Foreclosures, defaults fall, but analysts urge caution – By Roger Showley

(Real Estate) Foreclosures and defaults (in San Diego) continued to fall last month as distress seemed to ease in the local housing market, locally based MDA DataQuick reported yesterday.

But industry experts warned of a “false dawn” that is likely to lead to more lost homes in the months ahead as more homeowners find it impossible to keep up with their payments in the face of rising interest rates and a sluggish economic recovery.

January brought 986 foreclosures, down 34.9 percent from December and off 10.9 percent from a year earlier. It was the lowest foreclosure count since May. Notices of default, the first step in the foreclosure process, numbered 1,741, down 7.3 percent from December and off 38 percent from January 2009.

It was the fewest notices of default since November 2008.

“There’s a lot of distress stacking up outside the formal foreclosure process,” DataQuick analyst Andrew LePage said. “It’s anybody’s guess when some or most of it will flush through the foreclosure process.”

Sean O’Toole, CEO ofForeclosureRadar.comin Discovery Bay, who reported similar numbers earlier, said lenders are intentionally slowing down foreclosures and defaults in response to officials urging them to do all they can to keep people in their homes. O’Toole said a string of initiatives is failing to solve the basic problem: Housing expenses are too high.

Eerie out there…

It is pretty eerie out there right now in the market. On one hand if you have a property in the less than $450,000 range there are multiple offers on it, it’s as hot as 2004. On the other hand I know there is a ton of people not making payments (I know of people who have been in their house for 17 months and the bank forgot about them!), doing loan mods which are failing at a rate of about 75% and a ton of NOD’s that keeping on getting pushed backed and postponed.

All these properties that are just sitting there is what is referred to as the “shadow inventory” or this article references as the “false dawn”. In the last week alone there have been over 239 references to this shadow inventory.

What to believe? So much conflicting data and opinions…

On one hand you have data like this (A friend of mine and great agent Michael Friedman of Sea Coast Exclusive properties in San Diego sent this to me, email him for his monthly updates. A little technical but some great pieces also)

Well, first let me start off by saying if someone tells you they can predict the market I have some ocean front property in Arizona to sell you. So what do you do???

Monthly Mortgage Resets

As the graph suggests there are still a lot of mortgages that are set to reset. Yes, we have low rates right now but 1 – can people really qualify and 2 are they going to want to because they are so upside d0wn. I have read that 40% of mortgages are underwater. So what will happen? orange

My focus on the flips has been in the lower 1/3 of the market. Part of the reason is if something happens and we can’t sell the price vs. rent ratio is much better or in other words the cash flow return on our money is greater. As a matter of fact the last 6 deals I have bought would have all generated a better return per unit than apartment units.

Below you will see a chart of the San Diego Real Estate “months of  inventory”  You will notice the lower quadrants sell MUCH quicker and I think much of that has to do with the fact that  the price someone pays right now with the mortgage rates as low as they are makes sense because it is cheaper than rent in many cases.

When flipping properties one of the greatest enemies is time and the quicker you can turn them over the quicker you get your money back (which has locked in the return) and the quicker you can reinvest (as long as you have more inventory to buy). Sometimes it is better to sell for a little less so you can move on to more opportunities.

Some keys to turning them over quickly. Construction & pricing – you take care of those two things everything else will fall into place (easier said than done).

Which way did it go George? Which way did it Go? Is the San Diego real estate market up? Down? Nope, it’s all around.

As I said above I don’t think anyone can absolutely predict the market BECAUSE there are so many variables that people don’t have control over like THE GOVERNMENT. What I do believe is that

  1. There is a lot of properties that is sitting either vacant, in loan modification, short sale, or just not paying there mortgage. Banks have been given more leeway in the past to work with home owners (same thing is true in the multi family market and commercial real estate market). And the rules seem to be changing often so how do you bet on it? Everyone did a pretty shitty job last time trying to predict it what’s different this time.
  2. Entry-level residential (lower end) is the best investment right now in the Real Estate arena. Upper-end homes I believe have a lot more problems do be worked out. The commercial and the Apartment market can’t make up their minds on how bad they want to get and I think we really won’t see what will truly happen for at least another year to 18 months. I will say I am starting to see some apartment deals that may soon start to interest us

Well here are my thoughts. If you have the time, money, energy, expertise and cajones

  1. you need to get in and out of the lower end of the properties quickly. Preferably within 6 months and you need to purchase these properties at no greater than 70% of after repaired value


After repaired value $300,000

Construction Costs   $50,000

You can pay $300,000 x 70% = $210,000 – $50,000 = $160,000

If you pay this amount you have about a 15-20%  net spread after purchase, holding, construction, & selling costs. If you can do this within 6 months the market would have to have a 30% drop in price before you lost money (disclaimer – this all sounds nice and dandy and a great way to justify buying Real Estate but let’s face it most of us had our asses handed to us this last time around because we thought we were so smart eh?)

Nonetheless, if you are going to get in the market buying Real Estate in San Diego or anywhere else in that market be quick.

2. If you buy and hold get something that will give YOU  a return you are happy with. Do your calculations and just know like most other things in life it will cost you more, take longer and you will make less than you projected.  Be prepared to hold it for a while, if you can do that and start collecting some of these houses and condos with these low rates I believe you will be great full in 10 years. Even if the market drops for the time being.

Well I’ve spent enough time rambling and need to get home to the wife and kids so until the next time.


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