Where have all the foreclosures gone?

There is a LOT of conflicting information in the market about foreclosures. Some of the latest you may have seen:

• Forelcosures up
• Foreclosures down
• Prices improve
• Prices decline
• One in mortgages "under water"
• 30% of all sales are "distressed sales"
• Case-Shiller says we may be headed to housing double-dip

What's up with this? The truth is...no one knows for sure. Between the prognosticator views, poor servicer performance, media hunger for 24 x 7 headlines, and political interests swirling around an upcoming important Presidential election, there are many varied interests trying to "spin" results in to their own perspective.

REALTORS as an organization attempts to spin the positive whenever they can to keep up the spirits of the market and their individual agent-broker constituency. The reverse side of that are the various investment, political and media interests that need to slant a story to further their ends.

Huh? If you sell stocks, bonds, commodities or annuities you're not likely to promote real estate as the right thing to buy because it is at or near the bottom of its cycle. Imagine a stockbroker's customer saying, "gee I think I'll move $500,000 or a $1,000,000 or so out of the bond portfolio and pick up some real estate assets. I think it just might be the right time to buy." What do you think that stockbroker is more likely to say: "great, I agree, I think we ought to rebalance your portfolio in that sector," or are they more likely to say: "are you nuts? The real estate market is dead and won't come back for 20 years, if that!" The stockbroker may or may not believe their conclusion, but if the investor asked: "do you have any real estate investments, like REITS that might be a a place to position ourselves right now? Then, the investor may get a very different answer. Probably something more like: "yeah, we may have a couple of funds that may interest you..." The same is true of whichever interest you're promoting, whether it is political, financial or in your self-interest point of view.

You might be interested to know that, as always, all real estate is "local." There are hotspots in the country where housing prices are actually increasing, and many areas where prices are still declining on the whole, but even in these areas, there are sometimes bright spots - certain neighborhoods, locales that may have reasons for their value increase in an otherwise declining market. You can find these doing a websearch on any of the major search engines.

From our vantage point, with various connections to major foreclosure services around the country, we are finding that the banks themselves have been reluctant to "flood" the market with more and more foreclosure inventory, instead, opting to slowly let out as few properties as their balance sheet will allow. How is that possible? Well, if you could borrow money from the US Treasury in the 1/2% range to bolster your balance sheet, instead of writing off -$100,000 on a $300,000 mortgage, what would you do? You might do what some of them are doing - borrowing hundreds of millions from the US Treasury and loaning it back to the "Fed" by buying bonds at about 3% yield with the money you just borrowed.

Think about that. If you got credit to buy a cup for 50 cents from a wholesaler, then sold it for $3.00, that would be a 600% markup - on BORROWED money. Hmmmm. Isn't that what large banks are doing? Borrowing money a 1/2% and "selling" it back to the government through investing in government bonds at 3%? That's a pretty good, so far, fail proof business, BUT, it's not for you. You need to be chartered and licensed bank entity to get away with that. It sure beats taking a 1/3rd loss on ONE mortgage, then trying to make up the loss making $20,000 car loans at 4% interest in this market. You would have to make 125 auto loans of $20,000 each at 4% interest to make up for just ONE loss of $100,000 on ONE house. That's a pretty big problem when there are nearly 2,000,000 houses in some stage of foreclosure, and another estimated 3,000,000 or so houses "under water" on their mortgages - where some portion of those are very likely to be foreclosed on.

This example is not intended to be a moral judgment, it is an example to help you see WHY there aren't as many foreclosures actually on the market for sale, as there otherwise might be. This is an ENORMOUS problem, and something that likely dwarfs the debt levels you have heard about to date. In  the end, we the people will wind up feeling the brunt and the burden of this debt as it comes home to roost over the years through further government indebtedness - that's what "Quantitative Easing" is - it's the government buying its own debt. Lots of that debt has been accumulating through Fannie Mae's and Freddie Mac's mortgage insurance losses in the billions and billions. These losses are very likely to continue well into the future, either as debt assigned to these entities, or assigned to other entities in the "money shuffle" that has become our current national policy.

