Following the debacle in the mortgage lending industry of the past month, the median price of the American home is expected to drop next year for the first time since federal housing agencies began keeping statistics in 1950.
According to the LBN E-lert, an online news service that tracks national financial trends, the decline should be a modest 1 percent to 2 percent, but will spread beyond the once-booming property markets of the Northeast and California to Midwest cities like Chicago and Minneapolis.
Whether this is a trend that applies to Malibu’s peculiar property market remains to be seen. But all signs of culpability point to the subprime mortgage wave that hit the nation in the past few years when “Alan Greenspan [former chairman of the Federal Reserve Bank] made credit available to any participant in the credit market, no matter how feeble that loan may be,” said a source, who is a real estate investor and did not want to be identified.
Initially, lending institutions offered interest rates low enough to attract buyers who didn’t have resources for down payments and who would otherwise not qualify for loans. Within a few years, however, interest rates rose, forcing borrowers to meet higher monthly payments, re-finance the loans-losing equity-or lose the properties to foreclosure, which are then offered for auction by a trustee.
Industry analysts have been warning of the nontenable risk of such loans for years, and the recent spike in property foreclosures have born out the prediction across the country. California foreclosures were up 20 percent in the second quarter of 2007, with Los Angeles County seeing a 25 percent increase from June to July.
While Malibu has its share of property owned by people who “don’t even need a mortgage,” there is plenty of vacant land, smaller homes and condos that are being foreclosed upon, the source said. And this offers tremendous opportunity to investors who can afford to bid on properties lost to foreclosure and hold them until a buyer is found, a practice known as “flipping.”
“Typically, foreclosures will be auctioned at a price well below market norm, so there’s a lot of bidding,” Kyle Speer, a trustee sale auctioneer who overseas auctions of L.A. County homes at the Norwalk Superior Court, said. But with the number of foreclosures going up, I’m seeing lots of houses whose bid price is higher than its real equity, so no one’s bidding on them.”
These properties revert to the bank and are known as REOs (real estate owned by the bank).
“Probably 80 percent of foreclosures coming up for auction these days go to REO,” Speer said. “There are still properties that have good equity, but if REOs flood the market, I think housing prices are going to go down.”
Brian Williams, a partner in a high-end, mortgage-lending firm with clients in Malibu, noted that the dry-up of available capital is hitting the sub-prime market hard.
“Wall Street isn’t interested in buying any of these kinds of loans so companies are going belly-up,” he said. “Big banks will drop their subprime divisions and there’ll be big layoffs. Aegis Lending Corporation in Texas closed its doors last month. Countrywide is getting killed.”
But Williams thinks that most buyers in the Malibu market will have no problem finding loans. “If you’re looking at high-end property $3 million and up, you’ll be fine,” he said.
And for those investors who have the wherewithal to bid on foreclosures, the profit can be worth the risk, if the property meets certain conditions.
“One, you have to look at what comparable houses are going for,” the anonymous industry source said. “If you have a property in a neighborhood with houses going for a million and the foreclosure is listed at a starting bid of $800,000, it’s probably worth it, even with the commissions you pay.
“Two, you need to check the capital structure,” he continued. “Are you only bidding on a first mortgage? Is there a second? Are there other liens, like to the IRS? This will tell you what the property’s really worth.”
And finally, what does the house look like inside and out? The source said that foreclosure homes are not normally available for a buyer to view before auction.
“And you need to show up on the courthouse steps with a cashier’s check in the full amount of your bid,” he added.
This makes it difficult for anyone other than the dedicated investor to consider bidding on foreclosure homes. And it might be even more difficult in the months to come with the expanding ripple effect of the market meltdown.
“The REOs we’re seeing are due to a lot of people who took out their loans in ’05 and ’06 when the market was high and who can’t make the rising mortgage payments. There’s not a lot of equity there and the bank’s have less investment capital,” Speer said. “So I predict that we’ll see a rise in foreclosures, which will ultimately make property values go down.”