The Impact of Distressed Properties on Neighboring Values... 8

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1 why now is a great time to sell 2nd QUARTER 2011

2 table of contents 5 Reasons You Should Consider Selling Now... 1 Will I Get More Money If I Wait?... 3 Almost 14,000 Houses Sold Yesterday... 4 What Exactly Is Shadow Inventory? Month s Shadow Inventory: State by State The Impact of Distressed Properties on Neighboring Values... 8 Oswald Acted Alone and We Did Land on the Moon... 9

3 5 Reasons You Should Consider Selling Now If you plan on moving anytime in 2011, you should strongly consider selling your house now rather than waiting. Here are five reasons why: 1. This is when your house will get the most exposure. There is currently an increase in the number of buyers attending open houses and searching online for a home. This surge dramatically increases the exposure for your house. The best chance of getting quality offers (perhaps even multiple offers) is RIGHT NOW! 2. Foreclosures and short sales will increase in about 90 days. The good news is that the number of people paying their mortgage on time is increasing. This will lead to less distressed property sales later this year and throughout The not-so-good news is that there is still a large inventory of existing foreclosures and short sales that will still be coming to market. As an example, LPS reported in their latest Mortgage Monitor that: There are still twice as many loans going 90+ days delinquent as are starting foreclosure. There are almost three times the number of foreclosure starts as there are foreclosure sales. Distressed property inventory levels are almost 45 times the rate of monthly foreclosure sales. This means that there is a backlog of properties which will start coming to the market in about 90 days as banks clear up their paperwork challenges. These properties sell at dramatic discounts. They will be your competition. Both Fannie Mae and Freddie Mac have recently discussed the magnitude of this challenge. 3. Interest rates have risen over the last six months. Interest rates have stabilized recently. However, in the last six months, interest rates have climbed over 1/4%. Every time the rates increase 1/4%, approximately 250,000 buyers are eliminated from qualifying for a mortgage. In an environment of volatile rates, waiting could mean that there will be fewer buyers eligible to purchase your house. It also could mean that you will pay a higher rate on the next home you buy. 4. Qualifying for a mortgage is about to get even more difficult. Besides increasing rates, there are other factors that will hinder a buyer s ability to qualify for a mortgage as we move forward. Lending standards have been getting tighter over the last year. And as the government debates the new proposed guidelines (QRM), banks are gearing up for even more stringent standards. Morgan Stanley recently stated: Recent developments in issues such as GSE reform, Dodd-Frank securitization rules, and foreclosure settlement issues suggest a tighter and more expensive environment for mortgage credit. This may impact any potential purchaser for your property and may also impact your next purchase. (cont. on next page) 1 P a g e

4 5. It s time to get on with your life. Probably the most important reason to sell is so you can get on with your life. You placed your home on the market for a reason. Do not allow a less-than-stellar housing market prevent you from reaching your goals as an individual or as a family. Think about the reasons you decided to move in the first place. Are these reasons still important to you? If you have to take less than you were originally hoping to get for your house, your family has a question to ask each other: Is the dollar difference in sales price worth putting off our plans? Only you and your family know the answer to that question. If you plan to sell this year, the reasons above prove that selling now makes more sense than waiting to later in the year. Sit with a real estate professional in your area today to fully understand your best option. 2 P a g e

5 Will I Get More Money If I Wait? Sellers in any real estate market are looking to get the best possible price. If you are looking to sell in the next year, today s price may well be the best price. Home values stabilized somewhat in Many hoped that was a sign that values had bottomed out and we would see price appreciation in Studies released recently have painted a different picture. Mark Fleming, chief economist with CoreLogic, said, A number of factors continue to dampen any recovery in the housing market. Negative equity, which limits the mobility of homeowners, weak demand and the overhang of shadow inventory all continue to exert downward pressure on housing prices. We are looking out for renewed demand in the coming months as the spring buying season gets underway to hopefully reduce the downward pressure. They are not talking about the spring market increasing or even stabilizing prices. They hope it will reduce the pressure to drive prices lower. Radar Logic s RPX Composite Price comes to virtually the same conclusion: Radar Logic believes the RPX Composite price will continue to exhibit year-on-year declines throughout 2011 due to a growing supply of homes for sale and in the inventories of financial institutions, and weakening demand due to the reduction of government incentives for home buyers. Moreover, banks are facing uncertainty over whether they will be forced by regulators to expand mortgage modifications, and may reduce lending and tighten standards as a result. No matter what you call it, a double dip or the continuation of a long process of deterioration, the current trend in home prices is evidence that housing markets are continuing to languish, said Quinn Eddins, Director of Research at Radar Logic. We expect the negative trend to continue under a severe supply overhang that includes a large and growing shadow inventory of homes in default or foreclosure. It seems that prices have again begun to fall nationally. With the overhang of existing and shadow inventory, prices will probably continue to decline throughout most of If you re thinking of selling, now might be the best time. Check with a local real estate professional to see how this might impact your area. 3 P a g e

6 Almost 14,000 Houses Sold Yesterday One of the biggest misconceptions in today s housing market is that homes are not selling. That is simply not true. The National Association of Realtors (NAR) is showing that homes were selling at an annual rate of 5.10 million. That s an average of 13,973 every day 365 days a year! We realize that 40% of the sales are distressed properties and that 22% of buyers are investors. Yet, that still doesn t negate the fact that homes are in fact selling and 60% of them are NOT foreclosures or short sales. And Lawrence Yun, chief economist of NAR, believes this uptick will continue: Based on the current uptrend with very favorable affordability conditions, rising apartment rents and ongoing job creation, existing-home sales should rise around 5 to 10 percent this year. Homes are selling. You probably will need to offer a compelling price if you put your house on the market. But if you do, it will sell. 4 P a g e

