So I am writing this for all of us real estate investors out there that either bought a property or are looking to jump into a home, all of us there that are into foreclosures and bank REOs either for investment purposes or becuase they are looking to buy the home of their dreams and finally all of us out there that have been waiting for the real estate market to collapse and are trying to see whether the 30%-plus decline in home prices in Southern California, Nevada, Arizona and Florida represents the bottom or not. I am also writing to those of us who hold some core positions in the stock market and want to know when it's time to rotate back into banking and homebuilder stocks. For those of us who want to know if this is the bottom or if this is a head fake for real estate.
So how do we know if we have reached the bottom in the real estate market? We can listen to the news, look at statistics etc but by the time the news makes it to the headlines, we are already past the bottom and we are off to the races. By the time the economists tell us that we have reached the bottom, it'll probably be too late. We need some simple tools to see for ourselves before everyone else.
A good quick tool would be to gauge the depth of REO inventory on the banks' books. REO, for those not familiar with the jargon, stands for Real Estate Owned, which means properties that are owned by the banks. What happened to those properties is that they were foreclosed, they went on the auction block and nobody bid high enough to buy them at the auction. The bank then exercised their right to buy back the property as the auction's highest bidder and now they are owned by the bank. But the banks are not in the business of owning real estate and they are trying to sell this inventory. As the REO inventory increases, the supply of REO (or you can say foreclosed) homes increases, which signifies no bottom anytime soon in the real estate market. Once you see the inventory decreasing, then maybe we are near the bottom.
Now a good question is how do we find a good measure of how many REO properties are sitting on banks' books? A good website where you can see that is one that displays all banks' REO foreclosed properties. What I do actually is I go every week and I check to see the bank REO of the biggest banks that are listed there (Countrywide, Bank of America, Citigroup and Wells Fargo are all there). Then I see how many houses they have and I write that number down. There are many other banks on that website but I wouldn't bother with them since they are smaller. The big banks REO websites ... give you a good idea of what's out there. Don't spend your whole day counting one by one. Just get a general idea of how many pages there are there and multiply.
Now, remember this is just a tool. This is not the complete picture as many other events affect the level of bank REO inventory at any given time. For example, California put a moratorium on bank foreclosures from Nov 2008 to Jan 2009. Banks could not foreclose during that time. As a result Countrywide's Bank REO inventory went down up until Jan 2009 but then rose again in February when banks could foreclose again. Please remember that this is just a tool and a very useful one but it doesn't solve all the problems nor can it predict the weather on its own. You need to keep your eyes and ears open to watch out for other things that might affect supply and demand in REO inventory and real estate in general.
That's my two cents. Good luck in the future finding and buying your dream home or REIT stock at the bottom. I hope I helped.