A Tale of Two Cities (Part Two)


The paradoxical nature of the great Dickens novel could be easily paralleled to our current real estate market. One might naturally assume it’s simply “the best of times” for Buyers and the “the worst of times” for sellers, due to the dynamics present in our current real estate market. However, I would argue this might not necessarily be the case. The real estate market is simply a set of “circumstances”, which impacts both Buyers and Sellers. With this in mind, what might the circumstances look like from a seller’s point of view?

Favorable circumstances for Sellers include:

• Inventory – In January 2009 there were 45,393 Active Residential Detached Listings. Compare that to 33,983 Active Residential Detached Listings in January 2010 and you have 25% less inventory today than you did a year ago. Less inventory means less competition, which is good for sellers.

• Interest Rates – Currently still at historic lows, homeownership is still attainable and remains the American Dream. Interest rates are anticipated to increase as a result of the Fed terminating their purchases of mortgage backed securities as of March 31st, therefore buyers may be further incentivized to buy now.

• Time – With the deadline looming for Buyers to take advantage of the current Home Buyer tax credits (both 1st Time and Move-Up), Buyers need to take action quickly in order to capitalize on this opportunity.

Circumstances perhaps not so favorable:

• Composition of Inventory – Every month, the percentage of homes either in a short sale situation or in Foreclosure increases. Properties of this nature typically sell for less than a home that is not in a “Distressed” situation, thereby causing continued downward pressure on pricing overall.

• Looming “Shadow Inventory” – There is a tremendous amount of “Shadow Inventory” (properties that are either Real Estate Owned or in a serious state of mortgage delinquency) that is set to be released to the marketplace in the next several months. The result, an increased in supply and additional competition.

• Expiration of the Tax Credits – In order to keep 1st Time Homebuyers and Move-Up Buyers in the market place beyond the expiration of the Tax Credit on April 30th, Sellers may potentially have to make additional pricing concessions to offset the expiration of these credits.

Keep in mind the current real estate market is just a set of circumstances, and circumstances are neutral. Some might consider them “good”, while others may view them as “not so good”. Regardless of your point of view, they are just circumstances. What’s more important to consider is the advice and wise counsel you receive as it relates to how to best position your home in light of the “circumstances”.

A Tale of Two Cities?


“It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness”. Those famous opening words, written by Dickens, set the tone for his famous novel back in 1859. Over one hundred and fifty years later those same words could be a potential headline today, describing the current real estate market.

Some would argue it’s the “best of times” for Buyers and the “worst of times” for Sellers, the “age of wisdom” for Buyers and the “age of foolishness” for Sellers. However, I would argue this may not necessarily be the case. In this two part series, I will explain how it could be the “best of times” or the “worst of times”, regardless of whether you are Buyer or Seller. How can that be, you ask? Well, it all depends on the advice you are getting and who you’re listening to.

First, let’s consider some current market dynamics that make it the “best of times” for Buyers:

• Tax Credits – For both First-Time Homebuyers and Move-Up Buyers

• Interest Rates – Currently still at historic lows

• Selection – Current Inventory levels offer a variety of options

And why might it be the “worst of times” for Buyers:

• Time – Upcoming expiration of the tax credit. Buyer’s MUST be under contract by April 30, 2010 in order to be eligible, and must close by June 30, 2010.

• Interest Rates expected to rise – The FED is intent on wrapping up mortgage bond purchases at the end of the 1st Qtr 2010. In light of this announcement, interest rates are expected to rise by as much as 1-1 ½ percent.

• Continuing to wait – Many buyers remain on the fence. Either waiting for prices to continue to decline, or waiting for additional choices assuming a “traditional spring market” mindset. However, prices would have to decline by over 10% in order to offset an interest rate increase of 1%, and the current market dynamics negate any past “seasonal” tendencies.

So, while most would assume the current market is more favorable towards Buyers, there are certain dynamics in place that Buyers need to be aware of and take in to consideration. The clock is ticking, opportunity is knocking, the Buyer who waits will fall victim to the “age of foolishness”. Check back in to learn how Seller’s are potential beneficiaries of the same market dynamics!

To be continued………………….

Me and My Shadow - Part II


So, now that we know what “Shadow Inventory” is, what is the anticipated impact of this looming inventory going to be on the housing market? Well, we’ve already established that a 33 month supply of “Shadow Inventory” currently exists and is waiting in the wings. How exactly is this inventory going to be absorbed in to the marketplace though?

Several scenarios are possible, consider this. According to S&P, “In summer 2009, it seems servicers nearly exhausted the supply of plausible candidates for loan modifications and switched their emphasis back to liquidation. The balance of loans that became recently cured fell to just more than 35% by October 2009 from about 56% in April 2009. During this period, the balance of loans that directly closed or entered REO rose to 64% from about 44%. Servicers are requesting, and borrowers are accepting, short sales in increasing numbers. Many of these are strategic defaults, meaning borrowers have significant negative equity and determine that they can enhance their standard of living by foregoing ownership to rent at a lower monthly cost.”

Liquidations equal an increase in inventory. Increased inventory equals more competition (supply). Home prices are directly impacted by the simple principle of Supply and Demand. Unless demand is present to keep up with the increased amount of supply anticipated to hit the market it is almost a certainty that home prices will be negatively impacted.

In recent months, prices have stabilized in the Atlanta marketplace. What’s the root cause? Again it comes back to that simple principle of “Supply and Demand”. In January 2009, there were 45,393 Residential Detached listings. Compare that to the 33,983 Residential Detached listings this January and it represents a 25% decline in inventory. Twenty five percent fewer homes to compete against coupled with increased demand as a result of favorable tax credits, interest rates and overall affordability will ultimately lead to price stabilization.

What does the future hold? S&P believes “In the coming months, servicers will increasingly conclude that a significant portion of the pool of seriously delinquent loans is unredeemable and, with slightly increased government support toward this direction, will conclude that the optimal workout solutions for these loans will involve liquidation. In addition, we believe most of the loans that became recently cured within the past year will once again become seriously delinquent. Given their track record and servicers' recent tendency to increase liquidations, we believe that this time servicers will opt for the liquidation of the homes backing these loans, either through foreclosure, deed-in-lieu, or short sale. “

It is estimated there are $473.4 billion in loans that will eventually need to be liquidated, which equates to approximately 1.75 million properties, or almost 50% of the existing homes available for sale year end 2009. Keep in mind; these estimates only include mortgage defaults in the private securitization market which makes up less than a 1/3 of the total securitization market and less than 5% of the total mortgage market. Granted, it is unlikely these properties will be liquidated at the same time, however without accompanying demand the introduction of these properties on to the marketplace will have an impact on prices overall.

Conclusion: An increase in inventory is inevitable due to “Shadow Inventory”. 2010 is going to be the “Year of the Short Sale” due to the composition of the “Shadow Inventory”. If you’re a seller who is not in a distressed situation pricing your home correctly is critical, the price must be COMPELLING not just competitive.