That's the bad news. The good news is, we WILL get through this - eventually, though it ill be tough and there will continue to be more and more losses for the false economy we supported our collective selves with for the past dozen years or so through borrowing to pay for current expenses. Housing is so dramatically visible because that is the asset that so many people used as their private piggy bank to finance a lifestyle they might not otherwise have deserved had the "loose money" lending practices of large lenders with government acquiescence had not prevailed for a good 10 year period at least from 1995 through 2005. This was a time of national speculation in a consumptive economy. Current statistics tell us that we are now an economy that is fueled 70% by consumption. If we don't buy. We starve.

Remember, we have to live somewhere. Our country is still blessed with vast amounts of resources, so compared to much of the rest of the world we are far better off. The top 5 economies ni the world are:

• United States about $15 Trillion GDP
• China - about $6 trillion GDP
• Japan - about $5 trillion GDP
• Germany - about $3 trillion GDP
• France - about $3 trillion

Thee US still has about the same GDP as the next 4 major economies COMBINED. If we didn't buy goods and services from them, how well do you think those economies would stand up? All of these economies manufacture things. To manufacture things, you need natural resources. Of the economies above, who do you think has the most natural resources. The US does, of course, by far. So, IF we ever had to bring more of our manufacturing back to our shores, we have a good chance to do so. We might have to pay more for some products, but we have that option. The other 4 major economies right behind us have far fewer options that we do to steer our economies. We also still have an underlying "can do" spirit that still prevails in time of crisis. We can, and we will persevere through this current economic crisis and those that will come in future generations. Today fewer and fewer people tend to be studied in American History. Many schools have deemed American History as less relevant than say more "modern" subjects like: technology. That's too bad. If they only studied a little of our history they would see how much we have overcome over the years. We have had failures, collective bad judgment and yes - catastrophic economic crises - with no collective government help available, or even the ability to communicate crisis in a timely manner. We have also had extraordinary successes, and we are the examples today.

Our lifestyle is second to none in the world. We actually live a very privileged life compared to most of the rest of the world's inhabitants. No country contributes more to the world good and the world's safety on the whole. Yes, we make mistakes. We have made mistakes, and we will continue to do so over time. Serious comparative analysis however over time will demonstrate that we have no peer for supporting the general well being of human kind, nor has there ever been another of our stature.

What does this have to do with real estate? Actually, more than you think. Since the home is still the largest investment most of us will make, it commands a very large part of our individually family's "economy," whether you rent or own, for many people it still takes about 30% of your gross family income for housing. Should you buy now? Sure - but you need competent advice. I'm the first to say that not all real estate agents are competent, but the same is true in any other profession. Not all teachers, lawyers or doctors are competent either. Shop around for the right real estate advisor.

Real estate is like any other service. You have to do your own due diligence. what amazes me after 30 years in the business is how LITTLE thought most sellers and buyers give to choosing their real estate professional. When you're buying a toaster for $40, you probably shop several stores and check online for the best buy; but when shopping real estate agents any people just choose their agent because they came "recommended  to me..." The problem with that is that the people doing the recommending are usually well-intentioned but often they don't know the intricacies of real estate themselves.

Let me give you an example. I heard of someone who listed their property with an out-of-town agent, because "we used them in the past." That makes sense, except for the following. The price determined by the agent was deemed too low by the seller, so the agent listed the property at the price the seller requested, likely to "test" the market. Within a few days several offers came in - in a DOWN market - and the property sold for ABOVE the list price, that the agent involved had indicated should have been even lower. I actually heard there were several offers on the property.

Question. Was the property listed at the right price? Maybe - but it is certainly suspect, isn't it? The ironic thing is I happened to be at an event when one of the parties involved was voicing their "good fortune." I smiled and nodded my assent, but after hearing the details, I thought, "wow - they  probably paid somewhere in the $40k range for that service and advice?" The "take-aways" for me were:

• Why didn't that seller get more than one opinion of value - especially from more local agents?
• Wouldn't you question the value of selling above list price in a few days?
• How much more should I have gotten?
• If there were multiple offers, why not a sealed bid offer?
• How many listings sold, did THAT AGENT have in THAT community?

