Banks & Builders Leading Us Downward

I’ve been out with several buyers these last few weeks. All have been sophisticated internet shoppers with very clear ideas about what they’re looking for: views, space, upgrades, location. But at the top of everyone’s list is a great deal. Because when you’re buying in a market that isn’t so stable, you want to give yourself the biggest cushion possible, as things will probably get worse before they get better.

Why are they buying rather than renting? Various reasons, but usually it’s about control. They want to own the property so that they can decorate, landscape and upgrade it however they want. And they are often planning to stay in the property for years, which gives the market time to work itself out before they have to worry about it again.

My buyers are mostly folks from out of town, looking to relocate. They usually have 20% down, high credit scores and are coming to the table with plain old vanilla 30-year fixed loans. They’ve got so much to look at, it can really be daunting. So we focus on the best values, as in, homes offering the most bells and whistles for the least amount of money.

Grossly overpriced? We’ll never see it. But we’ll see lots of other houses. One couple looked at 30 houses per day for four days straight before making their decision two weeks later. If your house doesn’t stand out, we won’t even remember it.

I was particularly struck by how much prices have been slashed by new homebuilders. Talon Pointe in Somersett used to sell those beautiful little view homes on the ridge for $650K+… now they’ve scaled back pricing to the high threes, for a quality-built, panoramic view home in Somersett. Allegedly these prices are just above cost. I imagine Ryder is pushing onward to keep the machine going and finish out the subdivision. The neighbors can’t be happy, but what can they do?

 Toll Brothers has taken similar action at Dorado in Damonte Ranch. Where once, these beautiful decked-out duets sold for the high fives and up, now they’re starting in the high threes. I hear the guy who paid $800K for his highly upgraded special unit is furious, but what can anyone do? Markets go up and markets go down. Hopefully he’ll enjoy the property and maybe even retire there.

We saw a lot of empty houses. Judging by the dead bugs, ice cold temperature and little rodent poops, some had been vacant for a very long time. Many were in South Meadows and Northwest Suburban, but we also found them in the Old Southwest, Galena Estates and Caughlin Ranch. No neighborhood seems to be entirely immune.

Not a short sale! has become a badge of honor for any well-priced listing. We saw many short sales. Some were with agents who knew the bank and seemed to have the process all dialed in, others were with agents struggling to understand the process, and some were with experienced agents dealing with difficult, non-responsive banks.

After inquiring on several such properties, I’ve come to the conclusion that unless you have all the time in the world to wait for a response, it’s probably better to let the house go through foreclosure and back to the bank. Once the banks own them, they seem a lot more willing to make a deal.

So as foreclosure sales exceed resales, as 96% of standing inventory lingers on, and as banks reduce prices on their properties in the MLS, Centex Cyan sells 20 homes a month. The banks and builders are leading the way, along with the occasional smart seller who prices her home to move no matter what the market is doing.

We have a long way to go.

29 comments

  1. smarten

    Found this update particularly informative Diane [but viewing 120 house in 4 days?].

    I whole heartedly agree with following comment: “I’ve come to the conclusion that unless you have all the time in the world to wait for a response, it’s probably better to let the house [the subject of a proposed short sale] go through foreclosure and back to the bank. Once the banks own them, they seem a lot more willing to make a deal.”

    But here’s my question. What banks have you discovered that are willing to make REO deals BEFORE [and rather than] simply turning them over to their realtor[s] of choice so they can be marketed at retail [thus not being “good deals”] on the MLS?

  2. Allen Murray

    It is getting harder to qualify for a mortgage in this area. Not only are appraisers coming in low to cover their butts, but I hear underwriters are automatically knocking off 5% of appraised value to cover their butts. This is from one of the biggest mortgage lenders in our area. On the flip side, FHA is raising their local loan limits and jumbo limits are supposed to increase also. At least buyers are starting to look seriously again.

