A foreclosure wave is coming!!! And short sales are about to be unleashed!!! That’s often the housing narrative, and let’s talk about that while looking at some changes we’re starting to see in the Sacramento market. I hope this is helpful, whether you’re local or not.
Skim by topic or digest slowly.
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4/1/23 NAA Conference in Sacramento
MORE DISTRESSED PROPERTIES ARE POISED TO COME:
There is no longer a foreclosure moratorium in California, so we should see more foreclosures ahead. We should see more short sales too since a sharp change in prices lately will mean some people who bought over the past year especially will start to owe more on their mortgage than the house is worth. I realize this can bring up lots of PTSD from the last housing bubble, and the inclination is to say we’re on the cusp of The Big Short 2.0 (classic movie). But having more distressed sales ahead doesn’t automatically mean there will be a distressed property avalanche like last time. The truth is it’s impossible to predict how many distressed sales we will see, but right now delinquencies are low, there is political pressure in California to not see foreclosures happen, we don’t have the problem of adjustable rate mortgages ready to reset, we’ve had a decade of strict underwriting, and lenders theoretically should have a more efficient process to handle short sales and loan modifications. We’ll see what happens, but I advise being careful about hyping a foreclosure tsunami. If I had to guess, I’d say we won’t have the same bank-owned bloodbath we saw last time, but we should still see more distressed properties ahead.
WE ARE AT THE BOTTOM:
We have bottomed out with distressed sales, and there isn’t any place to go but up. For instance, so far in Q4 we’ve seen 0.29% of all sales as either bank-owned sales or short sales in Sacramento County.
WE’RE SEEING A TRICKLE OF NEW BANK-OWNED LISTINGS:
There have only been 50 bank-owned sales in the Sacramento region this year, but there are currently 45 bank-owned listings, so there has been an increase in distressed listings. I’ve heard a few REO brokers tell me they are starting to get listings and hearing of more coming. I’ll admit I’m careful about putting too much weight in stories because we’ve been hearing about foreclosures coming for over a decade. But I am seeing more distressed listings hit the market, so there is at least something to this. No matter what, the number of listings is a DROP IN THE BUCKET of total volume, so be careful about selling fear. Yes, there is a trend here, but these aren’t 2007 foreclosure vibes either.
UNDER $500K: Most bank-owned listings are under $500K right now, and most are also under 1,700 sq ft. This tells us entry-level price points are experiencing more foreclosures hitting MLS (not a shocker).
OLDER UNITS: Most bank-owned listings are 20+ years old.
SHORT SALES LISTINGS ARE INCREASING
In all of 2022 there have only been ten short sales in the Sacramento region, but there are now 19 short sale listings. Some of these short sales are clearly due to market conditions (prices dropping), but others are personal circumstances. In other words, it’s not just one thing.
- 21% of listings are due to prices declining in 2022
- 26% of listings are old reverse mortgages
- Quite a few short sales are older pre-bubble loans
- Over half the loans are FHA or VA.
EXPECT MORE UNDERWATER OWNERS AHEAD
The market has seen sharp price change, so we should logically expect to see more people in a negative equity position. The most vulnerable groups are FHA and VA owners in light of putting little money down when purchasing. Over the past year, there were 3,278 FHA and VA sales in the Sacramento region, which is 13.7% of all sales. It’s hard to say how many local owners are currently underwater in their mortgage, but a good portion of FHA & VA buyers are candidates. Keep in mind there are conventional programs that require little money down, so conventional buyers aren’t immune from the trend.
Not everyone who is underwater on a mortgage is going to sell, so it would be a mistake to sensationalize this data or say things like, “13.7% of owners are in trouble.” Please don’t do that. Ultimately, if more people start feeling economic pain and job losses, that could help the trend grow. For now, we are at the beginning of a trend.
WATCH FOR INVESTORS:
A Realtor friend reached out this week and let me know of a local investor with some properties heading toward foreclosure and some possible short sales. In this case, the investor is having a problem with not enough cash for rehab costs. I’m not sure if there are other issues, but one of the struggles with flipping homes today is such quick price change has wiped out room for profit.
