(c) copyright, View from Silicon Valley, 2008. All
rights reserved.
We couldn't resist commenting on the real estate article
on the cover of today's local paper. (As usual comments and emphasis added.)
* * * * *
Renters Julie Herning and her husband Oliver have been trying to buy a home near San
Jose's Japantown since February. With a slow housing market, and with enough money for a healthy down payment, they figured
they finally had a shot at owning a piece of property.
What they didn't expect was the competition - so fierce that
they've been outbid on four houses priced around $500,000.
(Kids, when they're still bidding over list price, even the foreclosure /REO market
is, by definition, still speculative.)
"It's kind of crazy," Julie Herning said. "One person I called said I would have been
the 13th offer on the property."
Bidding wars have remained common in high-priced places like Cupertino and Los Altos,
where stellar school districts are the big draw. But with more than 900 houses for sale in Santa Clara County for $450,000
or less, many home buyers assumed that market was soft and are shocked to find themselves outbid on foreclosed, bank-owned
properties in this price range.
"The REO market is cooking hot right now," said Jason Chan Lee of Intero Real Estate,
who has numerous clients trying to buy "REOs." The term refers to "real estate owned" by banks and other financial institutions
that have foreclosed on the properties.
Banks eager to unload their REO inventory - which forms a large
chunk of the cheapest houses for sale in the county - have been lowering the listing prices. It's become common to find
bank-owned houses in South San Jose priced at roughly $400,000 (a
cash-flow-positive rental would need ~$4K/month even at that price. Even using 135 gross-rent-multiplier (GRM), you
need nearly $3K) that last sold in 2005 or 2006 for $600,000 or more,
for example. (When the cash-flow-positive rental needs $6K /month, 135
GRM means you need nearly $4,500.)
Editors' note: For $4K per month, you can
rent a nice Cupertino or Los Altos house with an estimated sales price of $1.7M. Why would anyone pay $4K /month for a smaller house after it sold for $400 ort $500? For crying out loud, doesn't anyone do arithmetic
these days?
Spurring buyers' interest:
Lower prices
have helped spur buyers' interest in bank-owned homes, especially because "regular" sellers generally have not brought
their asking prices down to meet the banks' prices. ("YET!") Also, trying to buy homes in "short sales," another option for entry-level buyers, has proved frustrating,
time-consuming and often fruitless for many buyers. (Said
another way, sellers believe "it's different this time." On the way up, the latest comp always set the
market price. However, on the way down new comps will magically become meaningless to prospective buyers --and
appraisers -- and loan officers.)
A short sale occurs when a mortgage lender gives approval to
homeowners to sell for less than they owe on their mortgage in an attempt to avoid foreclosure. The trouble is, lenders often
take months to approve the transactions, the foreclosure happens after all, and the property becomes an REO. (So why would anyone buy on a short sale if the property usually goes to foreclosure and gets even cheaper?)
With more demand for REOs, multiple offers abound, Lee said.
"It's a secret nobody knows," he said. "You have to write a
full-price offer. If you want it, everybody wants it." (So
far... we're still early in the ARM /Option-ARM /Interest-Only reset game. Not to mention layoffs popping
up here and there.)
The competitive landscape has discouraged the Hernings, who
thought they'd have an easy time buying because "all you hear about is 'Oh, the market is terrible,' " Julie Herning said. (They're right. It is terrible.)
"We had no idea we'd still be sitting here going, 'What's going on? Are we going to
find a house?' "
As with "regular" listings, it's the bank-owned homes in the best condition that are
most likely to attract a flood of offers. A bank-owned three-bedroom home for sale on Allegro Lane in South San Jose, for
example, has new kitchen cabinets, a stainless steel dishwasher, and pristine Pergo floors, with views of downtown San Jose.
It's listed at $429,500, and got five offers after only two days on the market, said listing agent Peter Carey of Realty World.
But not all REOs are
as inviting. A few blocks away at a three-bedroom bank-owned house on Harmony Lane listed for $389,900, dirty water is stagnating
in the backyard pool, unfinished construction remains in the family room, and a bedroom has been painted haphazardly in a
deep-red color. (Ironically, if "nobody" wants one that needs
work, you might be able to get it down to a price that makes it the only "deal" on the market. Eventually,
we won't be the only ones thinking this way...)
One San Jose resident, a mobile-home owner who has been looking
for a house since February with a budget of up to $550,000, bid unsuccessfully on several short sales and half a dozen REOs
before getting a bank-owned Evergreen house for $540,000 that was listed at $529,900. The buyer, who did not want to be identified,
said he's investing despite fears that valley home values may continue to fall.
(Let's cut to the chase. "Investing" is still a code word here for betting the price will soon
go up.)
"I have a feeling it's still risky to buy a house at
this moment, but I want my kids to go to a good school, so I'll take a chance," he said. "I might stay there for 10 years.
I look for the long term, not the short term." (Can you really
service the debt for ten years? And find no better use for your 20% ($80K) down payment? Or are you somehow still
able to get 100% financing??)
Some agents who specialize in REOs said about half the buyers
now scouring the market for deals on bank-owned properties are people who want to live in the homes, while the other half
are seeking investment property to rent out. But even at today's REO prices, some investors are waiting to buy because
they can't get enough monthly rental income to cover their mortgage and expenses. (Per the above, rents still doesn't remotely cover costs. Therefore, such "investment property"
is still extremely speculative. When 50% of buyers are still speculators, we are very comfortable sitting
on the sidelines and renting...)
'Gambling on better times'
True, Carey said, but the ones buying now are "gambling
on better times" in the future, he said, hoping to buy property in the $400,000s that will eventually gain value. (Some buyers "late" in the bubble are getting our at the expense
of buyers "early" in the decline. Their combined losses will fuel the eventual reasonable real estate market starting
some time after they're both washed out...)
It's not clear that the recent flurry of competition for
REOs will last long. (Egads, the realtor's union must have
been asleep to let that comment make it into print...)
Sen Dharmadas made an offer a few weeks ago on a bank-owned home in Los Gatos - a
rare find compared to the number of bank-owned properties available in San Jose or Gilroy. He offered the full list price
of $775,000, and his was the lowest in a field of about five offers, he said. He raised his bid by $12,000, but the bank chose
another, higher offer.
"Because of that we almost lost hope," said Dharmadas, a software
engineer. "Getting an REO is very difficult."
* * * *
Conclusion:
How can we realistically claim it's such a terrible
market when all these REOs are flying off the shelf?
It's really very simple. Even with all these REO deals allegedly selling fast and above asking price, sales volume in Santa Clara
is down. Resale houses are -37% year-over-year,
-51% year-over-two-years and even -59% since 2004. Overall, sales volume is at a 20-year low!
How do they propose to overcome this 20-year low in sales??
Do we need---
--- more REOs??? ;=)