  3. Steve

    Couple of things: Eeww is that a Lexus in that picture? More Lexus’s (Lexi?) were bought with MEW in the last five years than any other vehicle. Toyota benefitted from the housing bubble too and played it right. Just like banks, insiders, originators, servicers, politicians etc.

    Allen: Mentions Jumbo limits, the only thing that this will do is allow mortgage originators to offload their crap paper to Freddie and Fannie. Get it off of their books and let the Fed insure it and the taxpayers cover the losses instead of the banks. If you think that there is any concern over the average person being able to refi from one jumbo product to another then sadly you have been mislead.

    Diane says: “Markets go up and markets go down” What has happened here is not simple market theory. This was a P.O.S ploy by the current administration to make themselves look better and make the populace feel better about themselves while individual rights are stripped away. NOT simply markets! Normal markets do not run away like this, and there is hell to pay down the road for what has happened in the last 10 years with the effects of 2 bubbles that now need to be defalated away.

    Yeah and did any of the so called wealth that was purported to be seen in the last five years with the housing bubble and the 5 years before that with the tech bubble get used in increasing the U.S. manufacturing base or other “stuff” that will make the U.S. more competitive in the global world economy? No.

    And now even my company is seeing effect of the “economic downturn” Everybody was greedy during this and almost everybody will pay dearly, well except for the big money center banks and brokers that will see to it that they get bailed out once again.

    Hmmph, sorry if this is too political, and I am not picking on anyone here. It has been a while since I have posted. There a lot of good commentaries here but it seems at times the discussion are getting too detailed. This situation is bad and will bemuch worse by 2009 or 2010 than the majority are predicting. Many of the contrarians that were being laughed at in 2005 and 2006 about their viewpoints regarding the housing bubble are now being proved as having been overly cautious in their outlook at that time.

    I could go on, but too long and windy already. You can keep wishing and hoping but economics, markets, reversion to mean and gloablism have come calling on the door and things will change more than we know. Some will say don’t overlook Human or U.S. ingenuity, yeah right all that has got us is richer bankers, people in over their heads on homes they cant afford and Trillions of worthless Credit Default Swaps, now that’s ingenuity alright.

  4. Allen Murray

    Steve, you definitely sound bitter. As you must realize, there is opportunity in any market. Many got rich during the depression, and I look at this adjustment as a good thing. Perhaps you should move to Canada????=)

  5. Steve

    Not bitter really, just calling them as I see them, this mess was ENGINEERED, some people made a lot of Money from this GS for example, both on the upside and on the downside, the U.S. real estate market was just a pawn in this new age, global, economic experiment.

    There are more ads right now by realtors etc. about now being the time to buy, this in spite of a very ugly macro economic picture, ugh!

    Well if you consider that this past week saw the largest increase in conforming 30 year rates in 14 years, yeah maybe that would make it a time to buy and also as you mention appraisals and PMI are getting tougher also to work with also.

    Anyways Diane again said it “banks and builders are leading us downward”, just like the led us upwards at a frenetic pace, it’s just that it is not the last 5 years of market trends that need to be worked off but more like ten to twelve. Some just are not realizing how far down these institutions will lead the markets.

    Again Diane stated “We have a long way to go.”

  6. Diane Cohn

    For the record, that Lexus was purchased in 2001 courtesy of a tax refund. It’s gonna have to last another 150,000 miles because there’s no way I’ll be purchasing a new car in this economic climate. Not unless I win the lottery.

    My theory about bank owned properties being easier to cut a deal on may be totally shot… I just attended an inspection today with another agent who said he’s got two of them going and that they are the most painful, difficult transactions he’s ever done. Why? Because the one title officer in charge of them all sits at a desk in Las Vegas with 87 of these files on her desk… they hire temps to fill in who really don’t know what’s going on, the HUD statements show up all wrong at closing, and the volume in the pipeline is staggering. The only way to get these through is to get on the phone with people every day begging and pleading for attention. Buyers will need to be patient, and agents working on their behalf will need to persist, persist, persist.

