Foreclosure Activity at 40-Month Low, but No Thanks to a Recovery

A recent report issued by RealtyTrac® indicates foreclosure activity in the month of April was at its lowest point since December 2007. That might sound like good news, until you dig a little deeper.

The reduction in the number of foreclosures processed is largely due to the increase in the amount of time it takes to foreclose. The same report indicated it took an average of 400 days to foreclose in the first quarter of 2011. That’s up from an average of 340 days during the same period last year.

For some perspective, in 2007, foreclosures took about 151 days.

What does this mean for the housing market and those interested in buying a home? Well, as I’ve said before, I don’t have a crystal ball. However, if I were in the market and could afford to wait a few months to buy, I might consider holding out, unless you think the opportunity is just too good to pass up.

I think we’re going to see a wave of foreclosures hit the market between now and the end of the year. This could be especially true in states such as Massachusetts, New Jersey and Nevada.

Unfortunately for sellers, this probably means home valuations are headed lower again. Simple economics tells us that as supply increases, the price decreases (all other factors being equal, of course). Again, bad news if you are planning to sell, but potentially good news if you are in the market to buy.

Interest Rates

The “X” factor in this discussion is interest rates, which are hovering at around 4.5% for a 30-year mortgage. I believe the Fed has kept rates too low too long in an effort to help a sputtering housing recovery. They know if they raise rates while potential home-buyers are already on the fence, the housing recovery could completely stall.

I recognize it is a delicate balancing act, but I think the pendulum has swung too far for too long.

The benefit of low rates is that borrowing money to buy a home may not be cheaper for a generation. The downside is inflation; as we’ve all experienced at the grocery stores, gas stations and elsewhere over the last several months.

If interest rates begin to move up, as I suspect they will soon, a shaky housing market could cool even further. In a matter of months we could be looking at higher costs to borrow and a wave of new foreclosures hitting the market. Not a good combination for homeowners.

Real Estate Investors

This could make for a good time to buy an investment property, if you are so inclined, and your finances allow it.

In a recent post I discussed the dilemma of being out of debt and wondering how to allocate money to savings, investing, etc.

I’m not much of a market timer, however, I’m also convinced the market is just about maxed out in the near term and may backslide a bit in the coming months (particularly if this housing market gets any uglier).

Instead of piling cash into investments that may soon get the rug pulled out from under them, it might make since to invest in more tangible assets, such as real estate. Now, I have no illusions of fixing and flipping, rather I’d love to find a small property that I could rent out, using the cash flow to pay off the mortgage quickly and enjoy years of rental income.

Even if the house itself appreciates very little over the years, the earnings from renting could make real estate investing a profitable idea. Until the real estate market shakes out, I bet the number of renters increases significantly, increasing the demand for rental properties.

Of course, if you have enough cash, and enough patience (and savvy) you could even look at buying a foreclosure.

If you aren’t up for land-lording, it may also be a good time to look at land – timberland, farmland, etc. Like my grandfather used to say, “They ain’t making any more of it.” I suspect land itself (improved or otherwise) will continue to appreciate more than home values in the near term. And of course with the news of food shortages, farmland has been a very hot commodity in recent months.

In addition to traditional investments such as stocks and bonds, I believe real estate, in some form, should be part of your overall investment mix, along with more conservative investments such as CDs, cash, and gold and silver. You can adjust the mix according to various factors such as your age, risk tolerance, etc.

Comments

  1. Again, you continue in the same line of thinking in which I have found myself. I have a house we bought several years ago that has since appreciated in value. In the meantime we have purchased another house we currently use as our primary residence. While being a landlord has been an up and down experience, we have at least been able to cover our mortgage and take advantage of the tax benefit owning additional property provides. Our current dilemma is whether to sell at the current market rate (we’d profit nicely but not to the extent we would have prior to the housing crisis reaching a head) or continue renting, accept the bills that come with a house that is aging, and wait for a market rebound. We’ve also looked at property from time to time to buy and hold now (perhaps gather some timber or farm income) for a future dream house. But with disposable income being what it is, that becomes an either or proposition- continue investing and paying off the mortgage or pay on the land. I say all the above as an example of how your posts always seem to be relevant to my situation. Thank you for that.

  2. We bought land the last time prices dipped (1980). 10 acres in a beautiful area. Suddenly the state decided we were speculators and our property taxes went up to 16% of the value of the land. Be careful!

    Otherwise- we are considering buying a beach house and renting it out when we are not there.

  3. I bought last year in time for the 8k tax credit. I thought that combined with “historically low rates” and depressed home prices, I was probably getting the best deal out there. Now I have seen rates drop, and prices drop in my neighborhood quite dramatically. I would say to be careful, homebuying is still a good thing, but there is NO NEED to rush into it at all…the deals will be there a year from now.

    • We bought in March of last year and saw the same results – I was sure that rates were going up, but they dropped about 1/2 a point from where we bought. Oh well, hindsight is 20/20.

      I definitely agree with your suggestion of move slowly. There will always be another deal.

