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Nevada County Real Estate Market Snapshot - How the Housing Bubble is different
Created: 9/2/2009
September 2, 2009 – In earlier housing cycles, such as the early 80s and late 90s, the housing decline was a secondary effect of a different economic problem. In the 80s, it was more or less due to closing of defense industry plants that were tied to old technology and wars like Vietnam. A “Defense Bubble”, if you will. California was particularly hard hit, and actual housing prices didn’t go down very much, but there were many people out of work.
Then in the late 90’s/early 2000s it was the Internet Bubble, and again housing prices didn’t go down too much, but a lot of people were out of work. What these two cycles had in common was that some folks couldn’t keep up with their house payments, and lost their homes, but in many cases they still had plenty of equity.
What’s different about this cycle is that it’s a Housing Bubble, and home prices have gone down so far that many people, even some of those who are able to keep their homes, have no equity, even negative equity (underwater) in many cases.
When a home in foreclosure has equity, it will often sell to a private party at the Trustee’s sale on the courthouse steps, because the minimum bid is the loan value and the actual market value of the property is higher. In this case, the property will sell at or just below market value in an auction on the courthouse steps. The buyer may capture a small amount of instant equity and look forward to some market appreciation plus whatever value they can add by improving the property.
In today’s market, the vast majority of homes that are in a Trustee’s sale have no equity and in many cases the loan value is quite a bit higher than the market value. Again though, the minimum bid will be the loan value, due to flawed bank policy that hasn’t kept up with the market. So no buyer in their right mind is going to pay more than market value at the courthouse steps, and the bank ends up repossessing the property. Then the property goes through the whole process of foreclosure and is placed back on the market by the bank.
As much as the bank would love to price the property at or above the value of the foreclosed loan, no-one would buy it, for the same reason it didn’t sell on the courthouse steps. So they price it at market value or maybe just a tad below so it will sell faster. That’s what we are seeing today, a lot of REO properties, priced more or less at market value relative to other properties on the market.
The way to add value in this market is either to improve the property (sweat equity) and bring it up to a higher segment of the market, or to improve it to a certain minimum level and convert it to a rental property.
At least for the time being, the days of buying instant equity on the courthouse steps are gone, and the discount available in the REO market is minimal. There is a wealth of opportunity just the same. Every now and then, a property comes up that is so trashed, they almost give it away (at land value), and for the seasoned homebuilder or experienced carpenter, this can be an opportunity to do a total rebuild and capture some instant equity (profit), just like a homebuilder would, starting from scratch.
That’s the best I can do to explain why this market is different because we are still figuring it out. The books that have been written up to this point on how to make money in foreclosures are based on earlier market cycles that were not “Housing Bubbles”, and so they are not necessarily relevant to the opportunities of today.
In today’s market, prices have fallen so far in an over-correction that most of the upside is in future appreciation, plus whatever sweat equity is added by the buyer, or the rental income from converting the property, or both.
Paul Sieving is a Realtor® with CENTURY 21 Gold Dust Realty, has been Chair of the MLS Committee and a Director of NCAOR and Board Chair of the Grass Valley Chamber of Commerce, while serving our community as a real estate professional for 10 years. Comments, questions and thoughts are welcome at Paul@PaulSieving.com or (530) 274-0906.