  7. GreenNV

    Diane, your “News From the Front” posts are invaluable for getting a feel about the real market out there. There ARE buyers out there, and your “get noticed or die” advice is something that needs to be learned by an awful lot of sellers.

    I’ve got to agree with you about the futility of pursuing short sales. The banks aren’t set up to deal with them, lenders aren’t agreeable to the extended lock-in periods for the buyers, and most of the short sale properties have other tax/mechanics/sewer/HOA or other liens attached. Best to let the forecloser deal with them and offer you clean title as an REO.

    I forget who asked the question or on what post, but the idea of getting into a bank’s pants to negotiate a sale after or concurrent with a TD, and before MLS listing, is very compelling. Hard to do in most cases where the loans have been sold off, but definitely an avenue that the smart Realtor should be pursuing aggressively. I’ve seen a few cases that have resulted in some pretty spectacular deals (Ridge Field).

  8. BanteringBear

    Diane posted:

    “Talon Pointe in Somersett used to sell those beautiful little view homes on the ridge for $650K+… now they’ve scaled back pricing to the high threes, for a quality-built, panoramic view home in Somersett.”

    That’s a decent haircut. I wonder how the neighbors feel about losing 40% of their equity 3 years after purchasing their dream home. Ouch. And we haven’t seen the worst of things. Once the recession is really hitting hard, those prices may be in the low $200k’s. A median price of $150k for the Reno/Sparks area doesn’t sound far fetched the way things are going. High unemployment and low wages will have their way in the end. Sad.

  9. smarten

    Green NV states “the idea of getting into a bank’s pants to negotiate a sale after or concurrent with a TD, and before MLS listing, is very compelling.”

    I agree, and urge Diane and Guy to exploit this ignored segment of the market.

    Right now the overwhelming majority of trustee’s sales result in the security reverting to the beneficiary. Banks already know this.

    Your job will be to educate them [based upon the data referenced in Mike’s prior foreclosure post] that they’d be doing well indeed to realize 80% of the principal amount outstanding at the time of sale.

    So if you can get to the foreclosure officer’s bank contact person prior to sale and negotiate a sale [at 80% of the bank’s mortgage] contingent upon the property reverting to the beneficiary, I think you’ll be light years ahead of the game.

    Now instead of waiting for clients to come to you [to preview 120 homes in four days], I suggest you be pro-active. Search out the properties yourselves and then offer them to your pool of interested purchasers right here on this blog. I think you’d be surprised at the response.

    And for those who think median prices are going to plummet by 50% or more from where they are today, remember they won’t drop [appreciably] until sales volume increases markedly. But by the time this occurs, we will probably have already seen the market’s bottom so beware.

    More on this after I see Guy’s sales figures for February.

  10. BanteringBear

    Diane posted:

    “Talon Pointe in Somersett scaled back pricing…allegedly these prices are just above cost.”

    Maybe this is true, maybe it’s not. Regardless, they, as well as many other builders, will continue to build and sell at current market prices-even if it proves to be at a loss. They can only pray that the market improves. They don’t have many options and just might build themselves all the way into BK.

  11. Martin

    I’m not sure that I understand that getting an REO house for 80% of the principal amount owed is necessarily all that great of a deal. I suppose it depends on what the original financing was and when the original loan was made. If we are talking about a house that was 100% financed in 2005-06, then we are talking about a 20% haircut from then. Is 20% off a cheap money frenzied overvalued and overappraised house from 2005 such a stunning deal? Just because some guy with a nothing down interest only loan paid $400,000 for an overpriced $300,000 house in 2005, doesn’t mean that $320,000 is a great deal today, does it?

    I am not as smart as some of the posters here, so maybe I don’t get it. Sorry if I am way off base here.

