Monday, October 01, 2007

Real Estate Ramblings: Free Houses

When the real estate market hits bottom, free houses will be available. Mark my words. You heard it here first. But more on this later on in the article. First, some background info.

I have invested in real estate for over twenty five years, including single family residential, multi-family residential, commercial, apartment professional offices, shared ownership, an island, and even gold mining claims (which aren’t technically real estate unless they are patented). About the only type I haven't invested in is condos. As I've written about previously, this is the worst real estate market I've ever seen and I predicted that it will continue to get worse.

I remember when I tried to refinance many years ago, the loan broker told me that I needed to get some fake tax returns showing a high income in order to get the loan. She said that everyone did it, that she did it and her boss did it. I didn't do it, of course, but it makes me realize that the mortgage companies these days made it so borrowers didn't have to fudge their returns. They created something called a "stated income loan", which means that you state on the application whatever the income you need to qualify for the loan (technically it is supposed to be the income that you really make) without any documentation. What were these banks and mortgage companies thinking? Besides that, they were offering 100% loans with no down payment. What were they doing?

There used to be a loan called a "no doc" loan which required no documentation, but I was told that "no-docs are for doctors – people who don't really need a loan, people who put down 50% when they buy a home." Now the no-docs are not just for docs, but for everyone. A couple years ago, I was riding BART (Bay Area Rapid Transit) and overheard two mortgage brokers talking about their business. One said to the other "I'm now giving loans to homeless people," At the time, I thought he was being facetious; now I'm not so sure.

Back on March 13, I predicted that there would be real estate "blood in the streets". We are just starting to see some of the blood starting to flow. I know half a dozen people who are going through or have gone through foreclosure, one of whom had his home sold (that is, an attempted sale) on the courthouse steps last week. If you really want to know how bad the real estate market is, talk to some of these people. Over the last few months, governmental representatives were interviewed on the radio and television, saying that "lenders are willing to work with you if you have trouble making your mortgage payments. Give them a call right away before you get too far behind in your payments." This is total rubbish and BS! You know what they said to these borrowers? "Why don't you try refinancing with another lender?" and "Why don't you try selling the house?" Is that what they call working with you? Has there ever been a situation recently where the lender has helped out a borrower who couldn't make the payments? I haven't seen anything in the news about a lender helping out, and if they did, it would certainly be news.

You want to know another reason why I think the real estate market is so bad? I live in an upper-middle class upscale town where houses sell for $700,000 to $1,000,000. Almost every day, I drive past a house that looks abandoned, with weeds literally over five feet high growing in the front yard. It has been that way for over a year with no sign of any occupants. It is located two blocks from the middle school and two and a half blocks from the elementary school. I thought to myself, if I could pick that up for $300,000, I could get some landscapers and painter in there, and flip the house for $600,000, about $100,000 below "market" for a quick sale. Even if there were electrical and plumbing problems, there would still be a huge profit potential. So I decided to check it out on the Internet.

It turns out that a foreclosure sale had already taken place back in June, for a $221,000 minimum bid and no bidders! If I thought it was a bargain at 300k and the house didn't even sell for 221k, unless the house was on a toxic waste dump, the market must really be in the tank. Where were the small contractors who would normally buy these properties to fix and sell as their own projects, or the flipper/investors? Are they that over-cautious? Are they that over-extended?

You will know that the real estate market has hit bottom when free houses will be offered. Of course, these won't be expensive Beverly Hills mansions; they will be small houses in bad shape that are located in run-down neighborhoods. Sorry investors, you won't be eligible. "Buyers" will have to agree to live in the homes for at least a year or two, and be able to prove that they can afford to pay the property taxes, insurance and maintenance on the houses.

What else are the banks, mortgage companies and other holders of the mortgages going to do? They aren't in the business of renting out real estate, nor are they in the business of even holding real estate. When they foreclose, they have to pay property tax, insurance, maintenance, and security. For that matter, they aren't even in the business of selling real estate. And buyers are still holding off.

When you see the free houses being offered, that will be the time to invest in real estate.

By Fred Fuld at


Anonymous said...

Thanks for sharing this info about Real Estate issues. Well, I'll share with you an article, "Stop Foreclosure! Know What To Do", which is somewhat related to your post. It's not really close related but somehow connects in the topic. Feel free to check it out. Anyways, great post. Well said, and informative.

Mark said...

Fred I agree. People say now, well houses are down XX% - must be a good buy... I am thinking wait 18 months min and more like 24 months.

We still have about 16 months of resets. We still have generally good employment. If employment jumps to say 5.5-5.7% (while great historically), thrown on top of the housing market it could get real bad. A lot of people made their living by being a realtor or at least part time realtor - a lot of people with no major other skills made their money selling crap mortgages. As we lose 'real jobs' and transition to 'service' jobs, these people are going to be working retail for 60% of their old salaries.

Bottom line is affordability is gone in top urban markets. The 'common' man has been priced out. If you put a $80K family household or $45K single, throw a 6% 30 year fixed you get about a $180-$230K home. THat is a pipe dream in many cities in the top 20 markets. (excluding Texas)

What will drive the reality is now current homeowners who will be stubborn and not drop prices enough - it will be the home builders slashing prices (HOV sale of century! just the first of many sales of centuries) - when home across the street goes for $150K from what you paid in 2005, than maybe some current homeowners will see the light. But not until then.

So these 'dead cat' rallies and countertrend rallies in homebuilders, cute and all, just setting up new shorting opportunities. I am thinking late 2008 as earliest to begin really being long homebuilders and probably farther out than that.

Stockerblog said...

Thanks TraderMark for you comments. I'm glad someone agrees with me. I keep hearig from people that now is a good time to hunt for bargains. When I keep hearing it, especially from people who have never invested in real estate, it really makes me concerned.