Foreclosures Are Mostly NOT Good Deals

Many people believe that foreclosures equal good deals and that good deals can be had by searching a market only for foreclosures. Nothing could be more wrong in our experience, especially in and around Houston, where most foreclosures are some of the worst deals on the market.

We have found that foreclosures, while they may look okay in photos or on the outside, most often a) need more work than an occupant can take on, b) require expertise and cash beyond what a homestead buyer normally has, and c) are often anything BUT good deals in the end.

The most effective way to find a good deal is simply to look in good neighborhoods for low prices and then figure out why the price may be low. An elderly person may be moving to elder care, it could be an estate sale, someone may just need to move quickly, perhaps a house needs updating that most will not want to do but you don't mind doing in time, etc.

Foreclosures per se are not good deals.

And don't rely on foreclosure "specialists" or workshops or special public auctions or lists you have to pay for. Remember also that almost any property can look good in a photo (think "online dating"). Nobody gets all good listings and nobody corners a market, so using the Multiple Listing Service in an area is still the best and most comprehensive way to search for prospective properties.

Some firms like mine only do foreclosures with investors. That way, we know the investor knows what they're getting into (foreclosures are riskier deals than traditional resale/new) and typically will not encounter underwriting issues and can accommodate the bureaucracy involved -- another huge disincentive for homestead buyers -- the timing can vary wildly from expectations on foreclosures and there's really nothing you can do.

Why are foreclosures often rotten deals? Well that's a trip down the rabbit hole we'll save for another time. Just know foreclosures often equal "beasts." Finding good deals takes standard old fashioned knowledgeable research and professional advice.

Houston House Prices: Still Pretty Good

From the new Houston Association of Realtors press release on recent home sale data:

Single-Family Homes Update
At $182,316, the average sales price for single-family homes dropped 10.5 percent from February 2008, when it was $203,797. However, the figure is up $18,000 from January of this year. The median price of single-family homes in February was $138,970, off 8.0 percent from one year earlier, but up about $10,000 from January. The national single-family median price reported by NAR is $169,900, illustrating the continued higher value and lower cost of living that prevail in the Houston market.

Now I can tell you we are not seeing those kinds of declines in value on the far north side of Houston in quality neighborhoods and with quality homes. The decline there, if any, is hardly noticeable.

But really, this chart contained in the release is all you need to see to get a simple read of the situation in Houston:

Look at the trend lines. Both the average price (skewed higher by expensive homes) and the median price (half of all sales are priced higher, half lower) -- both average and median trend lines show something very important that you can clearly see just by eyeballing it:

Prices in the Houston area are at mid-2007 levels right now.

In case anyone missed it, 2007 was a pretty darn good year for housing in Houston.

Early Indicator: Interest Rates to Rise

I received the following from a lender at Network Funding LP, but I can't figure out who owns the copyright. At any rate, very interesting headline and information.

Supply Concerns Boost Mortgage Rates

... [M]ortgage rates rose slightly during the week. The reason is that concerns about the enormous supply of debt that the government will need to issue outweighed the other factors. [emphasis added]

...This week, the Obama administration proposed a $3.6 trillion budget plan, with an estimated deficit of $1.75 trillion, which is enormous by historical standards. The Treasury will need to issue debt to borrow money to fund all of this. As the government issues more debt, the interest rate offered generally must rise to attract additional investors. Interest rates on similar investments such as MBS then move higher as well to compete for funds from investors.

Reflecting their concerns about an increase in supply, investors required higher interest rates at the large Treasury auctions during the week. The auction results showed that demand from foreign investors remained strong, which was very good news. If foreign investors should ever reduce their purchases of US bonds, then interest rates in the US would be likely to rise. [all emphasis added]

These are dynamics long discussed on this blog. Like day follows from night, so will inflation follow from the massive stimulus required to unfreeze credit and consumer markets where "scared money doesn't spend." Not to mention the very very real massive losses the banking sector faces from their catastrophic past lending practices, which further reduces available private money into the demand side of the economy.

