The Real Estate Market Will Crash.... Again!!

Now don't get me wrong, most people know me as a forever optimist.  Optimist to the point of waking up everyday singing and telling myself that the Real Estate market is bound to change.  In my opinion, 2008 was a correction, 2009 was a realization, and 2010 was suppose to be the year when things should bottom out and get better.   Here we are, 2011, and prices are still going south.  From the the look of it, we are still not out of the woods.  

There are many signs out there that points to the direction of another Real Estate Crash.  Here are a few:

1. Within the last 2 weeks, CNN has posted blogs of experts stating that we are about to see a double dip housing price correction within this year.  The average price of home are now comparable to 2009 when the price of home hit its all time low since the Real Estate buble burst.

2. MSN.com articles and blogs has predicted that there will be at least 1 million foreclosure that will occur this year.  This adds to the 1.3 million shadow inventory (homes about to be foreclosed) that is currently being held by the banks.  Real Estate experts predicted that it would take 3 to 5 years before the current toxic inventory be wiped away from the banks books.

3. Bank owned and REO homes are often priced 10% to 30% below market value.  With 50% of of the U.S. homes REO servicer  listed by banks such as Wells Fargo, Chase, and Bank Of America, home market value will continue to drop.  With a very large foreclosure inventory, their goal is to let go of homes as fast and efficient as they can (big goof-off are the Robo-signers they hired who foreclosed homes illegally). 

4. Sub Prime Mortgages are no longer the only reason people foreclose on homes; it is now because of lack of jobs, economy downturn, people believing home values are no longer there ( Strategic defaulter: the new in thing with people with good jobs), and divorce.  I've had far too many homes I listed last year with divorce and unemployment written all over therm.

Now where does all of this lead us.  Well, The Great Depression did not completely turn around until the 1950's.  Small Recessions in the 90's and early 2000's may have lasted only 2 or 3 quarters, but the impact lingered at least a couple of years.  There have been talks within the Real Estate profession that this may last 5 to 7 years. But the truth is, nobody really knows.  People were hoping for a "V" shaped recovery where we go down hard and bounce right back.  Others hope we have a more "U" shaped recover where we stay along the bottom for a while and then slowly recover.  The worst we can possibly go for is a "W" shaped Real Estate recovery.  This means we go down hard, go up, then go down hard again. 

I am not a prognosticator of Real Estate, but I do follow Real Estate trends rather carefully since this is one of the businesses I am currently invested in.  Now is the downturn good or bad? Well, It depends who you ask. Investors, buyers, apartment renters, and big developers may approve the downturn as a way to invest and make more money in the future in real estate. The cash flow that they can generate plus the low mortgage rates suites them just fine.  Now, sellers, positive equity owners, mortgage re-financiers, and home owners in general may not like what is going on. Losing value on homes means they are at risk to be "underwater" (loan greater than market value) in the near future.  If underwater homeowners decided to sell their home, their credit will get hit through a short sale. IRS sometimes step in to collect for deficiencies (only on deficiency states) on a short sale which leads homeowners to opt for bankruptcy if the home does not sell and nears foreclosure.  More on this subject on later article.  Such a vicious cycle we currently live in. 

In a nutshell, we may or may not experience another Real Estate Market Crash.  However, if the banking system and other government programs do not start helping current homeowners with their current mortgages, we may see a flood of foreclosure greater than what we have seen. But as I currently look around, the Dam is slowly breaking..

Strategic Default? Should You Do It?

I recently talked with a very good friend of mine who I listed a property almost 2 years ago. My friend and his wife are both top tier professionals who make a good living with great income.  Back then I remember how the wife was scared to lose her credit because the home will go through a short sale procedure. The husband urged his wife that this is a smart move financially they are planning to do. Right at their kitchen table I asked them for the reason of selling the property. Their response was that since the home has been underwater (loan greater than home value) for quite some time now, they would rather let it go now, save, rent, and then buy another home within the next few years. Sadly, they were my first Strategic Foreclosure clients.  Since then, many more individuals passed through my company with the thought of letting their home go now and buy another home later at a much lower price. 

My Question is, if you are a homeowner, should you do it too?

Now of course, everyone has different situations that will undoubtedly provide a different response to this question.  But as a Real Estate agent, let me shed some light on what I have seen to those who chose or not choose to do so. 

