Home inventories poised to rise

South Florida Business Journal - by Brian Bandell

The sales agents dealing with South Florida’s huge inventory of available properties might feel like they’re running on a giant treadmill powered by foreclosures.

And they’d better be ready to keep running.

Although a recent spike in sales has cut the inventory of homes for sale, there’s a glut of tens of thousands of foreclosure lawsuits pending against properties that are not listed for sale.

Until bank repossessions wane and mortgages become more widely available, property values might start stabilizing, but they won’t recover, said Keith Fleischer, a broker at the Weston office of Keith Owen REO Collection, a Re/Max International subsidiary that helps banks sell repossessed homes.

Banks often contact REO Collection about selling a home shortly before or shortly after it is seized through foreclosure. The company gets its name from the acronym banks have for their foreclosed property – real estate owned.

While REO Collection has a pretty decent amount of active listings, it has a huge board of pre-listings set for the market, Fleischer said.

“We’re going to see an increase in available new REO listings on the market,” he said.

Statistics seem to follow that logic, as banks are filing foreclosure actions faster than they are taking back homes and putting them on the market.

According to court data analyzed by Bal Harbour-based Condo Vultures Realty, there were 7,311 property repossessions in South Florida in the first quarter and 25,263 new foreclosure filings.

A study by the Mortgage Bankers Association suggests the state may be only halfway through the mess. Of the more than 3.5 million mortgages the MBA tracks in Florida, 10.6 percent were in the foreclosure process and an additional 10.7 percent were past due on March 31.
Dealing with the backlog

“The inventory of homes for sale will substantially increase. All you need to do is look at how many pending foreclosures there are,” said Bill McCaughan, an attorney with K&L Gates in Miami who represents banks in foreclosures. “There’s no question that the volume itself causes a time lag to list properties.”

Even if it’s clear that a property will become bank-owned, the backlogged South Florida courts and the bank employees overloaded with these cases make it a lengthy process, McCaughan said. Regulations, such as the mandatory inspections before REO home sales required by Miami-Dade County, only slow it down further, he said.

Condo Vultures principal Peter Zalewski said some banks are purposely delaying the foreclosure process because they don’t want to take ownership of homes and pay to maintain them while the market is near the bottom.

“Banks want to hold back on inventory to let the inventory be depleted so they can get higher pricing,” he said. “We’re seeing inventory being depleted because not all of the foreclosures are on the market.”

Much of the pain has already played out in the subprime mortgages, but several other factors continue pushing people into foreclosure. Unemployment is near a record high, and every percentage-point increase in the unemployment rate increases the probability that people will become seriously delinquent on their mortgage by 10 percent to 20 percent, according to a research paper published in May by the Federal Reserve Bank of Atlanta.
Payment option ARM issues

Add to that more toxic mortgages. Nationwide, there are about $500 billion in outstanding payment option adjustable-rate mortgages (ARM), where borrowers can pay only a portion of the monthly interest and let the size of the mortgage grow. When the value balloons by 15 percent or 25 percent – and the borrower is under water – the loan resets and requires both interest and principal payments, which can double the monthly payments.

A report issued in April by Credit Suisse predicted that these resets would start accelerating in the spring of 2010 until they reach a peak of $14 billion in option ARMs resetting in September 2011. They would not taper off until near the end of 2012.

The delinquency rates on those loans are so high that it helped push several option ARM-heavy banks, such as BankUnited FSB and Washington Mutual, into failure.

While the initial wave of defaults of subprime mortgages put many modest and lower-tier homes and condos on the market, the next wave of foreclosures from option ARMs and unemployment will include more top-shelf homes, said Bradley Hunter, director of the South Florida market for real estate analysis firm Metrostudy in West Palm Beach. That will give buyers more attractive targets.

Hunter believes that the median housing price could rise when those nicer homes start getting sold off by the banks, but it would be a false positive. The average sales price might increase because larger homes are getting sold more often, but the discounts based on past sales would remain – or even widen, he said.

“The downward pressure on prices continues and will continue well into next year,” Hunter said. “We are most of the way through the price adjustment. We probably only have another 10 percent [decline] more to go.”
Condo associations troubled

REO Collection’s Fleischer said single-family homes prices have nearly stabilized and will remain around this level for the next few years, but condo prices could fall further because of the crippling effects missed association dues are having on condo associations. The ailing condition of some condo associations makes the Federal Housing Administration and most banks rule out lending in those complexes, Fleischer said.