With the expiration of the first-time buyer tax credit on April 30, there are now two main props keeping the housing market afloat. One is the growing percentage of home sales financed by Federal Housing Administration (FHA) loan guarantees. The other is the refusal of banks to put on the market foreclosed homes over $300,000.In this article, we will take a look at the second factor. A future report will examine the role of the FHA in keeping the market from collapsing.
Chicago and Cook County, IL
Let's begin with Chicago. Cook County is comprised of Chicago and its contiguous suburbs and has a population of roughly 5.3 million residents. It experienced a huge bubble during 2004-2006 and has suffered a substantial drop in both prices and home sales.
RealtyTrac.com has the most comprehensive database on foreclosures. It claims to have specifics on over 1.5 million defaulted, auction-ready, and bank-owned properties. The information is updated daily. You can organize listings of defaulted properties; those scheduled for auction, and repossessed homes (REO) by date as well as by amount. The website also provides a separate listing of those properties which have been put up for sale by the lender.
As of July 15, RealtyTrac listed 28,829 properties which had been foreclosed and repossessed by lenders. Some have been owned by the bank as long as 2½ years without having been placed on the market. Roughly half have been repossessed by the lender since late January 2010.
This year, banks in the Chicago area have foreclosed on a huge number of expensive homes. RealtyTrac lists 2,650 repossessed homes for more than $300,000 and 169 for more than $1 million.
Here is where it gets really interesting. Out of 28,829 repossessed properties, there were only 1,292 listed by lenders as "for sale." The vast majority of these available homes were inexpensive. A mere 29 homes over $300,000 were for sale. In other words, the banks have withheld from the market 2,621 properties listed at $300,000 or higher.
There are probably two important reasons why banks have pursued this strategy. First, they are concerned that placing these more expensive homes on the market will severely weaken an already thin upper tier market.
Even more crucial is that selling substantial numbers of expensive homes at discounts of 50% or more would compel the lenders to take substantial losses which have been avoided by keeping them off the market.
To give you an example, one repossessed home in the upper income suburb of Glencoe was purchased in January 2004 for $850,000. Though not listed for sale yet, its opening bid price is $2,819,000. This suggests that the foreclosed owner had refinanced the property to the tune of $2.8 million. If the holder of the first lien put a home like this on the market, it could be forced to swallow a loss approaching $2 million or perhaps even more.
One big problem with this strategy is that the banks have also ramped up their placing of seriously delinquent borrowers into default - the first step in the foreclosure process. RealtyTrac listed 39,963 defaulted properties in Cook County as of July 15. All of them have been placed into default since August 2009 and half of them since early February of this year. That is nearly 4,000 per month for the past five months and nearly 10,000 in the last two months alone. Of these defaulted properties, there are 7,550 listed over $300,000. Sooner or later, these homes are coming on to the market either as foreclosures or short sales.
What does the market for non-foreclosed properties in Cook County look like now? As of July 15, trulia.com posted 38,877 properties for sale of which 14,866 were listed for $300,000 or more.
Sales of all new and existing homes and condos totaled only 9,057 in the first quarter of 2010 according to DataQuick. That is an average of slightly more than 3,000 per month for a county with over one million owner-occupied units. Since the peak in early 2006, home sales in the Chicago area have plunged by nearly 75%. Median sale prices for Cook County slid to only $175,000 in the first quarter, down 10% from a year earlier according to DataQuick.
With so many homes listed for more than $300,000 now languishing on the Cook County market, it is somewhat understandable that the banks would be reluctant to add their foreclosed homes in this price range to a weak market. When you add in the 7,550 defaulted properties in this price range which have not yet been repossessed by the banks, you can get a sense of the soaring number of homes that is ready to inundate an already glutted market. When these homes come onto the market, as they eventually must, prices will inevitably plunge.
Current home sellers may have been taken in by all those reports lately which have been claiming that the housing market is "stabilizing." Only 35% of all the homes listed for more than $300,000 have had their asking price reduced since posting on Trulia. So these homes just sit ... and sit.
Miami-Dade County, FL
Most readers know that the collapse of the housing market in south Florida has been more severe than anywhere except perhaps Las Vegas. A recent REAL ESTATE CHANNEL article reported that banks have been repossessing south Florida homes at a rate of 4,000 per month in 2010. That would seem to suggest that the foreclosure debacle might soon stabilize. Let's see.
According to RealtyTrac, on July 16 there were 10,858 repossessed properties in Miami-Dade County. More than 2,100 have been held by the banks for more than a year without having been placed on the market and 600 for more than two years. Over 1,400 of these foreclosed properties were listed at more than $300,000.