These factors necessitate the enormous spending from the last credit-worthy entity capable of replacing all the lost demand (through debt-financed spending), namely the federal government.
Unstated in the quote however is the notion that investors/lenders require higher returns when loaning money even to the United States government because at some point, the investors/lenders begin to worry a little bit more about the government's ability to raise enough tax revenue from the economy's future production in order to pay for the national debt load (remember we're starting already over $10 TRILLION in the hole, with an actual doubling of the national debt in the last 8 years with nothing to show for it).

An important caveat: The United States will never default on its loans, that's the market assumption. But it may, if necessary, only avoid doing so essentially by printing money to pay down the debt, which only ends up causing inflation as new cash enters the system without being backed by any real production or assets. This raises prices of everything, yes, but it also reduces the real value of debt as "printed money" pays down the loan balances. Everyone loses.

To illustrate, imagine if you could pay off your mortgage not by keeping a job and making payments with the fruits of your labor or even by inheriting enough existing money to pay it off -- but rather you could just print your own money to pay it off, or successfully pay it off with a "valid" hot check. See? The only "winner" is the one printing the money, but then the printer will never get an affordable loan again either.

That's kinda the dynamic that gets figured in here, the risk level of that scenario above actually happening, as foreign and domestic investors consider issuing loans to the federal government. As the lenders' or "investors'" concerns rise, then so does the pay they demand in return for their loan -- the interest rate.

And all interest rates are related in some fashion. So when the federal government has to pay a higher interest rate for its debt, so too do individuals borrowing with mortgages, as no person or entity is seen as "more" credit-worthy than the United States government.

(In finance, the 10-year Treasury bond rate is often referred to as the "risk-free" rate.)

No, this will not be on the exam.

New Rule: Sell Low, Buy Low

Recently at a good friend's holiday party I met a very nice woman who wants to leave her house of 20+ years where she raised her children to move into a single story, smaller house. She has a very common problem: she no longer can climb the stairs to and from her master bedroom and bathroom every day without difficulty.

For many young families, floor plans with all bedrooms up offer a very good value -- they get a functional layout downstairs for family activities and 4 bedrooms or so upstairs including the master, which also usually keeps the footprint of the house small so that it fits well onto a small but affordable lot. Using upstairs space for livable square footage is also a good value because upstairs square footage is much less expensive to produce, since a house only has one foundation, one roof, one set of plumbing stacks, etc. On a per-square-foot basis, single stories are often priced higher than comparable two-story homes for this reason (and a few others).

Some young parents also feel reassured sleeping close to their young children.

[An often overlooked advantage to having a master suite upstairs is that it typically allows for a much larger master suite.]

But in a few decades, those young parents become empty nesters and their many years of hard-work may leave their bodies a little less forgiving with the stair climbing up and down all day every day.

So the lady at the party with whom I was speaking felt like now is not a good time to sell in the market, particularly because she paid at the high end of the market cycle in the early 80's and it's difficult to face a lousy investment return on a house, even though the house has served as the main family stage for those many years. Memories aside, the simple numbers are disappointing. I get it.

So I asked her if she wanted to stay in the same area, and she said yes because her adult children still live in the general area.

"No problem, " I said. "You may sell your house for less than you might have a few years ago, but you're also going to pay less for your next house."

This is the new rule for taking advantage of the current housing market: sell low, buy low.

So for many people who might want to downsize or even buy a bigger house, if the goal is to stay within the same general market area, then it would hold that however much the market may be depressed, it's depressed on both the selling and the buying side. So yeah, you might not get to sell for as much as you would like (nobody ever does in Houston), but you will get to buy for less in the same market!

Not to mention the historically low interest rates right now for qualified buyers. (Well qualified buyers have no excuse not to be in the housing market right now. Move up, refinance, whatever, but now is your time.)

Think of the California market circa 2005, for example. What use would it serve for a couple to sell their 1200 SF home for $1.5 million if all they could do was buy another comparable 1200 SF home for $1.5 million?!? This is why Texas saw so many people relocate from California and other areas, because cashing out was only possible by selling in the high market and moving to buy in a market that wasn't so wildly out of control (ie, Houston).

