New Year, New Opportunities
By Rick Sharga
As we enter a new year — and begin a new decade — it’s a good time to take a look ahead and try to answer some of the most frequently asked questions about the foreclosure market.
Overall, we expect an ample supply of discounted foreclosures to be available in 2010, but pent-up demand and record-low cost of ownership will ensure the best deals will be snatched up quickly by well-prepared bargain hunters. Most local markets won’t experience a double-dip in home prices during the year, but the prime buying conditions in place now may be gone by year’s end.
Question 1: What’s the outlook for foreclosure activity in 2010?
It’s likely that we’ll set a new record in terms of overall foreclosure activity for the fourth consecutive year. Over 1.3 million U.S. households received a foreclosure notice in 2007; over 2.3 million received notices in 2008; and although the 2009 numbers haven’t been completely counted at the writing of this article, there will be somewhere in the vicinity of 2.8 to 3 million households in foreclosure. We’re likely to see more than this in 2010, with the number of homeowners in foreclosure probably exceeding 3.5 million, before the trend begins to reverse itself sometime in 2011.
Question 2: Will we see a flood of REOs?
Investors, home buyers and real estate professionals have all been anxiously awaiting a tidal wave of REOs for the past two years. Instead, inventory levels have remained frustratingly low, even in some of the hardest-hit foreclosure markets. Expect more of the same in 2010.
What this means for buyers and sellers is that there will be limited availability of REOs, albeit at higher-than-normal levels. No flood, but a good chance that the trickle on the market today will grow to a more steady stream. While this makes it less likely that we’ll see a “double dip” in home prices, we also won’t see much price appreciation until these distressed assets are finally gobbled up. The most likely scenario is a long, relatively flat period of recovery in the housing market.
Question 3: Will there be a surge in Short Sales?
A big frustration for potential foreclosure buyers has been the difficulty in buying a property via short sale. Agents have questioned why banks reject a short sale offer 20 percent below the mortgage amount only to spend tens of thousands of dollars to foreclose on the home and then sell it as an REO at a 50 percent discount.
We’ll see an increase in the number of short sales if the Treasury Department has anything to say about it: Lenders participating in the Obama Administration’s loan modification program will be strongly encouraged to offer any homeowner who doesn’t meet the requirements for HAMP a short sale opportunity as an alternative to foreclosure.
But short sales won’t be a panacea, either. In many cases, the presence of a second loan will make negotiating a short sale much more difficult; in other cases, the owner of the primary loan might foreclose on the home, wipe out the second loan, and sell the home, using the amount of the second loan as a “market discount” to move the property.
Question 4: Is now a good time to invest in foreclosures?
What all of this means to foreclosure buyers and investors is that the process will require more diligence, persistence and patience. But there has never been a market with as much — or as varied — inventory to choose from, and the combination of deeply discounted pricing and historically low interest rates make many deals once-in-a-lifetime opportunities.
Whether you’re a wholesale investor looking to buy, rehab and resell, or a buy-and-hold investor looking for a cash flow property to rent out, 2010 marks the beginning of a decade of unprecedented opportunity.
Rick Sharga is Senior Vice President of RealtyTrac.