  4. Yes, I agree that this is a good time to invest in real estate. Both prices and interest rates are currently low. However, the investor had better be patient — for prices will increase slowly rather than quickly. Bill

  5. I snapped up a foreclosure in January – low enough price to pay cash for. Then moved into it (smaller but more land), and rented out my previous home (on a small town lot). Prices here are down to the price of land alone in many cases, so I don’t see it getting any lower now on most of these.

    Loving living in the country and getting my fruit trees in and my veggie garden going big scale now :) And being OUT of town :)

    Land – yep – they just don’t make more of it. I told my (grown up) kids I was spending their inheiritence on the new property…. they said, No Mom, you are investing it, and it’s a great investment !

    Knowing my renters personally, I also gave them a price I would accept for the house I moved out of. While they know it is not “for sale” (in this market) , they also know I would sell to them for the right price before I would sell to someone else.

    While I agree that DEALS will still be there a year from now,(like for a rental), I disagree that the most desirable locations will still be there (like for a personal home) ….They are starting to get snapped up by those of us wishing to better our locations for retirement living, while the prices are still so great!

  6. Rates could stay at these low levels for years. Don’t believe me, just ask Japan. The natural tendency for the economy is to deflate. During deflationary periods, long dated bonds and cash do well. The deflation is due to our high Debt to GDP levels. Of course, the Fed is trying to keep that from happening, but I suspect we will see a teeter totter between inflation (when the Fed conducts a QE or prints money) and deflation (when the Fed lets off the accelerator). This could keep rates in a tight range for years.

    However, this doesn’t help the home buying decision today. If you love the house and, more importantly, can afford the house, then buy. Just make sure you don’t plan to sell in the next couple years. The other key metric to look at is if you had to rent out your home would the rent received cover all expenses (mortgage, taxes, insurance, and reasonable repairs). If so, that means the home is still a solid value even if it could depreciate some from its purchase price.

  7. I’m unsure about a pure land play unless you are a farmer or a developer… just buying land without a way to add value to me is pure speculation (not investing)… and while you’re speculating you’re still paying the property taxes… so it is negative cashflow (something I never like to see in my investments)

    From what I can tell there are many places in the US selling homes for less than the replacement cost… meanwhile rents are still very high (from a magazine I just read houses going in Phoenix for 50K to 90K with rents of about $800 a month… wow)… buy low sell high right? If you can buy for cheaper than replacement cost for a building… and get a nice positive cashflow… I don’t see a huge issue.

    The biggest problem is that you’re up against big real estate investment trusts and other huge group buyers that are able to buy 100′s of properties at a time (and are getting to pick the cream of the crop)… if you’re looking to buy… maybe start researching some of these buying groups to join into? Also there seem to be a lot of companies now offering turn key investments with tenants already living there and property management setup… own a property that’s already renovated with a paying tenant… sounds nice to me. (Note I haven’t done any of this yet in the States… but if you do go this route you still have to research each of these companies or groups and do your due diligence checks… interviewing, references, etc.)

    As for landlording… that’s what you pay a property manager for… well worth the monthly costs! (And frees up your time to go search for other deals or just enjoy your free time)

    Just don’t be in too much of a rush… like I said before (and you seemed to have used as well) “There’s always another deal”. Do your due diligence first… but… kinda paradoxically… don’t over analyze and get into paralysis by analysis… action is still needed to get anything done. (And just have confidence you can work out any issues that come along ;) )

  8. Regarding Addbo’s comment about land investment, one thing for sure — the investor had better be in a comfortable cash position and have lots of patience. Land is about the least liquid investment there is. And given the length and depth of the current economic downturn I’d expect it to be quite a while before the land investor might smile.

    Regarding the point that there are many places in the US where homes are selling for less than their replacement costs — absolutely yes! Buy a home, pay low interest on a fixed 30 year mortgage, rent it out… that’s the way to go. Bill

  9. I’m not sure you were hardest hit – I think you guys were first hit. It makes sense that you’d be first to come out of it. However, I think things will skip along the bottom for years – this slight bump is probably indicative of spring as much as anything. Interest rates will be climbing soon, homeowner’s insurance is rising and taxes are only going in one direction. That means the part of the monthly payment that is in the consumer’s control – the price – needs to stay low.

    I don’t know anything about the Phoenix market, but I do know one other reason foreclosures are down across the country is because banks are taking longer to bring action against defaulters. With all the madness the MERS system is a mess and the banks need to make sure all their i’s are dotted and t’s are crossed.

  10. Dean makes an excellent point about, “… all real estate is local,” I’m sure that, as the market (at long last) recovers, we’ll see some areas moving way out ahead of others. Another point worth thinking about is the issue of small house versus large house. For as the retiring baby boomers downsize, we’ll see downward pressure on the prices of larger homes… again, in some areas more than others. Bill

  11. This article in the NY Times (below 5/23/11) suggests that the current price rise in Phoenix may be the result of a temporary restriction on the number of foreclosure homes entering the market. I think we won’t really know a recovery has occurred until this shadow inventory is out of the shadows and in the market. This does not include the additional shadow inventory of sellers who are waiting for a better market. Once the masses/market appreciates and understands the situation… then we will be at the bottom. I don’t think it has happened yet in Phoenix or elsewhere.

    http://www.nytimes.com/2011/05/23/business/economy/23glut.html?pagewanted=1&_r=1&hp

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