Everybody's talking about a bottom in real estate

"Of all mortgages covered, at year-end slightly more than 10 percent were nonperforming, meaning behind on payments, compared to about 7 percent nonperforming in September. "

From: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/04/03/BUU716RR4Q.DTL

Article is a good read, with some nifty graphics.

Here in the Sacramento area, I've seen homes listed as short sales for a very long time at unreasonable prices. I made an offer on one, an incredibly risky all-cash offer, and the bank didn't accept it. The house is now in the process of foreclosure, and I would not offer the same price for it today (the market has fallen since then, and the house has had a full year of not being maintained). Generally, when a house goes from short sale to foreclosure, the bank drops the price to a reasonable price, sometimes even a fabulous price. Sometimes, although it's rare, we see short sales at reasonable prices. Why are some so incredibly over-priced that they cannot sell, while others are priced almost as low as foreclosure prices?

It appears that the banks are only willing to be reasonable on short sales if the buyer stops making payments. As long as the buyer is paying, the bank will insist on an unreasonably high price. I base this observation on another observation - over-priced short sales sit on the market for a long time, some go well over a year, which suggests that the borrower is continuing to pay (otherwise the banks would have foreclosed). Well-priced short sales, if they do not sell as short sales, come back on the market rather quickly as foreclosures, which suggests that they were in foreclosure (not making payments) while listed as short sales.

So some of the increase in "seriously delinquent" mortgages may actually be a sign of buyers catching on to the bank's tricks, rather than an indication of increasing illiquidity. Still, the fact that serious delinquencies are increasing even as the government hands out free loan modifications, coupled with the overhang of inventory that is not presently on the market, suggests that the bottom may not yet be here. The article says that 10% of all mortgages are non-performing; when you think about the fact that many, many people have less than 10 years remaining on their mortgages, many people bought their homes in the 1980's for less than $30,000, a whole lot of people owe very little on their homes, 10% of all mortgages is a LOT. Then again, at least in Sacramento, there are homes priced so low that they cash flow even at very low rent assumptions, even if expenses are rather high (like if the owner hires a property manager). So, bottom, top, I don't know, but caution is still warranted. Not inaction, not abject terror, but caution. As I look to buy, I keep reminding myself of the old saw, "markets can stay irrational longer than you can stay liquid."

We made an offer on a house

We found a house that met our requirements, and the asking price made sense. It's a short sale - with two Cadillacs in the garage. Indy Mac bank owns the first and second mortgages. The house generated multiple offers, but, being a short sale, any offer had to be accepted by the seller AND the bank.

We made an all-cash offer. Our only contingencies were basic things like: we could do an inspection (only on the house) and we could back out or renegotiate if necessary repairs exceed $40k. We offered a large deposit, increasing the deposit to 30% upon acceptance of our offer. We offered a fast close - less than a month. I thought our offer was as good as a cashier's check. And we offered a tiny bit above asking price.

Well, that was three weeks ago. Last we heard, the bank was still thinking about it. Our offer has technically expired, although we would still proceed with the sale if we hear from the bank, say, tomorrow. I have to admit, I am surprised that the bank would drag their feet when they have a solid offer on the table for a property in Sacramento county, one of the nation's worst housing markets right now. The house, like many Sacramento-area homes purchased in the last several years, is suffering from deferred maintenance. If we buy it, I expect to replace the air conditioner this year - and I hope that it doesn't fail before we get it replaced.

We recently looked at another house, a REO. The house has water damage and mold because the water heater failed, dumping 40 gallons right in the center of the house. It has been vacant so long that rats and birds, at a minimum, are nesting in the attic. I am open to a lot of things, but rats and snakes cross my line. Another house - another REO - is barely salvageable because it sat vacant for so long that scavengers and children have picked it clean. The banks are playing a dangerous game when they repossess a house - hoping that the house will be livable and sellable by the time the bank gets an agent assigned to sell the house. From most of what I have seen on the market, banks are getting hosed on repossessing houses. But, I guess there's something I'm missing, because, at least for Indy Mac, it's worth losing a cash offer at a fair price while they play "don't call us, we'll call you if/when we get around to it."