Out of 10,858 bank-owned homes, a mere 983 were listed for sale. Nearly all were very recently placed on the market -- after June 1 of this year. Only 11 of the 1,400 homes listed for at least $300,000 were actually on the market. Same as in Cook County. The problem is very similar. Trulia posted 13,114 Miami-Dade County non-foreclosed homes for sale at asking prices of more than $300,000. Only 21% have lowered their asking price. As with Cook County, most just sit ... and sit.
Banks in the Miami area are also very reluctant to dump these higher-priced homes onto a still weak market. But they have the same problem that banks in the Chicago area are facing. RealtyTrac listed 22,753 defaulted properties for Miami-Dade County as of July 16. All have been put into default since late January of this year. Over 500 were defaulted in one day - July 15. More than 1,500 of these defaulted properties were listed at more than $300,000. All of these defaulted properties will be coming onto the market either as foreclosures or short sales.
The situation is even worse than in Chicago, however. Loan Performance, a division of Core Logic, tracks those metros with the highest percentage of seriously delinquent prime mortgages. This included loans that are either delinquent for more than 90 days or in the process of foreclosure. The Miami metro had the highest percentage of any metro in the country at the end of this year's first quarter - 28%. This means that more than ¼ of all outstanding prime mortgages in Miami were either in the foreclosure process or almost certainly heading there.
The cure rates tracked by Core Logic tell us that practically all of these serious delinquencies will eventually follow the 22,000+ defaulted properties into foreclosure or short sales. The reluctance of banks to put higher end foreclosures onto the market will do nothing except delay the inevitable collapse in prices of homes purchased for $300,000 and above during the bubble years.
Orange County, CA
Orange County is situated between Los Angeles and San Diego. With a population of roughly 3 million, it includes such cities as Irvine, Santa Ana, and Anaheim as well as the tony towns of Newport Beach and Laguna Beach.
Like so much of California, the housing collapse after the bubble peak has been severe.
As of July 16, RealtyTrac listed 6,270 repossessed properties. Although 3,200 of them have been taken back by banks within the last six months, 650 have been in the inventory of banks for more than two years without having been placed on the market. As with Cook County and Miami-Dade County, very few foreclosed homes in Orange County are listed for sale - 227.
More than 3,800 of these repossessed homes are priced above $300,000 and 650 for more than $1 million. Yet not a single home over $1 million is currently on the market. Only 85 of the 3800 bank-owned properties priced at more than $300,000 have been listed for sale. This strategy is looking familiar, isn't it?
There are 5,694 defaulted properties listed by RealtyTrac as of July 16. Although banks accelerated the foreclosing of properties in 2010, they have placed delinquent homes into default at an even faster pace. Half of the 5,694 defaults occurred in the past two months. More than 2,400 defaulted properties are listed at more than $300,000.
Are there a substantial number of non-foreclosed homes for sale at more than $300,000? You bet. Of the 15,599 homes listed for sale on Trulia, 12,249 have asking prices more than $300,000.
The inventory of homes for sale rose steadily in the second quarter of 2010 according to the Orange County Real Estate Blog. Short sales now comprise 20-30% of all sales in most cities in Orange County and this has put downward pressure on home prices. Had the banks placed more of their REOs on the market, prices would have very likely crumbled on the upper end. When banks finally release these repossessed and defaulted homes to the market, which is what will happen.
Bergen County, NJ
Finally, let's take a look at the Northeast. Bergen County is made up of fairly affluent communities which are located in northern New Jersey just west of the George Washington Bridge. Although home prices have dropped rather substantially since the peak, it has not been nearly as bad as in California or Florida.
RealtyTrac listed 615 repossessed properties as of July 16. Roughly 120 have been owned by the banks for more than a year without having been placed on the market. Two-thirds have been repossessed since the beginning of 2010.
Similar to the three other counties we have reviewed, many of the foreclosed properties in Bergen County are expensive homes. More than 100 are listed on RealtyTrac for $500,000 and above. More than 350 of these homes are listed for at least $300,000.
Are the banks withholding most foreclosed properties from the market as banks have in the other three counties? Absolutely. On July 16, there were only 31 repossessed homes on the market. A total of four were listed higher than $300,000. That is four out of more than 350 foreclosed homes in Bergen County that are listed on RealtyTrac for more than $300,000.
