Shadow Inventory (Part 2): Predicting the Future

In my previous post I discussed a backlog of foreclosure properties, coupled with a growing pool of homeowners needing to sell, potentially creating a surge in the number of homes for sale in Pickens County GA, and other parts of the country.

I have since read further "dire predictions" about the next wave of foreclosures and the potential for additional price drops in a majority of the markets surveyed. I have also read countervailing theories and reports of growing improvements in home sales and values.

So the big question is, what do we do? Believe the predictions? Buy into the hype? And if so, whose argument should we believe in choosing our course?

For buyers, there is the obvious concern of buying into a declining market. On the other hand, if we've already reached a "bottom"-- as some would hold -- the only direction for prices is up, so not buying now could be costly down the road. For sellers there is the similar challenge of knowing "when to hold" and "when to fold". Sell now before prices decline further, or wait for a turnaround and a better price?

To me, this is very similar to trying to "time" the stock market as a whole. It's like watching the Dow Jones or NASDAQ indices and trying to decide based on current performance whether the trend will be up or down for the future. And from there, if the decision is to participate in the market at all, trying to decide on a particular stock or company, based on a similar prediction as to whether those shares are going to perform better or worse in the future. This requires a certain level of guesswork (dare I say gambling?), to suggest at what point a floor or ceiling has been reached, and whether this is now a "safe" investment with all potential downside removed.

The are plenty of Wall Street analysts calling both sides of the coin. Only a few get it right. Even fewer with any consistency. The truth is, predicting the future has never been a very reliable means of decision making.

I think an analysis of successful investors will show that a majority of them generated their good returns by picking companies with solid fundamentals and holding for the long term. Their decision is based on factors such as a quality product or service, good management, appealing P/E Ratio, etc. Of course there are the stories that abound of millions made overnight via "lucky" investments in tech startups and so on, but these are anomalies, much like suggesting that winning the lottery is a wise investment "strategy". Absolutely, it would be great if you can do it . . .

Likewise, selling smart in the stock market isn't always the windfall of an insider tip, "premonition", or knowledge of the future. It is a sound decision based largely on changing investment needs, restructuring, or early warning signs of potential trouble on the horizon for that company or sector. An investment held for a long time that has seen comfortable gains can be easily divested, even in the face of an already declining stock price, leaving no need for second-guessing. If the pricing pressure is seen as temporary due to some particular event, such as a lawsuit, product recall, or other "bad" news, but the company's fundamentals remain strong, the option remains of riding the stock to the bottom and back up again, if it is a long term investment.

Since real estate is perhaps the largest investment most people will ever make in their lives, it seems that similar logic to other forms of investing should apply. Of course, the analogy isn't 100% identical, as there are a lot of factors, considerations, and data available in stock trading that there aren't in real estate, but the decision making should be similar.

In real estate, as with the stock market, even the so-called "experts" are often caught flat-footed by the direction of the real estate market as a whole. Just as deciding that the Dow hitting "10,000" is a good time to jump in, or when it drops to "8,000" is a time to bail, deciding to buy or sell a home based on national sales statistics reported in the Case-Schiller Index, by the National Association of Realtors, or the Office of Federal Housing Enterprise Oversight (OFHEO), is like playing darts while blindfolded.

Declines or gains in home and land sales volume or price have a tendency to vary greatly by location, much as certain sectors in the stock market may perform against the general trend of the index on which they are listed. Precious metals may be a good investment versus energy stocks in an otherwise declining market. Likewise, buying or selling in the southeast may be a very different proposition from the midwest. Atlanta may be very different to Chattanooga. And Jasper may be completely opposite to Atlanta, based on local dynamics. Certain neighborhoods in Jasper may in turn perform better or worse than other neighborhoods in the area.

As described above, when investing in the stock market, one generally doesn't invest in the market as a whole, or even a sector, but a carefully chosen company or two. The same is true of buying a home. The broader market, the area, the city, the neighborhood, are all just a general backdrop which have to be taken into consideration, but, the actual investment is the home itself.

So, ultimately, in my opinion, rather than the question I hear so often "How's the real estate market? Is it a good time to buy / sell?", a better question might be, "Based on my particular unique set of circumstance in the current environment, is it a good time for me to buy or sell a home?"

If considering a purchase, the issue should always be,"Is buying this house as a long term investment, in this location, at this moment in time, a good decision for me?". If deciding whether or not to sell, similarly the issue is, "What are my alternatives, options and consequences, in choosing to sell or not sell at this precise moment?"

Questions which will be more fully explored in Part 3 of this post . . .

Shadow Inventory: A New Wave of Foreclosures in the Cards?

