Sunday, September 21, 2008

Foreclosures, financial crisis, and buying a house in California NOW

First of all, as I sat in a meeting last week with a loan officer as we're beginning this experiment to see if we should/really want to buy property in California, I have never felt more like a Republican. Our loan officer is a fantastic guy (ask us if you're looking for one, we'll send his info along), and I have no idea what his politics are (nor do I care), but the number of times he said "conservative" in our meeting struck me a little off guard. I suppose we do make good salaries. I suppose we are fairly "conservative" in how we handle our money and choose to spend it. I like to think of it more like "fiscally responsible" myself, as both of us have been through periods of debt and now that we're clear with good credit, we don't want to become "house poor" in our mid 30's as parents. So I suppose we ~could~ spend a lot more than we want to and push up that debt-to-income ratio. But let me illustrate why we are entertaining the idea of buying property in California NOW.

We've learned a lot about foreclosure in the last few weeks.

On the technical side, we've learned how people default on their mortgage payments and then get served a "Notice of Default". The smart ones at this point try to sell "short", which means the lenders expect to receive money "short" of what they are owed. "Short" does not imply "quick". Often there are two lenders from two mortgages, and the two lenders fight over who gets what amount. So a "short" sale (this is also called "pre-forclosure") can often take months. An offer can sit there, and the lenders don't have anyone assigned to the case yet, so the potential buyers are stuck in the water until something gives.

Often what happens next is that the owners in default get evicted and the property goes to Auction, where it eventually ends up getting bought by the primary lender on the mortgage. Then property is called "REO" (Real Estate Owned) or "Bank Owned". Vacant, and with a single owner, the process can move a LOT faster. I've seen a few of these properties pop up around here. They hit the market, hold an open house, get a flood of offers, and sell immediately. Unless they're in really bad shape, then they sit for a loooooong time.


Notice of Default -> Pre-Foreclosure (short sales) -> Eviction -> Auction -> REO

On the personal side of foreclosure, well, that's a varied and sometimes heart breaking thing. The good news here is that if owners succeed in selling "short", their credit is kept a whole lot more in tact than it would if it goes to foreclosure. The bad news is that if they don't ... people end up evicted, with awful credit, and no hope of getting another home loan.

We've gone to view several properties that are "short" sales ... pre-foreclosures ... these are not people who are trying to make their property appealing to buyers. Some are down on their luck and terribly embarrassed to have people show up to view their property. Some have a real tendency to spend way beyond their means, and it shows in the size of the flat-screen TVs in the living rooms. Some are probably running an organized crime business, and again, it shows in the size of their flat-screen TVs and in the wires hanging off the powerlines in the back. We've also seen a handful of vacant REO properties. The ones that turn quickly are the ones that have been well taken care of; usually well-meaning people who got in the market in 2003-2005 at the height and couldn't keep up. The ones that linger are the ones where people have left all sorts of garbage and fire pits full of glass bottles for God-knows what kind of illegal activities. Many smell really bad.

Anyway, all this to say that the financial crisis of 2008 and the burst of the housing bubble has hit California pretty hard. It sucks for a lot of people. And for that reason alone I'm voting Obama over the failed economic policies of the libertarian "let the market work without any oversight" right wing. But that's another story.

Here is a map of the properties going to Auction in our rough area of Campbell and south San Jose (Cambrian Park). Courtesy Realty Trac.

And here is a map of the bank owned "REO" properties in the same area.

What I haven't taken a screen shot of is "Pre-foreclosures", because there are more than 300 in this level of zoom.

Rediculous, eh? I hope this helps illustrate how bad the current crisis is on PEOPLE even more than on the BANKS.

But for those of us fresh off the 2001 dot-com bust who couldn't believe the real estate bubble of 2003-2005 was grounded in reality ... well, this whole thing means we can find houses for fairly reasonable prices.

The bubble is bursting. Housing prices are down literally $200K around here.

If you're fortunate to have nothing to sell, now is a GREAT time to buy around here.

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