7 What Exactly Is Shadow Inventory? It is difficult to read an article about real estate today without the term shadow inventory being mentioned. But, what exactly is shadow inventory? It refers to the inventory of homes not yet for sale that will eventually come to market in the near future. Most definitions include properties already foreclosed on and owned by the banks (REOs), those houses in the foreclosure process and those homes where the homeowner is seriously delinquent on their mortgage payment (at least 90 days behind). There are many questions about shadow inventory. Today, we want to address the most common misunderstandings. I ve heard about shadow inventory for years. Does it really exist? Not only does it exist, it is being slowly released onto the market. The National Association of Realtors has reported that over 30% of all home sales over the last few months have been distressed properties. Why include seriously delinquent homes in this number? Seriously delinquent are counted because studies show that 98% of all those who fall 90 days behind never catch up and these properties eventually come to the market as distressed sales (short sales or foreclosures). Do banks have a backlog of properties that they currently own? Yes. In an article in Housing Wire, RealtyTrac Senior Vice President Rick Sharga said: major banks currently hold roughly 1 million REO, or homes repossessed through foreclosure, but only 30% have actually made it onto the market. Why are banks holding this inventory? The article mentioned above answers this question this way: Striking a proper balance on how to manage this shadow inventory of foreclosures is vital for the banks to show a healthy balance sheet while not dumping too many distressed properties onto the market, further dragging down home prices and values. (cont. on next page) 5 P a g e

8 Isn t most of this inventory sub-prime and exotic mortgages? Not any longer. A study recently done by Morgan Stanley shows that: 26.3% of the loans are sub-prime 17.4% are Alt-A 56.2% are prime mortgages Right now, prime mortgages make up the majority of loans in this shadow industry. Isn t most of this inventory confined to CA, AZ, NV and FL? Not anymore. The Morgan Stanley study showed: the shadow inventory is growing across all of the United States While hard-hit cities represent a more than fair share of shadow inventory, its distribution broadly encompasses all corners of the country, said the analysts. Shadow inventory is real and will impact almost every part of the country. Make sure you ask a local real estate expert to find out how it may impact your market. 6 P a g e

9 Month s Shadow Inventory: State by State The National Association of Realtors (NAR) Economists Outlook shows the number of months shadow inventory by state: NAR Explained their Methodology: The map shows the number of months it would take to clear the shadow inventory by state. The months supply is estimated by dividing the shadow inventory and the monthly number of distressed sales. The numbers range broadly from 51 months in New Jersey to 7 months in Nevada. When looking at months supply it is important to keep in mind that this estimate highly depends on saturation of distressed sales. Given that New Jersey over the past year on average reported about 20 percent of existing home sales to be distressed sales, it will take a longer period for the shadow inventory to clear. In contrast, Nevada s distressed sales averaged a considerable 70 percent share of the existing sales and at that rate the current shadow inventory would clear in 7 months. Appreciation of residential real estate will not take place until a region works their way through the shadow inventory that exists. This map gives you an indication of when that will occur in your state. 7 P a g e

10 The Impact of Distressed Properties on Neighboring Values The banks are finally getting their foreclosure paperwork in order. They will start bringing larger numbers of distressed properties to market over the next six months. We must realize that this influx of discounted inventory will have an impact on the values of neighboring homes. How large an impact? According to RealtyTrac a foreclosure sells for 65% of the value of a similar non-distressed property. Therefore, this foreclosure inventory will affect values in two ways: 1. As Discounted Competition Obviously, a segment of purchasers will prefer the discounted property based on price alone. Even if the distressed property is in need of substantial repair, the buyer is getting the property at a 35% discount. Price is determined by supply and demand. Distressed properties will eat up a portion of the demand for housing and that will put downward pressure on all values. 2. As Comparable Sales on Your Appraisal Even after you put your house into contract, this distressed inventory can still impact your transaction. Unless your purchaser is paying all cash, there will be an appraisal of your property by the bank who is giving the mortgage to your buyer to complete the purchase. Because of the volume of distressed properties selling in almost every market, banks are instructing appraisers to use these discounted sales in determining values of non-distressed sales. We can argue the logic of this some other time. At this point, we must simply be aware that this is taking place. As banks move substantial numbers of foreclosures onto the market, values of other homes in the region will be impacted. 8 P a g e

11 Oswald Acted Alone and We Did Land on the Moon We believe that things are usually as they seem. We are not the type of organization that believes in conspiracies. However, there is something interesting in some of the housing price studies we are seeing in our research. It seems that some of the groups making the predictions are the same ones that have the greatest power to affect the prices they are projecting. Most housing analysts warn that the heaviest downward pressure on prices will be created by distressed properties and the speed at which they will be released to the market. Research shows that short sales sell at a 10% discount and foreclosures sell at a whopping 35% discount. Obviously, when and how much discounted real estate enters the market will have a major impact on prices of surrounding properties. Back to Our Research We are now seeing that a certain segment of those projecting future pricing have two things in common: They believe prices will fall rather dramatically in 2011 They have control of the flow of discounted properties to the market Predictions for 2011 by firms that fall in the above category: Bank of America projects that prices will fall 3.7% Fannie Mae predicts that median prices will drop $12,500 Wells Fargo reported that they feel home prices will drop 8% Not a Coincidence We are beginning to realize this is not a coincidence. The organizations which should best know when the surge of foreclosures will be released are saying house prices will be hit hard this year. We are not asserting that there is anything devious in what we have found. We are just reporting that those who have control over the flow of distressed properties must think/know that inventory is about to be released. Why else would so many of them be predicting a sharp decline in home values? If you currently have your house on the market and are hoping that you will see a better price later in the year, BE CAREFUL! Those in the know are warning you the best price might be attained TODAY! 9 P a g e