to the AMT that bit so many dot.comers when they exercised stock options; declared the phantom gain; and then chose to ride the market downwards thus losing all of their equity.
Yes, events are going to get quite interesting.
Reno Ignoramus
2sleepy, we are all watching history in the making. Up to now, every housing downturn was caused by a regional or national recession. This one is occuring in the midst of (still) strong employment numbers and a (still) good economy. So far. The question yet to be answered: will there be a recession that is the result of, and not the cause of, a housing downturn?
Truly we are where we have never been before. Never before in history was so much cheap easy Voodoo money handed out to so many unqualified to enbale them to buy houses they could not afford. History in the making. Right before our eyes.
2sleepy
oh yah… forgot to mention, I was in Northern California last week, and reading a local newspaper from Vallejo. (I worked in local govt there for about 18 years before moving here) anyhoo..they are talking about laying off 8 cops and 8 firemen citing a 9 million dollar budget shortage due to “slower than anticipated development”.. That city always did spend money like a bunch of drunken sailors; I’m sure their budget was predicated on the growth they enjoyed 2 years ago. Which brings me to another issue; has anyone noticed that cities like Vallejo which were not very popular before the housing boom seem to be more sensitive to changing market conditions than places in Nor Cal like Marin or Napa?
2sleepy
I thought some of you might find this interesting:
http://www.oftwominds.com/blogjuly07/housing-black-swan.html?ref=patrick.net
Rory
Lindie, Reno Ignoramus and BanteringBear:
I understand you feel the housing bubble is only its early stages but do you have to sound so giddy? Not everyone that’s losing equity is a flipper or speculator so you might want to refrain from cackling as peoples dreams vanish into thin air.
Being a real estate bear is one thing but to seemingly root-on a collapse is borderline sadistic!
Reno Ignoramus
For all of Reno-Sparks, there are today 162 SFR listings in the $500K-$550K price segment.
Here’s the score:
Price Reductions: 8
Pending Offers: 3
So 5% of the listings have a price reduction, and 1.8% of the listings have a pending offer. Yes, 1.8%. Ugly. If those 3 pendings actually close, that is 54 months of inventory in this price segment. That is 4.5 YEARS of inventory. Very ugly.
Over the past month, inventory numbers have dropped a bit, as sellers just give up and take their houses off the market. But the pendings:listings ratio has been worsening. We were at about 9:100 for quite a while. The ratio appears to be deteriorating.
These are not my numbers. You can look them up. They are what they are.
SkrapGuy
Rory your post causes me to wonder. Is it going to be better to watch this market meltdown over the next 5-6 years, drop of blood by drop of blood, foreclosure by foreclosure, short sale by short sale, auction by auction, or is it better to actually root it down quickly and get the damn thing over with? Which will inflict the least pain?
Interesting quandry.
Rory
SkrapGuy:
I’d rather it happen all at once. It’s like ripping off a bandaid, right? But I’m a renter so I’m waiting for some type of confirmation that we’ve reached a point stable. Whatever that may mean….
Rory
((((excuse my poor grammar in the above post. short term dyslexia.))))
agaunv
So in one aspect this market will unwind more quickly than you might think. Wells just raised their Jumbo rate from 6 7/8 to 8 today, another large lender is backing out in contracts in progress that have not yet been funded, and there is even rumour that some lenders/leinholders are starting to call loans.
A fed rate cut will NOT revive this market, it is going through a cycle, cycles take their time.
Regrettably a hell of a lot of inventory will be left and then watch the realestate market get REPRICED just like is happening in the markets at this very moment.
Yeah come to think of it RE has been priced Marked to Model not Mark to Market.
And all we have are greedy bankers and politicians to blame!
agaunv
And when literally masses of people are being evicted forceably who will they blame? Will it be the loose fisted bankers and regulators that played the game of, let’s sell them something that they cannot afford, we’ll make a killing in the beginning and a killing in the end too?
NO: They well say that the buyers are at fault, you should not have taken that loan, shame on you.
I BET: That eventually that this will get so bad that families will be broken up as Daddies and Mommys that wanted to give their children a home are hauled off to the local county jail (aka debtors prison) yes it is only a matter of time. Watch, Wait, See!
2sleepy
Well said Aqaunv, I’m not sure many people even consider the implications of a foreclosure on their future lives. It seems that in the past 20 years everything we do is affected by your FICO, employers regularly pull credit reports, your car insurance rates are at least in part determined by your FICO, not too many landlords will rent to you without a credit report.. What’s going to happen to these people? Will we have whole families sharing a room in an extended stay motel? And you are right, they are the ones who will be blamed.
Rebecca Despain
I honestly can’t believe the joy I feel from these postings. As a home owner who no longer lives in Reno, but still own one that I wasn’t able to get rid of, what makes any of you think that the end will ever happen? There is not anything that is bringing people to Reno, and a lot of people are leaving because the economy sucks. Houston is the prime example of what happens when the economy busts and the housing bubble busts…it was over 30 years ago when Houston became a ghost town, and it still hasn’t bounced back. I predict that is where Reno is heading. A ghost town.