Just a thought about Banks' new role in real estate.

I’ve been thinking that banks have a new role in this real estate market that is creating a vicious cycle. Many homes are being foreclosed upon because the owners can no longer afford the payments (for a variety of reasons). They go to public auction, the banks ask too much for them there so no one bids on them, they go back to the bank, then the bank puts them on the market 4-8 weeks later for a low, low price because obviously they want to get rid of them – FAST. The homes receive multiple offers within a couple weeks, and the home sells for a low low price – lower than anything else in the neighborhood. This in turn, counts as a comparable home, and brings the value of all the other homes down, which in turn, makes it more difficult for owners to sell their homes. And so those that cannot afford their homes any more, cannot sell them, and thus are forced into foreclosure. And thus the cycle begins again.

Even if a person can still afford to pay their mortgage, but needs to sell for any other reason (moving??), they may have to sell it for less than they owe, which creates a short sale scenario, which again drives comparable values down….AND, banks will rarely even consider a short sale, unless you’ve stopped paying your mortgage.  (WHA??)

Now I agree that home values were overinflated for a few years, but is there a possibility that homes will be undervalued in years to come because of the scenario I just outlined? For example, one of the homes that sold recently that was owned by the bank, 13 Wentworth, just sold for $20,000 LESS than it sold for in 1999. 1999!!! Is there a new price/value disconnect? Are banks creating their own problem?

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10 Responses to Just a thought about Banks' new role in real estate.

  1. randy walker says:

    So, True. we all know now the price disconnect in 2004 and 2005 from true market value. overwhelming number of buyers and no sellers. (hindsight, so clear. However we face the exact but equal opposite condition with an extreme amount of sellers and few buyers. Lenders, who fueled the fire then with 100% loans are now reacting equally opposite stomping values well below reasonable market value with the foreclosure process and inablity to act on short sale offers. And where did the mortgage money go which was supposed to help soften this crisis?

  2. Vince Perna says:

    I agree. The banks have OVERcorrected their risk appetite and cut off the funds. This is just as bad as the overzealous lending from before. Nobody can buy a home, which contributes to the downward pressure on prices. I hope they will get their act together soon and begin lending again.

  3. Brian Caldwell says:

    As a real estate professional and current owner of a property being renovated for profit, this situation alarms me. Everyday we see properties listed for far less than is owed and when or if they sell at all they drive our home values down. Will buyers be able to see through the fog of deceptive home values when looking at our own properties, and should we be so hypocritical as we balance negotiating the prices even lower when we are the buyer’s agent? Where is the line drawn? I guess that depends on who the client is.

  4. Vince Perna says:

    There are also “loss sharing agreements” where the FDIC (our taxpayer money) agrees to cover the majority of losses the bank faces in foreclosure. The banks incentive to modify has been taken away. We have written them a blank check. I even read a situation where a bank benefited from foreclosing over accepting a short sale.

    read more here:
    http://mandelman.ml-implode.com/2009/09/liberal-billionaire-george-soros%E2%80%A6-major-shareholder-in-indymacone-west-bank/

  5. Paul Brown says:

    When the pendulum stops swinging and settles back into the position of a “balanced” market, the banks will have remembered that they’re in the business of loaning money. That is the right way for them to put dollars on the income side of their balance sheet. Right now TARP is putting money on the income side. That is the wrong way. We need to stop the bailouts and let capitalism work. The new normal won’t be the same normal we’ve all benefitted from recently, but I hope we can get back to the right normal. By the way, I bought a property in Long Island in 1985 and sold it in 1986 for a 57% profit. If I would have waited until 1987 to sell, I would have been lucky to break even. This is proof that we’ve been here before and what goes up must come down.

  6. Mark Fuchs says:

    This is a great discussion. I hope that it generates lot of comment since it will impact anyone seliing or buying a home, or trying to get a mortgage on a purchase. In one neighborhood with less than 25 homes, 20% were short sales, or foreclosures. The neighborhood had been vibrant and considered a great place to live before, but that all changed. Now the question is what’s wrong with that neighborhood and the remaining neighbors are seeing the value of their homes slide lower and lower.
    Shifts in the market are a reality. However, there seems to be a difference this time. It appears to be more widespread and much more severe a correction than in the past. While it is true that things will change again, for some real estate will have lost its luster forever.

  7. Well, alot of good comments here. Let’s put ourselves in the place of the lenders. They ALL helped put their assets at huge risk by lending to folks who had little to no “skin in the game”. The lessons have been learned and as a real estate professional we must find buyers who have the qualifications(I,e, CASH) to buy. More importantly, as buyers reps, we need to help them FIND THE VALUE!

    This helps the banks book more solid loans and that helps every one.
    Trust me, the banks want to loan.. fee income and interest spread on CDs is not getting it done (profit) for them.

  8. Bill Friedlander says:

    Kristin,

    The pendulum never stops swinging, whether in a wound grandfather clock, the stock market or the real estate market. And when it gets too far as it probably – but not certainly has in Charleston vacation properties, then it will turn up. If you have clients who can afford risk they should be starting to commit now and investing cash in distress properties that the banks are throwing out.

    I am in my 53rd year in the business of pricing assets and this looks like one of the four best buying opportunities in that time period.

    Bill

  9. Dave Landry says:

    Lots of insightful comments here. The banks seem to be overly careful now. They are dotting every i and crossing every t in the mortgage process and making the process take longer. This, and the other problems cited here makes it more attractive to work with cash buyers. But, that leaves a large portion of the potential buyer market under served.

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