The Problems are the Path: And the Beat Goes On
We started out 2023 with sufficient amount of homes listed For Sale in inventory without the corresponding buyers to make many areas on the verge of becoming a buyers market. As interest moved higher by FED decisions, many anticipatory buyers began to look at the forecast of even higher mortgage rates. That stimulated buyers back into the market to reverse the trend toward a Buyer's Market. Inventory declined due to the belief of many potential sellers that they would be creating large capital gains, losing low a property tax base and the potential of even higher rates on a new mortgage. They decided Stay Put.
The lack of new supply created a negative balance of inventory to supply the resurgence of buyers. Real estate agents revived an old strategy to create multiple offers and over bids. Homes were priced drastically under market values. The strategy worked. Inventory began to diminish as new buyers gathered momentum to create what began to appear as a new wave in higher real estate prices. What appeared was not exactly true. Home values were down year on year and on a 6-month basis. Only on a 30-day basis were home values up.
On the rental market side, many once single family rentals were now sold and were being remodeled by contractors and Fix and Flip investors. Those rentals that remained showed signs of neglect, or were updated homes by income investors seeking higher rental rates
The refurbished homes now came on the market and were snapped up by buyers seeking move into newly re-conditioned homes that were up to current standards and designs. Those who were once renters saw it as a way to get out of the thumb of landlords who cared for nothing less than rent money, not conditions or habitability or the maintenance of the property.
Today the numbers are changing on a 7-day basis. New listings are increasing. Sales and pending sales are not keeping up on the 7-day average of New Listings. It will only be time before inventory begins to increase IF the listings begin to increase beyond the demand.
Add to that scenario is a beginning commentary that owners are reconsidering the negatives of selling. The stock market is down and volatile. Bonds values are down and appear to go lower as rates do not decrease but move up or remain the same. Owners now look at being locked in by the mortgage rate on their present home; along with the low property taxes. The belief of locked in with recession on the horizon, stagnant economy with the loss of jobs and potential employers out of state have a stress factor of, "where are my assets safe". The willingness to take profits and pay taxes to find a more favorable areas within the state of California or outside are beginning to have the affect of potentially increasing inventory.
Too many memorial services for friends are lessening the circle of friends for Baby Boomers. As neighbors move or die new neighbors are younger and do not relate to the older ones left. Children are moving or have packed up and moved away from Mom and Dad; it is natural for Mom and Dad to find a home near the children or in an environment where others their age have moved to. New friends and an environment of lower costs can have the affect of creating new supply.
Will it happen? Only time will tell.
On the banking side the cost and qualification for new buyers will become more stringent. The amount of banks who carry bonds and assets at cost in a classification of "Held to Maturity" have a real value of less than cost. We have seen that with Silicon Valley Bank's failure. The FDIC is getting lower prices for those bonds when put up for sale. Banks now look at strategies to repair their balance sheets. The answer is to lend stronger borrowers that do not have risks of foreclosure. The higher interest rates create higher asset value and great profits for banks to use to write off those discounted bonds as they move them from the Held to Maturity classification.
Foreclosures have their own risks to lenders; but they have been occurring. Occurring only in the notices not auctions or sales. The major issue is the market value of the property is greater than the underlying mortgages. The failure to make mortgage payments may come from a number of factors. Reverse mortgages create higher rates and sooner or later the question of what is left to secure the money drawn by retirees? Variable mortgage put pressure on owners who purchased the home on the hope and prayer that rates remain low or go lower. Finally, the layoffs are becoming so severe that many of the high earning technology employees are finding it harder to find jobs locally with equal pay and the past employment experience within Silicon Valley. The alternative is to move to where experience and jobs area available. That property owner can only hold onto what they have in savings and make due covering their cost of livings relying on the value of the home is in excess of the mortgage while looking for employment.
There are situations that positive equity is kept by the foreclosing institution. Not Fair? To my knowledge, only 18 states forbid the practice and lawsuits and political pressure is forming to stop the practice in the remaining states. Ironically, those other than the 18, are progressive states with a leaning to help their citizens. That leads the big bank lenders willing to work with lenders rather than foreclose and find that they now owe the borrower their lost equity, or face the potential of the buyers of the foreclosed property suing for losing the house they purchased by an illegal foreclosure.
The lesson to be learned here is to stay away from foreclosed properties.
There are numerous opportunities even under this scenario of foreclosures. Those areas are the developers and speculators who over paid for the property to be developed. They are either unable to get additional financing to complete the property, or have completed the property/properties only to find the homes they built do not fit the demands of current buyers. Those investors and developers must now bite the bullet and take lower prices to break even. Those investors and buyers also have lenders who want their loan repaid. If the loan is more than the market value a foreclosure is the last thing on the lender's mind. The lenders are left with a loss no matter what they do. Work outs are more the potential to solve the problem. The problem is the developer/investor and lender issue; it is not the buyers issue. This is where opportunity is created.
Creating those solutions is what I am here for.
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