A LANGUAGE LEARNING CURVE:
There are lots of people who work in real estate today who have no idea what a short sale is, and they may not be familiar with terms like being “underwater.” Thus, there will be a learning curve ahead as this trend unfolds. I often joke with people saying a short sale is when a short person sells a home (sorry, dad joke). In truth, a short sale is when the owner owes more on the house than it’s worth, and the lender gives approval for the sale to happen despite that. And being “upside down” or “underwater” is a description of owing more on the house than its worth (nothing to do with Stranger Things or flooding).
LOCATION OF SHORT SALE LISTINGS:
There are only 19 short sale listings right now. Technically there are a few missing on this map because they are located in such outlying areas. The green pins are listings and the blue pins are pendings. 68% of short sale listings are in Sacramento County, 16% are in Placer County, and the rest are split between Yolo and El Dorado.
Nationwide FHA: Black Knight shows FHA delinquency rates have increased more nationally, so this is something to watch (see PDF).
1.44% OF LISTINGS ARE DISTRESSED IN SACRAMENTO (TECHNICALLY)
Only 1% of all current listings and pendings combined in the Sacramento region are bank-owned, and only 0.44% are listed as short sales. Technically we could say 1.44% of listings and pendings are distressed, but it’s also the end of the year, and there aren’t that many listings right now. In short, as more listings presumably hit the market in the spring, the percentage of distressed listings could get smaller. We’ll see.
THE STATE OF CURRENT DELINQUENCIES
There has NOT been a major uptick in national mortgage delinquencies, but this is something we should watch – especially with talk about credit card debt rising. I think sometimes people are saying things like, “The foreclosure wave is about to hit,” but we aren’t having a massive delinquency problem. Could this change in the future? Sure. But for now, we need to let actual stats form our narrative instead of imposing a narrative of doom. As far as the future, if we have economic pain ahead, it would make sense to see more delinquencies. We’ll see. Visuals from Black Knight (see PDF).
AGENTS, PLEASE INPUT DATA CORRECTLY INTO MLS:
Friends, please input properties correctly into MLS if they are short sales or bank-owned properties. Accurate data helps everyone, and when stats aren’t accurate, it can lead to an off-base narrative.
BUYERS, DON’T GET YOUR HOPES UP:
Be realistic that there are VERY FEW distressed listings right now, so if your plan is to target a foreclosure or short sale, that’s a tiny pond for fishing. Moreover, 26% of bank-owned listings and 31% of short sale listings have been on the market for more than one hundred days, so there is clearly a breakdown with overpricing, negotiation, or something else. In other words, just because it’s distressed doesn’t mean it’ll be easy to close. Ultimately, the verdict is still out too on how efficient lenders are going to be with short sales. Stay tuned.
CLOSING THOUGHTS:
We are seeing slightly more distressed sales hit the market, and we need to pay attention to this. But it’s important to keep the narrative in check. Current distressed inventory is a drop in the bucket compared to total volume, so let’s NOT say there is a massive wave. Let’s keep watching.
I hope that was helpful.
HAPPY HOLIDAYS: This is my last blog post of the year. Merry Christmas and Happy Holidays from my family to yours. Thanks for making this year so great. I appreciate all the conversations, and I’m so grateful for all the business you sent my way. Blessings to you!!
MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.
Thanks for being here.
Questions: What stands out to you? What do you think will happen ahead with distressed sales? What did I miss?
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Hey Ryan,
Happy holidays! Enjoy the down time. Underwriting has been so much more robust over the past 10 years compared to before the Great Recession that we won’t see distress approaching anything the issues we saw last time. The vast majority of homeowners in our region have equity to buffer personal issues. We’re still significantly below historic short sale and foreclosure trends so as long as we don’t have any major catastrophes, we should do better than in 2005-2012.
That said, I think we’ve had more short sales than reported. Open Door and Zillow certainly sold a number of homes recently below what they paid….
Thanks Joe. Yeah, we don’t have the same exact dynamics. We should still see an increase as that’s what we are seeing now. I hear you on Zillow and Opendoor. Since they paid cash, I won’t count those, but it’s been incredible to watch the lack of profit from those companies. Merry Christmas!!
