With home prices showing some signs of stabilizing and sales starting to pick up again, it might seem like the right time to trade up to that bigger house or better neighborhood.
That isn’t necessarily the case, economists say. While the government incentive for first-time buyers does seem to be stabilizing the lower end of the market, many believe that the middle to upper end of the housing market won’t touch bottom for another year or more.
“It is the upper end of the housing market that is a clear weak spot right now,” says Scott Anderson, senior economist with lender Wells Fargo.
Indeed, while he expects the market as a whole to hit bottom six months from now, he says it could take much longer for the middle and upper end of the market to recover — perhaps as much as a year longer.
“The higher end has further to fall,” Anderson says.
A second and third wave of foreclosures?
That’s due, in large part, to the huge supply of homes expected to hit the market over the next year — many of them foreclosures.
Foreclosure data firm RealtyTrac recently revised its estimates of the number of homes expected to enter some stage of foreclosure this year to 3.5 million from 3.2 million, as the number of monthly foreclosure filings hit new records.
Instead of getting better, the foreclosure crisis is now broadening in scope to include a large number of so-called option adjustable rate mortgages, Alt-A stated income loans (also called liars’ loans) and even some prime fixed-rate loans made unaffordable by unemployment or loss of income, says Rick Sharga, RealtyTrac senior vice president.
The subprime crisis hasn’t gone away, he says. “There are just more loans being added to the mix.”
Indeed, according to the Mortgage Bankers Association’s quarterly delinquency survey, 71% of loans outstanding and 42% of all foreclosure starts in the second quarter of this year were on fixed-rate loans.
And, analysts say, there is a flood of homes that are only now being taken back by the bank because of the state and federal moratoriums that were in place until this spring.
With unemployment still roiling the economy and a large number of teaser-rate loan resets coming, Sharga doesn’t expect the waves of foreclosures hammering the market to ease up any time soon.
“At best, we have another year and a half of a very high level of foreclosures,” he says.
A bigger pool
While many of the foreclosure properties hitting the market in the past year have been starter homes financed with risky subprime loans, many in this next wave of defaults are larger, Sharga says.
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“We’re seeing more expensive properties coming into foreclosure (proceedings),” Sharga says.
Just how many are actually hitting the market is another story. Many higher-end properties seem to be “stuck” in the foreclosure pipeline, with homeowners not making mortgage payments and banks not performing loan modifications nor taking the properties back, says Southern California bank-owned property broker Leo Nordine. They are, in essence, letting the homeowners go mortgage-free in exchange for taking care of the property, or are simply too overwhelmed to handle the influx.
“I keep waiting for the floodgates to open for all the high-end REOs,” Nordine says, referring to “real-estate owned” properties, or those taken back by the lender. “The banks keep sitting on them.”
Meanwhile, U.S. existing-home sales rose 7.2% to 5.24 million units in July, according to the National Association of Realtors. That’s higher than the 4.89 million units in June, and 5% above the 4.99 million-unit pace in July 2008. And July was the fourth consecutive month of sales increases.
The widespread uptick in sales has led buyers in some higher-end Southern California communities to believe the market is bottoming out, Nordine says. Reasonably priced middle- to upper-end foreclosures hitting the market in desirable neighborhoods are receiving multiple offers, agents say.
Liz Vaughn Avila of Dilbeck Realtors in La Canada, Calif., said that anything priced under $600,000 in her tony area is getting dozens of offers.
One three-bedroom tract home her client bid on that was priced at $470,000 received more than a dozen offers before selling for $545,000.
“I have clients who are just tired of waiting and are ready to buy a house,” she said. “They hear such conflicting reports on the news.”
The backlog
One thing is clear: More REOs are going to hit the market in the months ahead. A U.S. Treasury Department report last month said that only 235,247 loans entering foreclosure had been modified through July under the government’s Making Home Affordable program.
Millions more that are significantly underwater in value or unaffordable to their unemployed or underemployed owners will not escape foreclosure.
It’s just a matter of time, economists say, before these backlogged properties start hitting the market, widening the pool for buyers looking for a larger house to accommodate a growing family, or a better school district for their kids.
The question is: How much will these foreclosures bring down prices in an already-battered market? Will buyers who hold on land that much more of a bargain?
