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Banks are not supposed to be in the real estate business. This new trend of their willingness to wait for a price is disturbing and will do nothing to improve their bottom line.

The traditional definition of "fair market price" is the price a willing buyer will pay and a willing seller will accept when neither is making a decision under distress. Foreclosure sales *used* to fall into the category of "distressed seller" because banks were in a hurry to unload, but these days the banks seem to be acting like they're retired homeowners who can just take their paid-off housee off the market and go on living in it if they don't get their price, aren't they?

Rob Dawg,

"Banks are not supposed to be in the real estate business. This new trend of their willingness to wait for a price is disturbing and will do nothing to improve their bottom line."

So who do you think is going to win? The savers or the spenders? People like me that have cash and are waiting to buy or people living on credit trying to grab at whatever asset they can get their hands on? Because that's the type of buyer the banks are marketing to. In 2004-2006 that worked but the laws of supply and demand have flipped it's getting harder and harder to get a loan. Eventually they only people that will be able to get a loan will be savers like myself.

Are the bankers all really that stupid? I assume it takes some sort of smarts to get to the top of these major financial institutions. How can it be that all of them are acting like idiots right now? Or... do they know something we don't? Makes me wonder.

My guess is that right now the institutions are afraid to dump their white elephants now out of fear that something is going to happen (government bailout, new president/policies in Jan, etc.) that will cause things to bottom and start upwards again, and then they'll be hung up to dry for unloading too soon. They're in CYA mode while they wait to see what happens, and are only selling at terms they think are no-lose for them until their stockholders finally decide there's no hope and start leaning on them to get it over with before it brings them down completely. They're not making decisions based on what makes economic sense, but on what staves off stockholder anger.

It's very frustrating to be a buyer right now (yes, that's not a typo), this still appears to be a seller's market including the REOs. As a potential buyer for more than half a year what frustrates me most is the lack of visibility into the machine from the buyer's side. You put together what you consider to be a fair offer based on condition, comps, etc., you have a great credit score and large cash down payment, and preapproval letter. You send in the offer, assuming there's some rational person on the bank side who knows a strong offer when they see one. I'm told the offer is great by the bank's agent....then nothing...someone else snatches it up at the 11th hour. I guess quality buyers are a dime a dozen in this market even with the tougher lending standards, or something shady is going on, I'm not ready to go there yet, but I wonder if my agent will pull title to see who actually got some of these places and if there is a whiff of a non-arms length deal.

Kwaping,

Bankers aren't used to not being in a power position when negotiating. The current banking environment is kinda like a gambling junkie. Because of the Fed banks can borrow as much money as they need. Imagine if a problem gambler had access to unlimited funds what would happen. Here's the kicker (which sucks for you and I) The more banks borrow to cover bad loans and provide more loans to again cover bad loans. The more inflation is introduced because the money supply is expanding.

When inflation/the money supply increases it does 2 things. People that save get screwed because the savings don't have as much buying power. The flip side is that debt also decreases in it's total buying power. What this means is that banks feel that if they cause inflation it will make the real estate foreclosures worth more (in times of inflation commodities/assets gain "value" because it costs more to buy them) But, it will also make their total debt "worth" less.

Screwed up isn't it?

Maybe bankers need to start thinking like milk farmers: if you can't get what you think is a fair price for what you have, dump it back to the earth. There are whole developments in SD north county few people would miss that could easily be bulldozed back to their undeveloped state to increase the "value" of the remaining overstock by reducing the supply.

So who do you think is going to win? The savers or the spenders?

there is no more blood in the spenders, draw the conclusion.

People like me that have cash and are waiting to buy or people living on credit trying to grab at whatever asset they can get their hands on? Because that's the type of buyer the banks are marketing to.

Absolutely. Banks begrudgingly pay out 3% and turn around and lend that same money out at 60%. In case you think that's a typo; sixty percent. Ahhh the magic of a fractional reserve banking policy.

In 2004-2006 that worked but the laws of supply and demand have flipped it's getting harder and harder to get a loan. Eventually they only people that will be able to get a loan will be savers like myself. | shadash

As mentioned above what needs to happen is a paradigm wherein the banks need to realize they are not negotiating from strength. We qualified buyers and our crack professionals (hat tip JtR) will have our day but not until the banks run out of knife catching specuvestors. People forget the downside of a bubble is also paved with fools. sometimes the same fools.

You have to realize how these banks / servicers sell their REO's. In almost all cases, they get a BPO from the listing agent and a supplemental BPO from another agent. Then these are reviewed by the asset manager and maybe even some type of appraisal person at the servicer. These review people could easily be living in another part of the country. I have dealt with people from Utah, Texas, Georgia, Florida and Ohio on properties in California.

One of the things the reviewers are looking for is recent sales in the immediate area. If an area has not yet been hit with a number of lower priced sales, the servicer will not start with a lower price because they can’t substantiate it. If they start with the higher price and then mark it down on regular basis (i.e. 5-10% drop every 30 days), they are covered on their decision.