  12. debo90

    Isn’t the homeowner the key person in any short sale? They realize they can’t (or don’t want to) continue to pay the mortgage and proactively pursue a buyer and a settlement with the note holder. Unfortunately, whether it’s pride, shame or looking for free housing for 120 days+, most homeowners do not call their mortgage company and try to work out a payment plan or pursue a short sale. And, sometimes, there isn’t a better answer than walking away.

    I don’t believe the bank can negotiate with potential buyers prior to the drop dead date because the default can be cured right up to the day before it goes to the courthouse steps. Blink your eyes and that’s how quickly a lawsuit be filed on a “pre-negotiated” foreclosure scenario that went bad. I understand the banks/lienholders take too long to make a decision, but I’m guessing that will improve as foreclosures continue to increase. Systems will develop and personnel will be trained to cut losses and move on.

  13. DERRICK

    “there’s no way I’ll be purchasing a new car in this economic climate. Not unless I win the lottery”

    And to think I just bought a 2008 infiniti g35x 3 days ago!

  14. Sully

    One thing though, the builders are not in denial anymore. The banks (et al) will have to follow soon, or face bankruptcy themselves. Congress sure isn’t going to help fix things, as always they will find a way to make an even bigger mess.

  15. Darrin

    “The banks and builders are leading the way, along with the occasional smart seller who prices her home to move no matter what the market is doing”

    This is were the problem lies. I am out there looking. I don’t want a house in Somersett, Double Diamond, or Spanish Springs, so I sit and wait for more smart sellers. So far they are few and far between. I truly feel bad for the the seller who bought a couple of years ago and is looking at a big loss, but I am sick of seeing sellers who bought a decade or more ago, and are holding on tight to 2005 prices. The longer they hold, the more they will loose. There are lots of us out here just waiting for them to figure it out.

  16. Reno Ignoramus

    Darrin,

    The people you refer to are not really sellers. These are the people who are taking up space on the MLS, may have a sign in the yard, but they are not sellers. The percentage of people who happen to have their house listed on the MLS who are really sellers is pretty small.

    Delusion runs deep. As does denial. It is really quite fascinating to me to observe how many people just don’t get it. They think we are in a downturn that will soon be over, and then prices will return to 10% annual appreciation. Why else do the owners of the 40% of vacant listings continue to cling to their dream on prices? They think 2001-2005 was normal. They apparently have no grasp of the fact that 2001-2005 was the biggest bubble in history. The biggest party ever. The biggest party is followed by the biggest hangover.

  17. Reno Ignoramus

    You want a story from the front lines about REO and the bizarro world of lenders?

    A colleague of mine, through a personal contact, became aware of a house in South Meadows that has gone back to the bank. The bank is owed $349K. My colleague, through a different personal contact with the lender, was able to identify the Person in Charge (the “PIC”)of the REO at the bank. My colleague offered $200K. Too low you say? An insult to the bank? Why did my colleague offer only 58% of the outstanding loan balance?

    Here’s why: the house has been gutted. The former debtowner, before he left and as the sherrif was coming to tell him that he no longer was the “owner”, took out all the cabinets. And all the granite. And all the flooring. And all the kitchen and bathroom fixtures and appliances. And the furnace. And the air conditioner. And the hot water heater. The automatic garage door openers are gone, and most of the walls have holes in the sheetrock about the size of a small slegehammer. It is known that the former debtowner drove a motorcycle. It appears that he had taken to changing the oil on his bike on the living room carpet. Which needs to be replaced.

    The former debtowner, a local small contractor, was last believed by the neighbors to be heading for North Carolina, where, reportedly, he has a girlfriend.

    So what was the response by the PIC? That the offer was way too low. Not even worth considering. So then my colleague revised his offer to $280K, but the bank has to do all the repairs to make the property habitable. The response of the PIC? The bank is not interested in putting any money into the property. So my colleague then asked the PIC: what do you want? What is your price? The response? The bank will agree to take $280K, but my colleague takes the property “as is”.

    Folks, we do, indeed, have a long way to go.