A big issue currently being debated in economic and real estate circles is the question of a "shadow inventory" of homes that could hamper any recovery effort.

This shadow inventory arises from two sources. One is the supposedly growing number of potential homesellers who have taken to the sidelines to await a more stable market and stronger prices, and who are likely to emerge at the first solid sign of improvement. The other is a possible surge of homes coming to market from sizable existing REO portfolios of unsold foreclosure homes already held by banks, investors and lenders, accompanied by a new wave of foreclosures, as large (some say larger) than that we've already experienced.

This spectre of rising foreclosures is a widely held belief among many in the industry and government, and is worth keeping in focus. Whereas the bulk of prior foreclosure activity was blamed on poorly qualified buyers, and resetting ARM's, the next go round is said to arise out of Option ARM's and Alt-A loans, possibly running to millions of foreclosed properties over the next few years. And many of these homes will be in a higher price range than the majority of distress sales currently coming to market.

There is hope that being aware is a step in the right direction to address the problem, but with the declines in property values, high listing inventory in many areas, increased unemployment, and questionable success in resolving current issues, it's hard to know from where any relief will come. More and more sellers are upside down on their loans, and even when they are able to find a buyer, actually closing the transaction becomes an iffy prospect that can be blown apart at any point by tougher (and very changeable) lending standards, unpredictable appraisals, and, more and more of late, the vagaries of dealing with short sale / loss mitigation departments of the seller's lender.

I have blogged elsewhere that remedial efforts thus far may have unintended consequences, causing them to backfire, while only a small percentage of homeowners have actually been able to take advantage of them. Lenders appear to have become more amenable to considering short sales and negotiating on foreclosures they hold, but as the number of failed banks climbs, it also becomes a question how much more banks can continue to suffer these kinds of losses . . . particularly when the equally ugly likelihood of growing commercial foreclosures approaches.

So, if all the indicators hold true, we're not quite out of the woods. This suggested shadow inventory of increased foreclosure numbers and "try-it-again" sellers could swell inventory and reign in any upward pressure on prices that might otherwise occur, even if the increased buyer activity we have been seeing were to continue.

That's a great many "ifs" and "buts", when none of us has a crystal ball -- a subject I will pick up in part 2 of this blog post . . .

Pickens County GA Things to Do and Places to Go: Parks and Recreational Areas

Despite an attractive mountain setting and numerous small lakes and creeks, Pickens County GA unfortunately has no larger lakes, parks or recreational areas of any size, or any with particularly noteworthy features. Unlike our neighbors, who have Lake Allatoona, Lake Lanier, Carter's Lake, the Etowah River, Amicalola Falls, etc., as a recreational backdrop, our parks are somewhat limited in size and scope.

This is not meant to disparage or criticize the Jasper City Park, Chamber of Commerce Park, and rec fields at Roper Park, which serve their purpose -- and where I have taken my kids on numerous occasions over the years -- but which for some, have certain functional, spatial and /or aesthetic limitations. With that in mind, there are places to see and things to do outside of Jasper and Pickens County, GA, that I will cover from time to time, hopefully broadening the opportunities for residents and visitors alike.

This post will cover some options for those looking more to the east and southeast of Pickens County, closer to the Marblehill and Big Canoe area . . .

One of the most obvious is Amicalola Falls, in Dawson County, about which I have written before, as this nearby venue offers options for both simple picnic and sightseeing activities, as well as more rigorous hiking and climbing.

A related choice is the Amicalola River itself. As part of the Dawson Wildlife Management Area, the river is accessible to the public in a couple of spots for kayaking, tubing, fishing, hiking, and picnicking. One such access point is located directly off Highway 53 East, heading toward Dawsonville, at the bridge across the Amicalola. A small side road provides parking and access to a boardwalk that follows the river, complete with benches and river entry along the way. This makes a great spot to stop and eat with the kids, where they can wade in the water or play on the rocks in a pleasant setting , without having to go too far off the beaten path. [I hope to add some pics shortly.]

Another possibility is Poole's Mill Park in northwest Forsyth County. Just off of Highway 369 (Matt Hwy), on Poole's Mill Road, this lesser know park offers a good size playground, a pavilion, a scenic covered bridge, and a broad creek.

Large rock formations in and around the water create shallow cascades and waterfalls, making it a fun place for kids of all ages. The park is rarely crowded it seems, although generally more so at lunch than early morning or late afternoon. (And aside from the park, the area itself is generally attractive, surrounded by appealing neighborhoods like The Legends of Settendown Creek, The Preserve at Etowah, Etowah Trails, River Rock, Wolf Creek Park, and more, which are definitely worth a look for anyone in the market to buy a home).

