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Real Estate 2007: A Perfect Storm for Foreclosure Bargains?

Storm clouds are gathering over the nation’s battered housing market. Depending on whom you ask, the forecast calls for either thunderstorms or gale force hurricane winds. Fueling the latest concerns is a deluge of discouraging data in the housing sector, all of which point to opportunities for investors and buyers looking for bargains — particularly on foreclosure properties.

Home sales plunge
Sales of existing single-family homes declined in 40 states and home prices dropped in half of the nation’s biggest metropolitan areas in the last three months of 2006,according to the National Association of Realtors.

Sales were down in all regions of the country, dropping 20 percent in the West, 7 percent in the Northeast, 7 percent in the Midwest and 5 percent in the South. At the same time, Nevada sales plunged 36 percent, while Florida posted a decline of 31 percent. Sales fell by more than 20 percent in Arizona, Virginia, California, Maryland and the District of Columbia. The biggest metro declines were in Florida-Sarasota-Bradenton (down 18 percent), Palm Bay-Melbourne (17 percent) and Cape Coral-Fort Myers (12 percent).

Home prices decline
Home prices nationally have been declining as buyers cope with rising interest rates and excess supplies. The national median existing single-family home price was $219,300 in the fourth quarter of 2006, down 2.7 percent from a year earlier when the median price was $225,300, according to NAR.

Regionally, the median Northeastern resale single-family home price was $274,600 in the fourth quarter, which was 2.5 percent below the same period in 2005. In the Midwest, the median home price was $161,800, down 4.2 percent from 2005. In the South, the median home price was $181,700 in the fourth quarter, which is 3.7 percent below a year earlier. The West was the only region that experienced an increase in median home prices, up just 0.4 percent to $355,100.

The declining home sales and median home prices suggest that the housing market is becoming more favorable for buyers, giving them more negotiating power. And homeowners in default who try to sell to avoid foreclosure will face more competition from other sellers. The difference is that they have a limited timeframe in which to sell and so are often more motivated to sell at a bargain price.

"It’s the old saying: you sell when people are dancing in the streets and you buy when they are bleeding," said Las Vegas real estate agent Adam Hunt, who recently helped two investor clients find foreclosure bargains by approaching homeowners in default. "It’s a blatant buyer’s market."

2.1 million vacant homes await buyers
In addition to weaker sales and declining prices, a record number of homes are sitting vacant awaiting buyers. An estimated 2.1 million empty houses were listed for sale during October, November and December, according to the Census Bureau. That suggests that prices may have to fall further for sales to pick up and the overall housing market to recover.

A high vacancy rate on for-sale homes also points to a buyer’s market. Vacant homes for sale usually represent sellers who are losing money each month as they carry a mortgage payment without receiving the benefit of a place to live or rental income. Every month that a vacant home goes unsold will make the seller more motivated to sell.

Housing starts tumble sharply
New residential construction fell sharply in January, plunging 14.3 percent to the lowest level in nearly a decade as the housing industry continued to struggle with a severe slowdown. The decline in the construction of new homes and apartments pushed activity to the slowest pace since 1997, according to the Commerce Department.

Regionally, housing construction tumbled 29 percent in the West, 15 percent in the Midwest and 12 percent in the South. Construction starts were up only in the Northeast, which saw a gain of 9 percent. For real estate investors and home buyers, weakness in January construction means that builders will slash prices and offer incentives to motivate buyers into writing offers.

Subprime ARMageddon on the horizon? This year, an estimated 1.3 million adjustable-rate mortgages (ARMs) that Americans took out during the recent housing boom will be reset — and many homeowners will see their monthly mortgage payments shoot up by as much as 50 percent or more.

Many homebuyers may have thought that they would be able to flip or refinance their houses quickly and avoid the rise in their mortgage payments. But now — in a declining real estate market — many of them are finding themselves stuck in a house they can no longer afford. Unable to pay their mortgage, many Americans in nearly every income bracket may soon be forced into foreclosure.

Foreclosure investors and buyers looking for bargains can step into these difficult situations and often negotiate a bargain purchase that helps the homeowner avoid a tarnished credit history and helps the foreclosing bank avoid the tens of thousands of dollars it can cost them to foreclose on the property. One way to negotiate such a deal is through a short sale, where the foreclosing lender agrees to a lower amount than is owed to pay off the mortgage.

"What we’re seeing a lot of is people wanting to do short sales," said Orange County, Calif., investor Ryan Walker, noting that short sales are popular because a lot of homeowners in default don’t have much equity. "It’s all about how good of a deal you can get. … But unfortunately there’s not a lot of equity in the homes any more. I think you’re going to have to hold on to the house a little while before you resell it to make any money off it."

Foreclosures surge upward
Indeed, the biggest news in residential real estate seems to be foreclosures. The 130,511 new foreclosure filings last month were up 25 percent from 2006, according to RealtyTrac. The time has never been better for aspiring real estate investors, home buyers and real estate agents to successfully purchase foreclosure properties.

Today, the real estate industry is saturated with overpriced, over-financed properties. Add sagging sales, plunging prices, a glut of vacant homes awaiting fickle buyers and havoc in the housing sector begins.

But in chaos there is opportunity — and the real estate industry is no exception. In current conditions, people with the skill, capital and vision can make great profits. For RealtyTrac members, the existence of these opportunities was no secret. They know that a growing number of bargain foreclosures are now available.

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