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.
UPCOMING (PUBLIC) SPEAKING GIGS:
1/12/23 McKissock Webinar (register here)
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1/20/23 NARPM Luncheon
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2/8/23 SAFE Credit Union market update (details TBD)
3/10/23 PCAR Market Update Lunch & Learn (detailed TBD)
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.
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!!
Thanks for being here.
Questions: What stands out to you? What do you think will happen ahead with distressed sales? What did I miss?