Hey Ryan! Happy New Year!! Should the housing market shed 15% to 20% of the gains made in the response to COVID I think it’s highly possible that we see a painful amount of shorts flood the market. A lot of folks took advantage of low rates and put 5% down with tight debt to income ratios over the 24months prior to March of 2022. Then you have a large group that made those purchases that would no longer qualify for their current loan amount at rates hovering around 7%. I’m one of those people. I upgraded in November of 2021 at 3% on a 30 year fixed the only difference is I was fortunate to have 40% to put down.
Market participants can’t stomach rates that many have never seen at 7% before and likely to move towards 8% come spring. For the vast majority of the 2000s rates fell and held in the 4% to 5% range. A decade is a long time! Then by 2009 rates were averaging 5.14%, a nice number when looking at today’s rates.
By the end of 2009, the average rate on a 30-year fixed mortgage was around 5.14%. By May of 2013 we hit a 10 year low at 3.35% primarily due to low demand. Rates remained low and in November of 2021 we were down to 3% on a typical 30 year fixed conventional mortgage. What we didn’t know and no one could have ever predicted, was that in March of 2022 our nation’s central bank would begin a series of aggressive rate hikes never before seen in the history of our country. Mortgage rates have followed suit. We hear the phrase “historically low rates” quite often and it makes me wonder with so many never experiencing rates above 5.5% and comfortably below that for so long now if we can really have a functioning market should they continue their hawkish stance.
Thanks for the great blogs Ryan! You do a great job! Thoughts?
Peace/Carl
Thanks Carl. I appreciate your thoughts. Low rates have been like a drug, and we’re going to have to taper off addiction and function without the steroid of such low rates. It’s to be determined what rates do ahead. Everyone and their Mom has a different opinion. It seems like I was hearing lots of optimism from some in the real estate community, but then rates ticked up over the past two weeks.
It has been a long stretch of low rates, and what we saw at 3% and below created total chaos. It’s good to get away from that sort of dynamic because it was so unhealthy, but this means the market has to experience pain through price drops in order to get more buyers back. We really should see more distressed inventory ahead, but it would be surprising to see anything close to what we saw before. This hinges on what happens with the economy and mortgage rates. If prices really began to dip too, the allure of holding on to a low monthly payment in an underwater mortgage is going to lessen. We are not close to that yet, but the median price is down about 15% in the Sacramento region now when considering December stats. We are still not affordable though. There was a 42% increase in the median price from $440K in March 2020 to $625K in May 2022. Right now the median is hovering around $530K, so there is a way to go before buyers start to feel more affordability.
The market wants to find balance, so it’ll keep trying to find that.
Down here last numbers in early Dec showed under 1% short sale foreclosures. Can’t tell you why except that we did have a lot of cash purchases in the prior year and maybe that helps, we had a lot of Orange County and San Diego County come into market bringing their mansion money so guess they are okay for now, unless they refinanced last year. My bigger concern is the big JV and Hedge Fund money coming into markets and buying up those type of properties for rentals. If we get another wave of that craziness, we will continue to see the housing storage. On a personal note, all my best to the Lundquist clan. Have a great holiday. And yes, new saddle and chaps ordered in the last week. That should get the new year off with a bang. Take good care, my friend.
Thank you for sharing Brad. It sounds like our markets are similar. Distressed sales are basically about as low as they can go. I’ll be curious to see what happens with short sales ahead. There will certainly be some people who need to sell for whatever reason even after purchasing recently.
Merry Christmas, Brad. Enjoy that saddle. Giddy up yippe ki-yay. 🙂
I think the affordability and rates will push prices down another 10-15% assuming the 30 year fixes stays above 5%. Any thoughts? Are we at the bottom? Will a recession push us lower?
Happy Holidays Ryan and thanks again for having this great data and your outlook!
Thanks Christian. Being that volume is basically down 41% from the pre-pandemic average, it’s hard to call this a bottom. If anyone thinks it’s a bottom, I would actually love to hear why. The reality is we have a way to go before getting buyers back into the market since affordability is still out of sync. For the moment there is still downward price pressure, but lower mortgage rates could obviously help change demand too. Lower rates are an x-factor too, so we’ll have to see what happens. Time will tell. On paper the market seems more inflated beyond just 10-15%. Even at 15% declines from November price stats locally, we would still be about 5% above the start of the pandemic. Merry Christmas!!
