Wednesday, June 06, 2007

Distressed Properties Update

Up, up, and away! The numbers below shouldn't come as a surprise to anyone. We've now hit the 20% mark though, meaning 1 in every 5 homes in MLS is either a short sale, pre-foreclosure, or REO. A while back I guessed we'd top out at 17%. Here's something you won't hear every day from a Realtor--I was wrong! But in this case, I don't necessarily mind being wrong. A 5.4% monthly increase in sales compared to a 15.6% increase in distressed properties. I just wonder if we can get to 25% now!


Anonymous said...


Here's an interesting question: will higher mortgage rates (10-y bond above 5% today) help or hurt this picture? How about mortgage rates at 7%? 7.5%? 8%?

... said...

Well, consider this... interest only loans have moved from approximately 4% to just over 6% in the past 2 years, a 50% increase in payments for most persons before "adjustments" .... has this had an impact on the market????

Ben Bernake thinks not.. do you respect his opinion?

I don't.

patski said...


Sold on 04/28/2006 Price: $746,500

Rents for $2095/mo


Wadin' In said...

Patski, Yikes is right. I bet that property is in Anatolia and probably has $300/mon Mello Roos bonds and $100/mon HOA. Taxes are $715/mon. So the poor FB nets $1,000/mon to make his loan payment. Let see, if it is a 100% sub prime, that payment might be $4966/mon.

$3966/mon negative cash flow. Ouch. If they hold it until 2016, when it might be worth what they paid for it, they will have spent another $595,977 in negative cash flow (of course rents may go up in a few years).

Anonymous said...

"of course rents may go up in a few years"

Yeah, because incomes are going up a lot. Wait...incomes aren't going up at all. What can this riddle mean?

Anonymous said...

Darth toll,

Rental rates are only based on income inasmuch as higher incomes increase demand. and since supply will be on a sharp rise for a while due to the increase in unsellable inventory, the supply v demand picture should drive rental rates down, I should think.

Wadin' In said...

Darth & Metro, You are both correct, but my calculation was wrong. It should be $475,000 in negative cash flow over 10 years. Rental rates will hold or drop slightly for a few years. Then you will see a gradual increase. My point above was that my calculation showing negative cash flow over 10-years will be reduced somewhat when rental rates increase in, say, 2011. A 3% increase in the rent results in a $1400/year increase, to reduce the $47,000/year loss. Of course the lost earnings on the flushed $'s in the early years will more than offset rent increase later.

In any event, no FB is going to hold a rental property for 10 years with $475,000 of negative cash flow. A lot of these homes will be going back to the bank when the speculators realize there is no other way out. Renters should take care.

The property Patski's friends are looking to rent on Pyxis was purchased from a builder in March 2006. The buyer paid $746,500 with 10% down. Countrywide arranged a 1st for $596,900 and a 2nd for $74,600. While the FB does not want to walk away from his $75,000 down payment, how long will he bleed $40,000/year for Patski's friends? It is a real risk in this market, where 3500 homes are already for sale under distressed circumstances (short sale, REO or pre-foreclosure).