Another item that the servicers look at is the As Is value versus the Repaired value. Some of these properties when you go into them are completely trashed. Holes in the walls, piles and piles of trash all over the floor, mattresses out back, kitchen sinks removed, hot water heaters stolen, etc… I have even seen places where the previous owner chipped up all of the tiles from the floor. Usually the lawn is in disrepair as well being either overgrown with weeds or brown from a lack of watering. The places that Jim has showed on his website are relatively clean compared to what they look like when you first take possession of an REO.

Back to the point, some servicers will spend 5-30k cleaning up a place (paint, carpet, landscaping, fixtures) so that they can market more toward a retail customer instead of an investor. So where they might have priced it lower at the trustee sale, they might list higher if they take the property back because of their marketing strategy.

Additionally, some servicers will sell an REO for less at the trustee sale since they will not incur as many costs like eviction (2k-5k), sales commission (5%-7%), trashouts (500-3k) and if they are servicing for others, the advancing the interest on the loan to the trust.

there is no more blood in the spenders, draw the conclusion.

The spenders win. It's easy, look at the dollar. Look at the debt. The spenders have a governmental credit card and they're going to use it.

The baby boomers are about them and they're about to join AARP.

Let the wealth redistribution begin!

Thanks for your comment, Securitization Expert. Things are much more clear to me now (this was a great post too JtR).

How likely is it that the banks will indeed start marking down prices without intervention? Is there any precedent for this, even if it isn't on as wide of a basis?

I still struggle to understand how people who raid their house before foreclusure aren't behind bars. I guess it isn't a crime if nobody is there to enforce the law.

Are the bankers all really that stupid?

No, they are not. They are simply working for their own short-term personal best interests. (e.g. getting that quarterly bonus) Which happen to conflict with the long-term best interests of their employer and the economy as a whole. This will continue until enough banks fail and the rest see the writing on the wall and can no longer avoid doing what is actually necessary. Can you say Resolution Trust Corporation?

Resolution Trust Corporation or RTC = The Savings and Loan bailout program from the 90's...

More info here....

http://en.wikipedia.org/wiki/Resolution_Trust_Corporation

Jim -

Sorry to be so thick, but what exactly would you consider a "retail" sale at this point in time?

Retail for these guys would be to sell without having to lower their list price, and still get within 5%.

We could say within 5% of these list prices, but let's see 'em do it without lowering. Lowering early and often keeps the urgency higher, but typically all sellers prefer to lanquish, thinking the miracle buyer will come along who just happens to love the exact same wallpaper that they have plastered all over the house.

The internet and hyped-up websites make it an instantaneous marketplace. If you're selling and don't find a buyer in the first week or two, your price is too high - you might as well lower it and git-r-done!

Genius,

How likely is it that the banks will indeed start marking down prices without intervention?
It depends on the servicer. The common periods are 30, 60 & 90 day reviews. If they have had showings and offers around their price, they are more likely to hold. If there is no real activity, expect to see a drop after 30 days.

Is there any precedent for this, even if it isn't on as wide of a basis?
There were lots of REOs during the Texas Oil Bust in the 80's and the California bust in the 90's. It took a years for the banks to get through them. However, those busts were more economic driven than credit driven like todays. The sooner there is a return of the credit markets, the sooner the housing market will stabilize. Jim was very observant in an earlier post that there is an Alt-A wave coming. The only thing that can minimize the damage is that the financing comes back.

Also, when I said Retail buyer in my earlier post, I meant a property that someone could get a loan against. There are a number of investor properties (cash buyer) where the condition of the property would disqualify anyone from getting a loan against it. The investors then buy the property, make it livable and either sell it or rent it.

The problem with 30/60/90 reviews is that in the last 30/60/90 days prices have declined more than the banks are going to lower. It still looks like typical homes are losing $100/day. Banks need to get out in front of that.

The reviews are worthless too, if nobody listens.

They asked me twice to review the list price of the previously-mentioned house listed at $533,900. I told them both times $499,000, and not only did CW not lower their price, once the $502,000 offer came in, they still ignored me.

I can get that kind of treatment from regular sellers - ones that don't make me evict people and spend thousands of my own money on repairs.

I'm a mid-range guy, my bread and butter is $500,000 to $1,500,000. I tell sellers that buyer expectations are going down $1,000 per day, but I'm thinking of revising it for the fourth quarter.

I think buyer expectations are going down $1,000 to $2,000 per day, meaning if you are listed now for $1,100,000, then if unsold in 30 days you better be at $1,050,000 or under if you expect to keep buyers interested.

The strategy of sellers hanging onto one price for months and months is boring for buyers - they lose interest quickly, and there are enough others coming on the market that today's shelf life is one to two weeks.

Jim, maybe what it's going to take for the banks to recognize reality is if they can't find realtors willing to try to sell houses on their terms...

There will always be realtors willing to try listing a property at a completely stupid price. Some work part time and would look at the listing as a lottery ticket. You never know when the golden goose might stumble along.

Sure, but compare that to the staggering number of REO properties. If the banks ever do decide to get serious about clearing their inventory, it'd take 20 years to do it with those kinds of realtors.

"The strategy of sellers hanging onto one price for months and months is boring for buyers - they lose interest quickly, and there are enough others coming on the market that today's shelf life is one to two weeks."

An excellent observation.

This "wish" price stagnation has made property searches boring. These folks should just pull them off the market to get rid of all the pointless clutter.