Thank you for the look at distressed sales. It’s been so long that these haven’t had much influence on the market that it is easy to stop keeping an eye on them.
For sure. And they hardly have any influence right now either. But here they are showing a slight uptick. I find when talking about short sales online that someone almost always asks me what that means. It just goes to show household terms from a decade ago aren’t so common right now. I guess it’s similar for me growing up not thinking about inflation, but my teens are at least familiar with the concept.
A Spicoli sized wave of foreclosures is not likely, but a moderate HB pier swell could be a possibility. Why? A couple of reasons. Some aggressive buyers that overbid and overpaid may have entered into homeownership underwater. VA and FHA buyers that put very little down payments on properties that appraised, funded and loans were made also have little to no equity. Too many appraisals hit the contract price and slid through review and underwriting during the gold rush. It could catch up with some of them. Wax up your board, there may be waves
Haha. Too good. Extra points for an HB wave reference. Agreed on vulnerable groups, and also agreed on buyers who went way above asking price. It’s a shame the market was that aggressive.
Ready to SHOOT THE PIER!! (HB reference) !!
Okay, I’m impressed with the reference. Wasn’t expecting that, Truett. Haha.
As You know value is willing buyer and seller agreeing on price however if you are selling and want a buyer how much below market competition do you need to price your house? I have found unless I’m priced 5-10% below market there are no offers. Then you will get beat up on incentives and repair requests. So is the market really 5-10% less than what its reflecting?
I’ll split hairs to say market value is the most probable price a group of buyers will pay – not just what two people decide on. I don’t know that there is a one-size-fits-all answer. This is where looking to the comps is the key. What sort of pricing are buyers responding to in the neighborhood? How long is it taking competitive properties to get into contract? How much lower are properties tending to close compared to their original list price? What sort of credits or concessions are sellers tending to offer? In the region 73.5% of sales in November closed below their original list price, and just under 17% went above. We’ve hands-down had an overpriced market as well as a declining one, so it makes it interesting to interpret the numbers and try to figure out pricing too. With that said, 5-10% below can be a big number, and that seems lofty to me for really recent stuff. But it comes down to when the comps got into contract. If the comps are from the summer, then there may need to be a more substantial reduction. Paying attention to when the price was established for each comp and pending is the key right now. But if value was $500K today, I don’t think it takes pricing at $450-475K to move the needle. If properties were selling at $500K in the summer though, then we could be looking at a more substantial reduction needed…
Yes, all those details are key and its market by market. In general though I feel we will see properties sitting a long time that may get a decent price compared to recent sold however if a seller wants to sell in 30 days or less it takes a big price drop/low list price otherwise the property will likely sit.
Appreciate your input Ryan!
Thanks Christian. It’s tough too because the market has changed, and I think there is still an adjustment happening. Last year properties were taking about half the time to sell, and I suspect lots of people got used to that. But this year it’s really taking about 7 weeks on average right now to get into contract (or 5 weeks median). I actually just pushed out some stats in the past hour on Twitter to talk about days on market for pendings. On one hand it’s simply going to take longer to sell today, but I still advise sellers to price reasonably and don’t wait 30 days for a reduction. Still about 30% of pendings are getting into contract in the first two weeks. Nothing wrong with going quickly as long as you’re not leaving money on the table. https://twitter.com/SacAppraiser/status/1605273394072932352
Good way to break it down??.
But I think price and market time are going to trend down. It will be interesting to compare a couple months from now.
Agreed. There is a real seasonal pattern at hand, so it should take less time to sell during the spring. You are right about that. We don’t usually see fewer days in the closed sales stats until February or March (which means it started to take less time to sell in January or February, but it just didn’t show up in the closed sales stats until later). For now we’ve been about a week above the pre-pandemic average, so we’ve been much more normal in this regard at least. It’s an unfolding saga. Let’s keep watching…