So, next time you're wanting to take advantage of a crisp spring morning or balmy summer evening, want to share some of North Georgia's natural beauty with guests from out of town, or just have a couple of hours to kill, these close-at-hand scenic spots are worth keeping in mind.

Pickens Georgia Real Estate Update for 2nd Quarter, 2009: A Hint of Improving Home Sales?

My last quarterly report for real estate activity in the Jasper GA area, first quarter, 2009, suggested that some early signs of an easing to the downward trend in home sales might be in the works (at least in sales volume, not necessarily price). Thankfully, data for second quarter 2009 lends weight to this suggestion . . .

Seventy-two homes were placed under contract in the April - June period, up from only 37 in the first quarter and, more importantly, higher than the 57 reported sales in the same period for 2008! Admittedly, still 35% lower than the 111 posted two-years ago, but a welcome shift in the trend nonetheless. For all pending sales average list price was $190,343. Of the 72, only 44 have closed as of this writing, so actual sale prices not yet available for the remaining 28.

Based on those transactions that have actually closed however, the average sale price of homes in Pickens County GA for the 3-month period ending June 30th, comes in at $187,650 . . . or 90.3% of list price. But, the average list price of the transactions yet to close is only $163,480, which is likely to reduce the above number substantially . . . below Q1's $182,000 average, and also much lower than averages for both 2008 and 2007, ($199,256 and $209,712 respectively).

Listing price to selling price ratios have continued their decline from 96.4% in 2007, to 94.8% in 2008, to this quarter's 90.3%, in part due to the significant role foreclosures continue to play. Of the properties placed under contract during this period, 29 were bank owned foreclosures (40%). Roughly the same as the previous quarter, but much higher than the 9% - 19% of total sales reflected in prior years.

When viewed as a whole, quarters one and two show a definite weakness versus the first six months of 2007 & 2008, much of which is attributable to the particularly anemic 1st quarter, more so than the second. Average sale price has trended downward in each comparative 1/2-year period, from 214,168, to $208,230, to $185,166 (likely to be even lower after lagging sales are accounted for). Median sale price has tracked a similar course: $180,615, to $169,625; to $162,755 (before lagging data). List-to-sale ratio has fallen from 96.5%, to 94.5%, to 90.9%, despite an average list price in the most recent 6-month period that is already more than 8% lower than two-years ago.

With 547 homes for sale in and around Jasper GA as of this writing, at current sales levels we stand at 30-months of inventory of houses on the market (22.8 months if we can maintain the pace shown for the last 3-months). Either way, we are in the neighborhood of 4-5 times more houses for sale than what is considered a "balanced" market. Still a long way to go, but the most recent quarter is a good start.

Pricing pressure is likely to continue for some time to come, but there are definite indications that buying activity is picking up -- mostly in the first time buyer and bargain hunter category, which will likely have a spillover effect as move up buyers get their homes sold and competition for the best deals increases. Foreclosures are still a dark cloud on the horizon (more on that in another post), but for now we'll take this glimmer of sunshine and relish it . . .

(And, FYI, as we stand at this point in July, year-on-year comparisons are favorable to outperform last July, and at worst, match 2007's numbers, so let's keep our fingers crossed!)

95% Lot / Land Financing in North Georgia Mountains

While the days of 100% lot and land loans in North Georgia may have been short-lived -- where they were available at all -- there is still at least one place at which pretty favorable loan terms are said to be available for buildable residential lots . . . 95% land financing for eligible borrowers!

At this time, I am only aware of this particular 95% land loan program being available for -- and restricted to -- a broad selection of over 70 quality building lots in the gated resort community of Bent Tree in Jasper, Georgia . . . a great opportunity for anyone looking to build in the scenic North Georgia mountains with relatively little down. The Bent Tree GA lots are all 100% certified buildable for a 3-bedroom home or larger, and come complete with new surveys and level-3 soil tests, for peace of mind when purchasing, which makes the favorable financing even more attractive.

The 95% land loans are said to be offered at competitive rates, with consideration given to the borrower's entire financial position, more so than just credit score and income, which could make these loans more accessible than other more "traditional" land and lot financing. In the absence of 100% financing for lots or land in the Pickens County GA area (at least that I am aware of), this may be a loan option worth looking into.

To date, I haven't worked with anyone who has used this relatively new program, but since I have a business relationship with the seller of the lots, I would love feedback from anyone who does buy a lot under these financing terms, so that I can update this post for other readers from an unbiased perspective.

Click here for more information about the 95% lot & land financing.

08/10/2009 UPDATE: The loan program has apparently gotten better . . . now offering 100% financing land loans on all certified buildable lots in Bent Tree, Jasper GA!