  18. BanteringBear

    In response to Darrin’s and RI’s posts: attached to every hideously overpriced listing is the name of an incompetent, greedy realtor. These listings would never even see the light of day if not for their ignorance. Now I’m not talking about those listings which are perhaps a tad on the bloated side. I’m talking about the ones priced at a 50-100% premium. These should never even make it to the mls, unless they are FSBO. I often wonder why realtors, as well as their brokers, would even want to be associated with such nonsense. It boggles the imagination.

  19. Martin

    There are more and more stories coming out now about owners trashing houses they are being foreclosed out of. Sometimes its just for vengenace, and sometimes its for profit. There is actually a thriving underground market now dealing in copper wiring and pipes (older houses) taken out of vacant REO houses.

    I think the banks are totally unprepared for what’s coming at them. They just don’t have the right experienced people making decisions. They are going to have to develop an expertise in this area very quickly.

  20. smarten

    In response to RI’s and Martin’s stories,

    It’s unlawful in California to intentionally waste a lenders/secured debtor’s real property by removing the amenities described/trashing the walls/carpets in retaliation. I’d be surprised if it’s not also unlawful in Nevada. But I guess local lenders don’t think about this just like they don’t think about going after the borrower for a deficiency judgment.

    I find RI’s story about the bank demanding $280K as is for a trashed home when the bank’s reversionary bid at trustee’s sale was $349K, interesting for a different reason. $280K “coincidentally” represents a 80% of the $349K the bank is owed. Wasn’t Mike recently telling us that according to the stats he has been monitoring concerning resales of foreclosed properties that they seem to sell for 80% of what’s owed?

    So here you have another example of the principle stated. If you’re purchasing a REO in as is condition, don’t offer more than 80% of what the [institutional] lender is owed. Although you probably should offer less, I’m sensing a trend that the magic number will probably be this 80% number.

  21. Reno Ignoramus

    Smarten I believe it is unlawful in Nevada also. I highly doubt, however, that the bank is going to chase this guy to North Carolina.

    It was not a coincidence that my friend’s second offer was 80% of the outstanding debt. He did that on purpose, as he thought that would be a fair price for the property in good condition. (My thought is that it was too high, but that’s just my .02.) It is an absurd price to pay for the property in the condition it is in now however.

    It will be interesting to watch this property and see what the bank does with it. Right now, it remains trashed, and is not listed for sale.

    Also, how would you like to be the neighbors wondering what the eventual next resale price will be?

  22. Sundevil

    My wife and I spent several months looking at houses in the South Reno areas. I started reading this blog right before when I was researching home buying in Reno. First thing, it’s really informative, well put together and has a good “peanut gallery” of commenters. Congratulations to Diane and Guy on one of the best blogs in Northern Nevada.

    Since we’re about to close, I figured I would post our experiences in home buying in Reno.

    Based on our experiences, Reno Ignoramous’ friend got further along in the “try to buy a house from the bank” game than we ever did. We couldn’t even get responses to our offers. Maybe it was our realtor didn’t have the connections to the PICs, but based on what we experienced, banks are not all that motivated to sell the houses they are holding.

    Our experiences were also that the new home builders in Double Diamond/Damonte Ranch are not will to deal – at all – not one cent lower than the “special” of the week that they are offering. Also, except for Cyan (which is a zoo), there is almost no one looking at new homes in South Reno based on our experience of never seeing another person at the models when we were there – and we visited pretty much every development multiple times and at different times.

    However, there are quite a few buyers picking over the resale homes in South Reno that are available, are reasonably priced and aren’t short sales. At open houses for these resale homes, there was always multiple other parties of people looking at house when we were there. Always. And, if the house is priced appropriately, houses are selling. We missed opportunities on a couple of houses because we moved too slow.

    There really seems to be two levels of houses for sale. The first is – People that think that houses never stopped appreciating – there are some of those that have been on the market literally since 2005. The second is – people that want or have to sell – and these houses really are moving.