It occurs to me that the reverse is now true in most housing markets. Sure prices may be a little down year-over-year, which makes the thought of selling daunting if one doesn't have to sell. However the market also has good buying opportunities coupled with historically, ridiculously low 30-year fixed interest rates.

In conclusion, it is not a buyer's market. It is not a seller's market. The forces affecting each side are relatively balanced when you think about it. So it's not a bad time to sell if what you want to do is turn around and buy. So don't give up, the opportunity to get what you need or want is still very much available in this market.

Repeat: Houston is the Exception

Okay, another press release, another frightening headline. But repeat and repeat again: "Houston is the exception." Let me cut to the chase, which is the last line in this Reuters article:

"The bear market continues; home prices are back to their March, 2004 levels," David M. Blitzer, chairman of the Index Committee at Standard & Poor's, said in a statement.

Okay, now as anyone can remember who was in the market in 2004 as a seller: those were not hard times in Houston.

So while other economic metrics mentioned in the article are at multi-decade lows, home prices in Houston remained relatively stable in comparison, down year-over-year in November by about 7%, but that's on much much lighter activity overall. Basically, sellers are afraid to sell, and buyers are afraid to buy, and so we mustn't be too serious about the price figures, which only reflect a small set of data due to the overall inactivity in the Houston market. (Note an important corollary: many would-be area sellers are also would-be area buyers. They are coupled, and so are the market effects.)

In other news, while the article says that a turnaround in housing is required for an overall economic turnaround (true enough), it also reports an important jobs figure:

Chief among consumers' woes has been spiraling job losses in recent months.

U.S. employers axed 533,000 jobs from payrolls in November alone, the most in 34 years, according to Labor Department data released earlier this month.

The Conference Board data reflected this, with its "jobs hard to get" index rising to 42.0 in December -- the highest since December 1992. That was up from 37.1 in November.

As we've discussed on this site again and again, the real indicator of an economic turnaround will be a stabilization of job losses. Without jobs, the economy can go nowhere for 99% of Americans. If you want a good housing market, you must have a good jobs market.

Repeat ad nauseum.

The Dynamics of Real Estate Pricing

There are far too many dynamics that affect real estate pricing to discuss in one post of course. But one important one, time and again that we see, relates to price adjustments, how to make them, and when to make them.

Our experience shows that price adjustments are most effective:

• early in the listing period; in other words, get the price right up front and price for the market you are in, not for the market you want to be in, and

• in fewer, more dramatic increments to get a "bang" in the market, especially since any interested parties will be watching the property for significant movement, and also it takes a dramatic incremental move to expose the property to new price-point buyers in the market. $5,000 increments over time will accomplish little more than a slow ineffective leak in the price with little to no impact... resulting in a lower sale price and longer time on market.

This is of particular interest right now because of parallels with the larger discussion about the best size and scope of government responses to a slowing economy. While it is natural and correct to be concerned about future deficits, most economists seem to agree at this point that doing too little right now is a far greater risk than doing too much.

From the recent Nobel-winning economist Professor Paul Krugman this
morning:

The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn’t just a hypothetical argument: it’s exactly what happened in two important episodes in history.

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.

This is remarkably parallel on a macro level to what happens when a property is on the real estate market. Incremental adjustments are fine when the market is on solid footing - sometimes small moves can be effective -- in tight markets. But as Joe Kernen on CNBC Squawk Box this morning keeps mentioning a very instructive quote from Barrons over the weekend: "Now is not the time for the Fed to act like a blushing virgin." Adds Kernen, "This is the time to be a big ol' hooker..." (See 1:40 mark for discussion of rescue size, 1:51 for quotes, and don't miss discussion of oil price impact/non-impact at 1:15 mark in video.)

In other words, in extraordinary market challenges, the markets require bold action, bold responses. This is a time to pull out all the stops, and leave everything on the road, including mixed metaphors.

Success in the market right now requires bold action, and it requires a recognition by sellers of the true nature of this market right now. Sellers who can adapt to current market conditions and offer appropriate market incentives, including price, will be today's winners in the market. Ironically, they will sell for more and they will sell faster, both of which bring the optimal financial outcome.

It is what it is right now. And no amount of clapping is going to make this a different market. Sellers ignore this at their own financial cost.