Bank Withholding of High-End Foreclosures from the Market is Nationwide
The four counties which we have looked at reveal a clear pattern on the part of banks to withhold most repossessed homes from the market and nearly all of those listed on RealtyTrac for more than $300,000. Is this occurring throughout the nation? Take a look at the following table and judge for yourself.
Will this bank strategy keep the market for homes over $300,000 from imploding? Not a chance.
Fannie Mae now requires an average down payment of 30% for securitized loans which it purchases or guarantees. According to Fitch Ratings, mortgage delinquencies for prime jumbo mortgages soared to 10.3% in May as underwater owners walked away in droves. That spells serious trouble for the five states which account for 2/3 of all outstanding jumbo loans - California, Florida, New Jersey, Virginia and New York. The problem goes well beyond these states, however. Housing markets throughout the United States for $300,000+ homes are in for rough sailing and prices are extremely likely to be headed for a real plunge.
Comments on this Story
LibertyLakeWA | 07/25/10 12:15 PM | Reply
This has been my experience. I have a newly built home (never lived in) in the most exclusive neighborhood of Eastern Washington (Liberty Lake) near the Idaho state line. This area never had the kind of boom we saw in CA, NV, AZ, FL yet home prices have fallen as much as 40%. The 4 br, 3.5 bath home on 3/4 acre has spectacular views of the city, the lake and the mountains (details here: http://www.tourfactory.com/346059). The house is currently listed at $1,199,000 -- over $500,000 below the cost of construction. Last year's assessed (not appraised, assessed for taxes) value was $1,715,000.
I had the construction loan "permed" on completion in 2007 (BofA nee Countrywide) into a 10-year fixed, interest only loan. Three months ago I ran into heavy medical expenses and had to stop making payments. So far, all they are doing is sending me notices but do not discuss resolution with me.
It looks like I will have to walk away from the house (deed in lieu of foreclosure), taking a loss of $700,000. This means that I will stop utilities, maintenance, groundskeeping, etc. when the bank takes it over. The value of the house will rapidly depreciate. There are bank-owned properties sitting in the exclusive development of the Estates at Legacy Ridge up to $2.5 million that have not been put on the market since foreclosure over a year ago!
Steven Jurgens | 07/29/10 1:47 PM | Reply
Dear Author and Readers of this article:
My name is Steven Jurgens. I am a real estate broker in Chicago. I would like to pose a few points to this article that is escaping much of the media and analysts. My argument has 3 points: 1.) Do you believe real estate is a unique commodity? 2.) Any product that has a boom is going to create undesirable producers. 3.) The media and independent sales sites such as Zillow, Trulia etc. have educated the public but have made them dumber at the same time.
1) You can not open up the news paper find 555 N Main Street and see it’s daily price as you can see the daily price of Apple or IBM. This is because 555 N Main Street and 557 N Main Street are two different properties with different qualities of assets, subjective/objective value, and character and charm. Likewise, 555 S Main Street is different than 555 N Main however are both in the same county. My point…properties in Englewood (area has a high crime rate) which has the highest number of short sales in cook count are different than properties in Lincoln Park (one of the best neighborhoods in the city). Yet all of these properties are calculated together to show the market is TANKING in cook county. Other factors to consider are what types of properties are we looking at…condos, single family homes, or multi-families? When looking at percentages for a county, the size of such county must be considered. At the end of the day, the answer for valuing property for a given duration of time should be this. In a specific like neighborhood, what properties have traded twice during a specific period of time and what was the average result.
If you look at Englewood in the above example, you will find that like properties that have traded twice during a given period have fallen more than 75%, however, properties in Lincoln Park average an approximately 3-5% drop. (note, I am speaking of Single Family residences in Lincoln Park. High rise condos and multi-families have been hit harder). Again, this makes a point regarding what do the number mean. I sold a home this year in Lincoln Park for nearly 2.7M. This home was originally purchased at the end of 2004 (the height of the boom as noted in the article) for 2.5M. If you would like to see pictures see www.2141seminary.com. My client came out in the black. In total there are a greater number of properties in Lincoln Park that have closed above what they were purchased for in the boom than in the red. However, the properties in the red have larger percent losses and thus the total like transaction average percentage loss for transactions selling twice in the last 5 years is around (2.5%). This is true for both condos of smaller unit buildings and single family homes in other high priced cook county neighborhoods such as North Center, Lakeview, Andersonville, Lincoln Square, Bucktown, Roscoe Village, etc…. I have completed this analyst of comparing like homes and condos for a given area for each of the above prime neighborhoods to help me in negotiating contracts as buyers are coming in with information from the media and Zillow stating that the Lincoln Park market is down 22%. See point 3 for more information on this example.
