HOLY INVENTORY SHORTAGE, BATMAN! WHAT NOW?
by Jay Rosen on Friday, May 4, 2012 at 6:41pm •
Catherine Cortes-Maesto, the very aggressive Nevada Attorney General is very proud of the new Nevada foreclosure law, AB 284. She told a crowd of over 1000 eager Clark County Democrats at their recent convention that the law she fought so hard to get passed last year, has become a model for most states that allow non-judicial foreclosures (Deeds of Trust). The law that went into effect on October 1, 2011, among other things, essentially requires any entity seeking to foreclose on a deed of trust, to physically possess the original “wet signed” documentation proving their right to foreclose in mediation. After all, as 60 Minutes and other investigations revealed several years ago, the major banks and other institutions routinely fabricated, forged and otherwise faked their paperwork regularly without a thought of the legality, morality or the consequences.
FOR THE RECORD, I WANT IT KNOWN THAT I BELIEVE AB284 IS A RIGHT, JUST AND MORAL LAW. It is right, moral and just to hold banks and mortgage companies to the same standards they hold the general public with regard to the ownership and disposition of their homes. It is also unconscionable that today, there is no one in prison for the hundreds of billions of dollars that these banks and other financial institutions have bilked from the American public, and the harm they’ve done to entire world with their collusion and fraud….but that’s a discussion for another essay on another day.
Today, I write to tell you what has happened, what is happening and what I believe will happen, and how you, both Realtors and investors should adapt to our light-speed changing market (or just get out now). I’m going to talk about the inventory shortage in our community, where it comes from, why it exists, what is likely to be done about it and how these things affect today, tomorrow, next month and next year. Most of my research comes from ongoing analysis of data from our MLS, but is supported by the deals I do, the deals that I supervise and review as a broker, and from research I have commissioned from title companies as well as other sources. I have also learned over the last several years to listen to my gut instincts and trust them. I have been right WAY more times than I have been wrong!
But first, we need a little background and education about foreclosure styles. To just scratch the surface, there are two main types of procedures for the holder of a secured ‘note’ to foreclose on the property that secures the note. The most common type of foreclosure is a non-judicial (without a lawsuit). The other kind is judicial foreclosure, requiring an actual law suit and a judge. The main difference between these two styles of foreclosure is the instrument used to secure the ‘note’ using the real estate. Non-judicial foreclosures generally use what is called a “Deed of Trust”. The idea is that when you closed on your house with all your rights to title, you immediately gave those rights via a “deed of trust” to an independent 3rd party (trustee) who holds title on behalf of the note holder (bank). The deed of trust has pre-determined instructions to the trustee that in the event you default on the note, he/she is to give that title to the note holder. If you pay off the note, the trustee is then ordered to give title back to you.
All of these things, especially the part where the trustee gives title of your house to the bank (foreclosure) are done under very precise and strict laws set up by the state legislature of whatever state you are in. If the rules are not followed, the transfer can be ruled null and void in a lawsuit. Non-judicial foreclosures generally make the process uniform, quick and without involving and over burdening the state court system. This is why the process has grown from being in only a handful of western states 30 years ago, to most states today. [see chart below] In legal history terms, non-judicial foreclosure is a child, dwarfed in age by the senior system of judicial foreclosure.
Judicial foreclosures go back to even before there was a United States of America. Like most of our basic laws, we adopted the judicial foreclosure system from the British. Whereas non-judicial foreclosures rely on a complicated and precise system of deeds and rules, judicial foreclosures simply secure the note with a mortgage. A mortgage is simply your pledge to a note holder that if you don’t pay the note, they can petition the court and the court will take away your title to the property and give it to the note holder. In theory, it’s a simple process, but as with anything involving lawsuits it can be messy, expensive and take a very long time to accomplish. Most states also include in their judicial foreclosure laws, a period of time in which the foreclosure can be reversed (usually 6months to a year, up to 2 years!). This “redemption” period means even after the foreclosure, the bank that foreclosed can’t sell the house with clear title until that redemption period is over.
It’s the redemption periods and all the mess with courts that have made non-judicial foreclosures all the rage, squeezing out judicial foreclosures. This too is true in the state of Nevada.
Armed now with a basic understanding of the difference in foreclosure styles, we can get back to the topic at hand, which is why there are only 1422 properties currently for sale in the Las Vegas Metro area under $100,000 (only 5570 total), and what that number is going to look like in the near, and far future. By the way, I’ve been involved in the Las Vegas real estate market since 2001 and I have never in my history here seen inventory this low! It’s really scary…
THERE IS NO GRAND CONSPIRACY!
NO MYSTERIOUSLY HELD BACK “SHADOW” INVENTORY EITHER!
