Housing Prices Demand Correction

by: Edward Tseng January 22, 2008 | about stocks: CFC / IDMCQ.PK / WFC / WM    

Edward Tseng

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

I would like to add to my observations in IndyMac Bancorp: Time to Take REOs Online.

I have to give credit to the REO management of Wells Fargo Bank (WFC). They advanced their market niche online by hiring Hudson to do “smart” auctions. Among those properties on auction block next month, Wells Fargo didn't even bother to give real estate brokers a chance to do regular listing and marketing. Some went to auction directly from court foreclosure steps.

Wells Fargo abandoned the familiar methods. No BPO or asset management needed. All they have done is use the market forces to set the price of REOs, not other artificial manipulations. These strategies will dramatically save time, cut out the middlemen and reduce their operation costs. (Unfortunately, the real estate professional is one of those being bypassed.)

Realtybid.com does negotiations after official bidding ends. Wells Fargo does the opposite; they do it first before the set auction date. I believe Wells Fargo's formula is better and more effective. However, the success of this kind of negotiation depends on the discount rate (recovery rate) set prior to the final day (a kind of reserve). So far, Wells Fargo seems not aggressive enough to willingly give sufficient discounts to cope with the market. In the first three business days, there were some results: two properties were sold and off the Hudson’s block at the next southern California auction. That is less than 1 percent out of the 250 REOs it put out for the auction. Not so great!

Even though Wells Fargo and Hudson have had too rough and primitive a start in trial operations and need to improve their website substantially, I have to say "job well done" to Wells Fargo in terms of creativity. (Although Hudson claimed success in their Detroit auction, I would say it was a very tough one for them since there was no auction fever, if not a failure or setback. But it is just the beginning. We have to wait and see whether this is going to be a decisive general trend.) Either way, it is a great step forward in solving the current housing bubble.

I am going to use WaMu (WM) as example to describe the current traditional marketing of REO operations. So far, Countrywide (CFC) (using REDC to auction thousands of its REOs in Southern California in the coming weeks, essentially remaining in the old-style on-site auction; even taking the benefit of cyberspace advertisement for its publicity, it is not fully using the advantageous functions of internet), Indymac (IMB), BofA (BAC), and other lenders are still as conservative as WaMu and are left behind by Wells Fargo. WaMu (and these other companies) is essentially no different than a regular seller. Both are ignoring the reality that housing prices have dramatically gone down.

Looking at the NAR website, we can find so many listings in San Gabriel Valley, CA that still have price tags of the housing peak. In this zip code, there are about 55 condos listed up to $400K. Per Ziprealty stats, there were maybe fewer than two condos sold in that zip code in Q42007 (there were more than ten times sold a year ago). Some are REOs with a price of mid-250k, but most sellers who own about the same unit in the complex are still asking near $380K; that's even higher than its peak. I saw one condo going for a short sale. It is very funny to me that the listing agent is asking a price higher than what the seller paid for a year ago. Does that seller expect a bigger fool than him?

In the same neighborhood, some houses are going for even lower than those condos. Just tell me, how can they sell their condos? I don't know how good the advice is that they got from their listing agents. All I can say is that those condos definitely won't move; their prices are about the same as during peak time, and are therefore artificially high and scary.

Can we stop blaming WaMu as we, real estate professionals, are doing the same thing - trying to get a listing by giving sellers imagined price hikes and unrealistic expectations? Let me ask you, who did BPO for WaMu? Isn't it one of our fellow agents? Yes, he or she is able to get $20-50 for doing an "inflated" BPO to "survive." It's fine, everybody deserves a living. But, oh, no. He or she in fact creates a hurdle to "sell" the property and "cut" income sources for the profession.

If a lender is so anxious to sell and sees no result or offer coming in, he is going to give an auctioneer the property on auction block. That's exactly the situation, here. Wells Fargo decided to let Hudson handle its three hundred REOs in southern California next month. Hudson gets a 5% buyer premium (isn't it a regular commission for an REO?) and takes our income away. To whom shall we point our fingers if our fellow agents are pleasing a seller and "discouraging" buyers from presenting an offer? (Please see my recent experience at A Funny World (19): Can Agents Refuse Receiving Offers or Not?)

As I know, there are a lot of buyers who really want to buy. But there are just TWO things stopping them from buying: unreal listing prices and those listing agents who are playing high attitudes. They "discourage" selling by saying: "don't give me an offer if your price is no more than.......", just as they used to during the housing peak.

It is very clear that housing prices need to be corrected. Can we stop snow from falling down? If we can’t, then why must the NAR deny the pricing downturn trend in California? Can we make this market adjustment period shorter and smoother, and be realistic in order to get things going? There will be less pain if we can let the market function naturally.

Related Articles

This article has 4 comments:

  •  
    Jan 22 12:18 PM
    Sellers are, for the most part, not willing to listen to good advice from their brokers. To price for a less than 90 day sale, sellers must understand that capitulation to this market will take them to the brink of vomiting.
    Reply | Link to Comment
  •  
    Jan 23 12:16 PM
    The real estate professionals are suffering under the delusion that they have some kind of control over what is happening to home prices. No matter. Houses can sell cheap, now, or sell cheaper, later. All else is hot air.
    Reply | Link to Comment
  •  
    Jan 24 12:18 AM
    I'm a buyer in the St Louis area (Wentzville, Lake St Louis). The builders finally get it because they have to: liquidate and maybe live, or die. Taylor-Morley chose the latter. The existing home sellers in our price range (300K-400K) are utterly clueless. We walked through EVERY home we're interested in last June. They were all on the market last January. They're all still on the market at or near last year's asking price OR foreclosed OR what my wife and I call "yo-yo'd" which is on for three months off for two, on for three, off for two, ad infinitum. Plus, there are a WHOLE lot of empty homes sans "for sale" signs. I've checked several at the county assessor's website and most are owned by asset management companies and not listed on RealtyTrac or the other REO sites. I'm just sitting back with a big bag of money, NO debts whatsoever, no house to sell and a tidy income. It's lonely out here but Citi, WaMu, Countrywide, BofA, blah, blah, blahwill have to pull their collective heads out of their asses and turn their real property assets into cash. Twenty bucks says Citi may NEVER pull their heads out.
    Reply | Link to Comment
  •  
    Jan 26 03:46 PM
    The market is working at its own pace. The last straw will be drawn once we reach there. But, before the last straw others are to be pulled out first to get to the proverbial the straw that broke the back.

    It will take time for all to get their reality dose in time.
    Reply | Link to Comment
More Comments on WM »
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Edward Tseng

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Housing & Real Estate
Real Estate and REITs
Consumer Credit
Insurance