Banks Face Growing Pressure on Home Prices

by: Barry Ritholtz

One of the themes I've developed over the years was that of the Slow-Motion-Slow-Down: As rates ticked higher, home sales would slow, refis and MEW would decrease, inventory would build, and prices would come down.

Add to that the ARM resets and increasing foreclosures, and you have the formula for:

1. Decreased Consumer Spending
2. Falling Home Prices
3. Economic Slowing

Whether or not this causes an actual recession is yet to be determined, but the statistical odds of one occurring keep moving higher.


In Monday's WSJ is an article that sums up how all of these elements combine: Mortgage Woes Force Banks To Take Hits to Sell Homes:

An auction of nearly 100 foreclosed homes here Saturday showed that mortgage lenders are having to accept huge discounts in some cases to unload such properties.

A surge of foreclosures over the past year or so has left lenders struggling to sell a growing backlog of homes. Rather than relying on real-estate agents, the usual practice, some are turning to large-scale auctions to speed up the sale process.

Real Estate Disposition Corp., the Irvine, Calif., company that organized Saturday's auction of lender-owned homes, plans similar sales May 19 in Los Angeles and May 20 in Riverside, Calif.

At the San Diego sale, houses and condos typically sold for about 30% below the previous sale or appraisal prices. In a few cases, the discounts were around 50%.

A four-bedroom home in Oceanside, Calif., attracted a high bid of $495,000 at the auction, 33% below the sale price recorded in November 2005 for the property. One condo in San Diego sold for $120,000, less than half of its previous value.

This raises a wealth of issues, including the absurd Appraisal Inflation we have mentioned in the past.

How might this resolve itself? As foreclosures continue to surge higher, lenders-in-possession will find themselves with an increasing number of homes. Indeed, so many so, that the only solution has become large scale auctions -- 100 or so properties at a time. As you can imagine, the impact of so much supply hitting the market all at once means that buyers can be quite picky, and bidders are free to low ball.

The net result, as seen above, is enormous price decreases from the loan amount, appraised value, or recent selling price.

Mortgage Woes Force Banks To Take Hits to Sell Homes
WSJ, May 14, 2007; Page A2