Something to think about

For years I have been promoting "fee for service" instead of "contingent commissions" for buying and selling real estate. This agent got paid more than a brain surgeon for what I deem to be somewhat suspect efforts on behalf of their client. $150 an hour for 30 hours (probably ore than was actually put into the process) of effort would have only cost $4,500. The DIFFERENCE is that the agent would have been paid whether the property sold or not. However, because these sellers (like most) don't want to take the "risk" of paying the costs of a property that DIDN'T sell, THEY paid somewhere in the $40,000 range. THAT is the cost of contingent commissions.

In all candor the majority of sales are co-brokered. Not the same agent sells the home that lists the home, so it is likely the selling agent here will receive about $20,000, or so, and the listing agent the same. Here't the kicker. the buyer THINKS it costs them "nothing" to buy. Buyers don't USUALLY pay a real estate agent for the services they render. Instead they expect the buyer's agent to get paid through the "splitting" of the commission - which was negotiated by the listing agent. So, what's missing in this equation is that EVEN if the seller determined it was a good deal to swap $4,500 for their $20,000 "side" of the commission, the selling agent would have to convince the buyer to pay a likely similar compensatory amount. Imagine telling a buyer, "well if you buy this house, MY fee is $20,000." They would "run" right? But, in fact they ARE paying it, because they are paying $20,000 MORE for the house than they would HAVE to otherwise. Assume the buyer's agent would put in exactly the same time as the example above: 30 hours at $150 an hour, or $4,500 worth of service. That would mean if the buyer would just pay $4,500, they would conceivably save $15,500 by paying that much less for the same house.

Analyzing the whole thing, paying the listing agent $4,500 and the selling agent $4,500 for a total of $9,000 , or a total of $31,000 difference for the cost of selling and buying the house. Another way to look at it is that the seller could negotiate some portion of that $31,000 to THEIR benefit, and likewise a similar benefit for the buyer in savings. Assuming the same benefit to each side would mean the seller would put $15,500 MORE in their pocket and the BUYER would buy $15,500 cheaper. THAT's something you don;t hear from your average real estate agent, is it? The other issue for both sides is; what if the agent spends 30 hours and the house DOESN'T sell, or the buyer DOESN'T buy. That is a problem isn't it? You see, the buyer or seller doesn't want to have to pay for these services if they don't consummate a sale - EVEN if it costs them FOUR TIMES as much on average to acquire or sell a house.

Right now the market absorption rate in MA for single family homes is 11.8 months of inventory. Maybe it's time for buyers and sellers to re-think where they are allocating their dollars in the purchase and sale of their home. Retinking the way they pay for the services rendered - because they do anyway, through the commission, might get both buyers and sellers to take more responsibility for the purchase and sale of their home. Sellers would WANT to be more involved because they really would want to price their home right to begin with, since they would not want to "waste" time marketing at unrealistic prices. They only THINK they are not paying that now, but in fact they are because the commission needs to be higher to take into account the "risk" factor of time in the market. Over-pricing is the primary factor in that risk equation.

Buyers too would want to be "ready to go." They wouldn't be "tire-kickers," at $150 an hour, BUT they would be saving $15,500 (in our example) on their purchase. You see buyers too are part of the "risk+time" equation their agent puts into the transaction that they is "free." It's not, when you're paying $15,500 more than you should have to in our example.

So, the next time you speak with the average real estate agent try telling them you would like to hire them by the hour NOT by commission and see what happens. Probably their first response will be "we don't do that. That's not our company's policy....."

Alas, in an industry that should really be at the forefront of this, they are sure s-l-o-w to change, after all, real estate agents have pretty much been paid commissions essentially the same way for the past 250 years - though "splitting of commissions," is a newer phenomena that is more accepted in general, I cannot believe that enterprising Colonials as agents, didn't compensate more than one party in some real estate sales to complete the sale.

Things need to change. In fact, the rental market may be leading the way in some markets. In Boston it is VERY common for the tenant of a lease property to pay the marketing fee. My son recently paid $4,500 for his. It's the same in New York City and many major cities around the country. the "listing agent" of most of these rentals also gets a fee from the landlord in most cases.

You see? There really is no "free lunch."