    We ended up getting a pretty good deal on the house we are closing on. However, if the market tumbles into oblivion or shoots off into the stratosphere, it doesn’t matter to us. We bought a house to make a home – and we only spent what we could afford.

    Oh, and for what it’s worth – there is still 100% conventional financing out there. It just takes excellent FICOs and W-2 documented income. We actually made the decision to go with 100% financing because the rates are so low that even paying PMI, I still do better to leave my money invested were it is than to sink it into a nonreturning asset.

  23. BanteringBear

    It appears as if Tahoe sellers are a little more stubborn and delusional than those in Reno. Now, I know Tahoe is a different market but it is still not immune from fundamentals. Further, the outrageous hyperinflation in prices had everything to do with rampant speculation, and nothing to do with real demand.

    I would guess that many of the Tahoe speculators have a little more staying power, yet I suspect that many will begin to cut their losses and bail out (sell at a loss) in order to end the frivolous cash burn. With foreclosures now increasing in Tahoe City, Truckee etc., intelligent people understand that the ridiculous prices aren’t coming back. It’s going to take some time, but I imagine a day will come when those little cabins are once again available at 150 per square foot. After all, they were plentiful as recently as 2001.

  24. smarten

    Interesting observation BB.

    Although I don’t necessarily agree with all of your conclusions, I think you should share them [come to think of it, isn’t that exactly what you’re doing?] with our friends from Incline Village; Lexi and Mark. You know the duo who assert that the high end of the market is going bonkers because SFR sales and the median price [based upon 10 or so sales/month] have both increased this last year.

    But of course if you take the position sellers of high end housing don’t “need” to sell and aren’t saddled with mortgage debt [positions I personally don’t share], maybe they’re right?

  25. SkrapGuy

    Sundevil, thanks for the post. Would you be kind enough to share with us the name of the lender that is still making nothing down loans?

    Thanks!

  26. BanteringBear

    Smarten:

    My comments regarding Tahoe are completely unscientific and are based entirely upon my observations of current homes for sale, and my memories of listings dating back a few years (I like to window shop). I don’t see a lot of capitulation on price which is why I drew my conclusions.

    The high end in Tahoe may very well be going bonkers, with the median increasing as a result. I have no idea if this is the case. But to me, it is completely irrelevant. In fact, I believe throwing out the top and bottom 10 percent of sales might help us get a more accurate glimpse of current prices, and where they might be headed. After all, when some hedge fund owner purchases a $20 million lake front estate, it’s an anomaly and should be treated as such.

  27. smarten

    BB –

    I too thought, as you suggest, that “throwing out the top and bottom 10 percent of sales might help us get a more accurate glimpse of current prices and where they might be headed.”

    But then Lindie steered me straight [BTW, where’s Lindie?]. Taking out the highs and lows has no affect whatsoever on the median [sales price]. Rather, they end up canceling each other out.

    The anomaly to me is that just like Reno, less than 4% of Incline Village [“IV”] and Crystal Bay [“CB”] listings are actually selling. In fact for the first five weeks of this year [I don’t have more recent numbers], sales in IV and CB are actually down some 40% compared to last year!

    Until sales increase, median prices and DOMs are meaningless; whether in IV/CB or anywhere else.

  28. BanteringBear

    Silly me (decaf not as good as advertised). I’m now remembering how the median is calculated, so yes, throwing out the top and bottom ten percent would result in ZERO change.

    Nonetheless, when only the high end is selling (funny money spigot OFF) the median is no doubt skewed higher as those bottom sales have dried up, as only those flush with cash remain in the buying pool. Commence the crushing inventory overhang, with an emphasis on the lower end.

  29. Sundevil

    SkrapGuy –

    We actually found three lenders, fairly easily, that are doing 100% loans – so I don’t think my list is inclusive of all lenders who may still be offering 100% mortgages.

    USBank is currently doing 100% Conventional and JUMBO loans. JP Morgan Chase is offering 80/20’s. And, one of the local credit unions is offering 100% conventional loans.

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