I am told, and read news reports that inventory around the country is down, but certainly not anywhere near as low as ours. I cannot account for those other markets, and frankly I really don’t care (with the exception of Cleveland where I have an office as well). There may well be some collusion and market manipulation in those markets, but what’s driving our current crisis is AB 284 and the fact that without the ability to fake the original documents, there is virtually no non-judicial foreclosure activity in Nevada any more. There hasn’t been since October.
We didn’t really feel the effects of what AB 284 was doing to our market for the first few months after the law took effect and the big banks stopped issuing their non-judicial foreclosure notices. We were so used to it being a "buyer's Market" with plenty of inventory, we didn't notice the dwindling supply. We were consumed with elation over an upsurge of interest in the market because the pundit class and their investor brethren had decided about that time, that Vegas had hit the bottom and that bottom spelled amazing cash flow for properties under $100k. After the incredible drought of the past several years, we were just too excited with the influx of buyers with cash and the property management accounts that came after them to pay attention to the dropping inventory numbers. That “shadow” inventory of homes the banks owned, but weren’t yet on the market, were coming on line and replenishing the market so our investors were making awesome deals with awesome cash flow (see earlier essays).
Then, somewhere around the Ides of March, the cupboard started running dry. Buyer’s agents like me, who had no sympathy for REO listing guys when they whined about no inventory, suddenly found ourselves in the same boat. At first we figured short sales would make up the difference where the banks had no REO’s (bank owned property) to release, but the truth is that homeowners and their representatives are not stupid. They realized there was no reason to do a short sale if the bank could not issue a foreclosure notice and follow thru with the foreclosure. They could just live the care free life of not paying for their home for what seems like eternity. So, with few REO properties and even fewer short sales, inventory dropped like a South Korean rocket. Right now, we are losing a net of 100-150 properties in inventory every day (ish).
In a very short period of time, our market flipped upside down. We went from a crisis of oversupply and low demand (early last year and in 2010, there were 22,000+/- for sale and no one to buy them), to today’s crisis of too many buyers and nothing for them to buy.
What Does It Mean Today?
What it means is that today, almost every property for sale at a reasonable price has multiple offers at well above list price.
Today, I found out that one of my clients (represented by me) was in a multiple buyer situation with another one of my clients (represented by one of my agents). One of us offered list price and the other offered 7% over list price. We both lost!
What it means is that today, property prices are going up faster than anyone can keep up with them, and taking the potential cash flow for investor’s away with it.
In that particular subdivision in Sunrise Manor, I closed one unit in January for 48% less than the offer I had rejected, and I am so happy that I have two in escrow getting ready to close at 42% less than what seems to be the current value. That's about $15,000 of instant equity, the day we close. Plus, we already have a tenant lined up for one of them!
What it means is that today, if you are lucky enough win the bidding on a property, or have had one in escrow for awhile (such as a short sale), by the time you close, you will have some pretty awesome equity just in the time it takes to get it closed.
Another client of mine (represented by me) bit off more than he could chew and put too many condos in escrow. Normally, we would just find a reason to pull the plug and walk away. But just since opening escrow with these condos, we’ve seen the market move 25%, 28%, & one I just could not get a solid figure on, but I can guess it’ll be about $25% too.
What it means is that today, in the communities where there used to be inventory and investment potential, there are no properties at all for sale. None, zero, zilch!
There is nothing more available in that subdivision, nor in 4 out of 5 other subdivisions I find to be stable and good investments.
Diminishing Returns, Increasing Value
Back at the beginning of the year, I was jumping up and down, screaming at the top of my lungs about how incredible I was finding the Las Vegas real estate market. I was regularly finding communities where I would calculate 15%, 17%, even 22% cash flow returns on a cash purchase. In all my life, I’d never seen it so good! Las Vegas was truly paved in gold for anyone who bought rental property in the first quarter of this year. Today, it’s still pretty good by historical standards. I can still find 8%, 10%, even 12-13% cash flow ROI, but not necessarily with as stable a property as before. Even so, when you add in the appreciation, the streets of Las Vegas are STILL paved with gold…..for now. A very short now…
What Happens Next?
The next phase shift in our market is going to happen, probably this Summer, when positive cash flow returns get closer to zero than 10, until they are gone altogether. When this happens conservative, serious, stable, honest investors will bow out of the market and be replaced with foolish amateurs, speculative/“creative” charlatans and cutthroats. We saw it happen in 2005-6, and we will see it happen again at about the end of this year into next spring. It’s gonna get ugly and many agents here in our valley will advise their clients to make stupid deals and take on way too much risk, just like they did when the bubble was close to fully inflated several years ago, just so they can pay their bills and stay in the business. The smart investors with reputable agents will take advantage of the foolish and unscrupulous and sell what they've been buying over the past year and now, for huge profits leaving the inexperienced, the risk takers and the foolish holding the bag when the next crash comes tumbling down. And yes, that day is out there. The very first letters of the writing are on the wall, faintly.