To conclude this point, one factor that must be considered is: since real estate is a unique commodity, what has similar unique commodities in similar neighborhoods traded at for a given period. This percent change should be one of the main factors in determining percent change for a given product.
2) Almost in every product that goes through a boom period this product is going to attract new producers to take advantage of high profit margins. From 1996 to about 2006, the real estate market in Chicago had one of these booms. I know several examples of Doctors, Lawyers, and other business professionals, leaving they’re jobs to jump in to the real estate boom. Today, most have gone back to they’re previous positions. Many of these individuals failed. I can only give you only a hand full of developers in Chicago I know and trust, especially at the high end market. They are still in business today and are prosperous because they have a system in place and build a superior product. My point, the boom created a lot of new construction. The majority of these builders during this time were not professions in what they built. In the higher end market, I can name more past builders who made many mistakes in there product which still can not sell to this day than I can good developers. Part of this is a factor of the market. In the good market we had in the early 2000s people were settling for inferior products. Now, buyers can be selective and good products such as 2141 Seminary noted above are selling. The bad products are continually selling for deeper and deeper discounts and are typically being repossessed by the bank. The bank does not know what to do with these properties as they know it is an inferior product. As the article notes, I believe this may be why the banks have reluctance to put some of these properties on the market. Personally as a real estate broker, I try to convince everyone to buy a superior product versus something on the surface that looks great but underneath could fall apart.
3) The media and other independent sights have really damaged the psyche of the real estate market. As a real estate broker, I am involved with many different transactions and people who are looking to buy and sell. People can go to the internet and find a lifetime of information about the real estate market. Zillow has the Zestimate, the media has taken multiple accounts about price drops, market drops etc. Once problem! The media does not explain that real estate is a commodity or that there have been rule changes on marketing and there are brokers like myself who drop prices of million dollar homes by 100s so I can remarket. Every product is different. The Zestimate listed my listing at 2141 Seminary worth 1.76M, again the property sold at nearly 2.7M. Several people who came in and questioned the price were dumber than smarter as they could not make the connection between a superior product that at the end of the day would cost them less than if they purchased an inferior product at a lower price. I can give you many more examples of this. The problem is that much of the media and internet sites do not give a true identity to a given commodity and therefore cast a shadow on a subject’s true price. In my personal opinion, sites such as Zillow have they’re pricing wrong at both ends. For example, this article that I am responding to suggest there are many more foreclosures to come. In my opinion, sites such as Zillow over value foreclosures. Typically on a dollar per dollar basis, properties that are acquired via foreclosure take more money to maintain and/or fix than just purchasing a quality product from the get go. However, the media and these internet sites create the mind set that the numbers that are being provided on these sites are accurate and each and every unique commodity of real estate is the same. At the end of the day, people who fall into this trap are then asking, “why am I in foreclosure again since I had to take out an additional loan or borrow money to fix all of my leaks, mold, structural defects etc.
An example of this is in this article notes a property in Glencoe. This is a very wealthy community on the north shore. The north shore suburbs have been hit hard in the past few years, partially because of the shear volume of new construction projects going under water noted in my 2nd point because they are inferior products. The article gives us enough information to suggest that the property was purchased for the land value. Construction than took place and a new home was constructed. The property probably can not sell as it was poorly construction, designed, and/or planned. If you compare like sales, you will see that this neighborhood has had a significant decline and upon further analysis you will see that many of these types of projects were poorly completed. This article gives the impression to a reader that Glencoe and Lincoln Park should have similar market results. One problem, Glencoe is about 20 miles north of Lincoln Park and the market results are drastically different. Thus, readers should not be confused or associate numbers in Glencoe with numbers of a different neighborhood. Yet, I still can not find an example of a media outlet or sales site marketing there estimates as individual commodities versus using numbers to prove whatever it is they want to prove. Hence, at the end of the day with all the information on the market, real estate investors from a value side are not being given the correct information and I see poor choices being made every day. Thus, I believe the buyer is educated but is dumber on there property selection because of it!
In conclusion, I am not saying we should be looking at the market with rose color glasses, but we should evaluate what true market value is based on an individual commodity versus lumping value together on broad basis.
If you have any questions, please feel free to email me at sjurgens@chemail.com
Cordially,
Steven
DBranch | 07/31/10 5:21 PM | Reply
The figures for Phoenix are not correct. You say there are just 16, bank owned homes for sale over $300,000. A quick search shows 66. Please explain.
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