The Definitely-make-financial-sense-to-do-so indviduals:
I've had a few people that sold homes with me that fit this category.  Many of them are underwater by atleast $100,000 dollars of negative (this is Nevada you know!) equity and in their financial sense it is just plain smart to let go of something with no value.  The questions comes to being, "Why would I keep paying the bank for $300,000 when my home is only worth $150,000."  It is definitely hard to argue with this reasoning especially when you consider that most mortgage payments actually double in value once every payment is calculated.  The $300,000 loan amount after 30-years of payment is actually closer to $600,000 with interest, taxes, and insurance. It sure is hard to argue thier logic if we are plainly talking dollars and cents. 

The I-Love-Our-home-and-too-much-memory-on-this home-individuals:
Now, I believe that most people who jumped in to buy their home typically did not do it for investment purposes. Most of my clients decided that it was time for them to achieve the American Dream of owning a home.  Families, friends, kids, and memories are put into play for years on the home that people bought.  For good or for bad, I do know quite a few people in this category.  Many are emotionally attached with their home plus the promise and obligation to keep paying a debt in their belief is the right thing to do.  The thought of not paying or the thought of a foreclosure under their name seems too stressful and outright embarassing.  And again, the thought of losing a home that their daughter and sons grew up in is too much to bare.   

Now as I have said earlier, different circumstances give different results in a family's decision to do strategic foreclosure. I may never convince one or the other individual for merits of their decisions.  But i do want to share with you this; Strategic Foreclosure is definitely rising.

According to the Las Vegas Sun In Southern Nevada, The 2,591 sales of single-family homes in February were 3.3 percent higher than January and 8.4 percent higher than February 2010, the Greater Las Vegas Association of Realtors reported today. The median price of those homes was $128,000. While up 2.4 percent or $3,000 from January, the price fell 5.7 percent from February 2010.
That downward trend may not stop soon. The median price of new listings was $134,900 in February, up 1.4 percent from January but 10 percent below where it was in February 2010.


According to Reno Gazzette Journal, Washoe County reported 383 sales of existing single-family homes in February, up 6 percent from January and 13 percent from February 2010.

"February was the highest volume in unit sales for a month of February in the history of the MLS," RSAR president Sherrie Cartinella said in a statement.

Median sales price, however, continued its up-and-down trek toward bottom. Washoe County's median price for existing single-family homes was $161,000, up a percent from January but down 5 percent from February last year.

Of course the reason for these increase sales does not necessarily mean an increase in Strategic Foreclosure; but I definitely do feel it contributed to it.  2007 brought about the sub-prime mortgage mess that brought down the biggest banks and wall street institutions and almost totally crash the U.S. economy.  2011 is 5 years from 2007 that last saw the 5-year arm note. The problem I see in this is how would homeowners who have maturing 5-year arm note refinance with negative equity home values?  Most, if not all banks would probably not refinance homes with this situation in Nevada and anywhere else in the United States.  Guess what, many homes who took a 5-year Arm (again for Adjustable Rate Mortgages) will soon face increases in mortgage payments while looking at a bleak U.S. economy.  I know a few people who asked for extensions and have been denied by their loan servicing company.  A work-out for a loan modification was a choice, and many lost their credit score during the process.  With No credit score, an underwater home value, and an increase in mortgage payment, their choice now become to keep on paying, short sale, or do strategic foreclosure and save money until their home is taken by the bank.  A cycle of distress that no one should be in, in my opinion. 

In conclusion, I believe the reason why we still have a downward price trend in both northern and southern Nevada is because there are way too many bank owned forclosed homes entering the real estate market than those who are able to buy.  The shadow inventory (homes that are delinquent, in pre-foreclosure, auctioned, REO) are rapidly increasing which further decrease the price of homes when they are released.  And I bet 1,000.00 many of those homes were let go by teachers, businessmen, doctors, lawyers, retail store owners who decided that it is best to walk away now from the huge house debt and buy themselves the same type of home for a much lower price.

The scary thing is, if Strategic Foreclosure becomes a trend on why people walk away from their home, this could cause a second wave of financial disaster in the US.  Our leaders better find more ways to work with people in keeping their home to avoid a mass exodus of people opting for Strategic Foreclosure.  Lets not repeat the start of 2007. Only time will tell.