Back To The Foreclosure Issue
Earlier we established that non-judicial foreclosures of Nevada deeds of trust have basically been halted. There are tens of thousands, maybe even hundreds of thousands of Las Vegas homes that are in default and/or vacant, but because of AB 284 they are not, and will not in the foreseeable future, come onto the real estate market for sale.
Something has to be done, and yes, there is a “work-a-round” to get these properties thru the system. In states such as Nevada where both judicial and non-judicial foreclosure are permitted, a common clause in both mortgages (judicial) and deeds of trust (non-judicial) is one that allows one to be converted to the other. This huge number of homes with defaulted notes, secured by deeds of trust can be converted to mortgages and run thru the courts for foreclosure. And this is what’s going to happen for many of them.....eventually.
Converting deeds of trust to mortgages for a judicial foreclosure is probably the best route to get these properties thru the system and back onto the market, to relieve some of this pressure. But there is a catch or two to this. One very important catch, is simply the massive volume of cases, and the already backlogged Nevada court system. They simply cannot handle it! Recently at a political function, I spoke with several judges and candidates for judge, and got the same story from each of them. “We’re not ready, willing or able to handle this!” One current sitting judge explained that the Nevada Supreme Court is working on writing court rules and procedures, as well as judicial guidelines to handle the tsunami of judicial foreclosures that is headed their way. They are also looking for cases to try, that will establish precedent for those rules and procedures.
The bottom line from all in the know about judicial foreclosures, is that even though they are coming, they will come farther down the road, and when they do, they will come slowly....So, no relief here!
Another option for banks with defaulted notes and deeds of trust they can’t foreclose on is something called a “Bank directed” short sale. This is where the bank comes to the defaulted homeowner and
ASKS them to do a short sale. Usually, the “ask” comes with an incentive, such as moving expenses or even cash. Now that homeowners know the bank can’t foreclose easily or quickly, the price of the “ask” has gone up. I heard rumors that In California and Arizona they are giving homeowners upwards of $20,000 as incentive to short sell. Now, that’s all well and good for the more expensive properties, but my question is whether or not a bank would be willing to spend $20,000 to get a homeowner to short sell a $50,000 townhome? I seriously doubt it....so the option to cure our inventory crisis with bank directed short sales also falls short of having any effect.
So, What’s Left?
Frankly, I don’t know the answer to this question. In the indomitable words of Sgt. Shultz, “I see noooothink!” [see Hogan’s Heroes] I see no relief in sight for the housing inventory shortage, and therefore the raising of prices to levels that incite very bad, very risky and very stupid business practices. I see no end in the next few years to such a lack of available properties, that many Realtors will go months without a closing and be starved out of the business…AGAIN!
There is one thing that could increase inventory and actually seems to be happening;
New construction.
Is new construction our savior, or is it a quick high that will only make the eventual withdrawal worse? Last month saw more new home building permits pulled than any time in the past three years. Great! New inventory for Realtors to sell. Selling new homes is an easy gig too. After what we’ve been thru, we deserve an easy gig or two! But building new homes to relieve our inventory shortage is a "wolf in sheep’s clothing". We don’t need more houses in the Las Vegas valley. We’ve actually lost population in the past three years. We have too many homes now! We just can’t get at them to participate in the market, that’s all. Building more may be a nice buzz now, but at some point we’re going to get all these foreclosures thru the system and then where will we be? I’ll tell you… in the toilet again with another massive oversupply of homes that sends property values plummeting to the earth. Really? When does the roller coaster hit the slow and serene part of the ride?
The Takeaway
So, after six pages of this essay, with sore fingertips and a sure future of carpal tunnel surgery, we come to the Dear Abbey part of the day [the advice part]. As an investor, or as a Realtor, what should you be doing and/or promoting for a business plan for the near and far future?
As cliché as it sounds, BUY NOW! BUY NOW! BUY NOW, for that window is closing fast and closing hard. Buy now while there is still positive cash flow, hold on to your properties for two to three years (or when I tell you to sell) and then take your profits when the idiots come into the market and drive speculation nuts. Don’t worry, I’m watching for that and will tell you when I start to see the vulture circling.
If you bought property in the previous 6 months, you are a golden child and if you play your cards right, you will finish the game a huge winner! If you’ve been waiting, kick yourself in the ass and as my father used to say, “make hay while the sun shines”, because the 6 o’clock sun is upon us and dusk is not far away.
So, Call me, write me, FB message me, but please don't wait too long or the window will be closed. The darkness is coming, the bus is leaving, that fat lady is getting warmed up to sing. Pick your cliche. Just don't for a second think you can wait another day!
Judicial vs Non-Judicial Foreclosure Chart by State
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