S&P/Case-Shiller to Atlanta: Prices Decline

Home prices have fallen for the tenth straight month, according to the S&P/Case-Shiller home price index.

The 10-city index data through October 2007 showed a record drop of 6.7 percent in year-over-year value, beating the previous record of 6.3 percent set in April 1991.

Month-to-month prices also dropped 1.4%, the largest monthly fall in the twenty years of the index.

Atlanta, where values have been holding steady during the national housing slump, finally saw year-to-year prices enter negative territory: September to October prices in Atlanta fell 1.3 percent, while one-year prices dropped 0.7%.

Atlanta has certainly fared better than other cities nationwide. Miami had an annual decline in home prices of 12.4%, Detroit shed 11.2%, and San Diego saw prices slip 11.1%.

“No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim,” said Robert J. Shiller, chief economist at MacroMarkets LLC and co-developer of the index.

“We are in uncharted territory,” Shiller said. “This was the biggest housing boom we have ever seen.”

For Atlanta-area real estate investors who are already facing a chilly housing environment, this latest news just reinforces the need to know your market before investing; buying a property with the expectation of short-term appreciation is probably unrealistic.

Now that Atlanta has seen negative growth in home values, investors should plan on this trend continuing.

With subprime ARM resents not peaking until early 2008, Atlanta most likely will continue to see a drop in home prices for the foreseeable future.

The smart investors will plan accordingly, adapt their investment strategies, and thrive.

The One in Which Due Diligence Was Not

As the home sales market has tightened and it becomes more and more difficult to sell a house, we’ve seen our investor clients shift their exit strategies to adapt to the current real estate climate. Investors who have been used to buying property on the cheap, holding short-term, and then selling at a reasonable profit are finding that investment model flawed as prices drop, overall sales decrease, and foreclosures skyrocket.

Instead, more and more of these investors are looking long-term, and we’ve seen a marked increase in investors who are waiting out the current problems in the housing market by becoming landlords and renting their properties. Others are looking at longer-term lease/options. Still more are turning to owner-financed sales through wraparound mortgages. Regardless of the shift in strategy, the effect is the same: to push back the investor’s payday until we see a better housing environment.

For those actively landlording, the investor won’t profit until they market and sell the house at some point in the future. In a lease/option, cashing out doesn’t happen until the tenant exercises their option and purchases the property. With wraps, because title transfers to the new purchaser, the investor, to get paid, is counting on that buyer refinancing the property as quickly as possible.

Most investors recognize the importance of due diligence in landlord and lease/option transactions. In fact, most investors would never think of entering into a lease/option agreement with someone before running a credit check on them, and evaluating their ability to get a mortgage.

However, it seems not all investors recognize that due-diligence is equally as important in wrap mortgage transactions.

Case in point: one of our clients recently contracted to sell a house with short-term wrap mortgage financing. With little equity in the property, the investor essentially was selling it at face value. Happy to find someone to take on the payments, the contract was signed. The buyer’s credit wasn’t run, and no due diligence was performed.

When we ran title, we uncovered almost $22,000.00 of liens and judgments against the proposed purchaser.

Needless to say, the amount of liens would have significantly affected the buyer’s ability to refinance the property; in order to qualify for a new loan, they would have to be paid off in full.

Even though the liens would have attached to the property junior to the wrap mortgage, the sale ultimately did not close. It is true that the investor could foreclose on the wrap at its maturity and knock the liens off title, but that would not achieve the investor’s ultimate goal: to get rid of the house, not to take the house back in two years, repair it, remarket it, and sell it again.

The moral of the story: Investors should always perform adequate due diligence when entering into a sales contract. A simple credit check on the buyer would have revealed that there was no chance he could qualify for a mortgage anytime in the foreseeable future. Knowing that, the investor would have passed on the deal altogether.

Sales, Prices, Fall

Once again, existing home sales have fallen, according to the National Association of Realtors. October sales dropped 1.2 percent from September to 4.97 million, the fewest number since the NAR started tracking sales in 1999.

The year-to-year drop: a staggering 20.7 percent.

Median home prices also fell to $207,800.00, down 5.1 percent from a year ago.

So what’s the point? Why the attention to falling house prices, soaring foreclosures, and lower sales numbers? After all, the news is almost always beak; and when it’s not bleak, the news is only not-so-bleak. Why focus on it all?

It comes down to this: as a real estate investor, to be successful, you have to know and understand the broader forces at play in the overall real estate market. All of this has a direct, and potentially significant, effect on your business. If you don’t adjust or adapt your investment strategies, you can really set yourself up to get seriously hurt.

I’ve said it a thousand times: any closing from which you walk away with money in your pocket is a good one. Getting a check is much better than writing one.

As sales numbers fall, as prices fall, this is more true than ever.

Atlanta: On the Brink?

Standard and Poor’s September Case-Shiller home price numbers are out, and once again they reflect a sharp decline in prices nationwide. Third-quarter prices have dropped 1.7% from second-quarter levels, and the year-to-year decline is at 4.5%.

Overall, this reflects the largest drop in the 21-year history of the index.

There is mixed news for Atlanta. While Atlanta is only one of five cities in which prices have risen year-over-year (at a whopping 0.4% from Q3, 2006), prices have fallen 0.6 percent from their August levels. In other words: Atlanta is precipitously close to joining the rest of the country in seeing a decline in average home values.

Home Prices, Halloween Edition

Last week, Standard and Poor’s released the latest Case-Shiller home price index. Appropriately in time for Halloween, the numbers were scary, and US home prices were, on average, down for the eighth month in a row.

The index, which measures home prices in twenty cities across the country, showed a decline of 4.4% in the past year. The ten-city index was even worse, dropping 5% in the past twelve months, a level of retreat in home prices that hasn’t been seen since June of 1991.

There is one bright spot in all of this negative news. While the rest of the country may be reeling, average home prices in Atlanta are holding steady. Where Detroit, for example, saw prices drop 9.3%, Atlanta has shown a slight increase of .8% over the last year.

In real-world terms, a home worth a hundred thousand dollars a year ago has gained in value… eight hundred bucks.

While hardly a spectacular return on investment, it sure beats the alternative.

For real estate investors, this reinforces how important it is to measure a property’s value and how much potential equity a property may have. As a group, investors sometimes tend to overestimate equity, and in today’s marketplace, doing so can potentially be very costly. No longer are investors able to count on three to six percent per year appreciation of the property, and the days of automatically being able to increase a sales price to cover closing costs are now behind us.

While it seems that Atlanta has weathered the price storm so far, we can’t assume that it will continue to do so for too much longer. There undoubtedly will be additional downward pressure on home prices as foreclosures continue to increase and more homes are listed for sale. Combined with the additional scrutiny that lenders are viewing appraisals, it is more likely than not that prices in Atlanta will fall as well.

One Billion Dollars!

News on the local foreclosure front: according to Equity Depot, foreclosures in Atlanta have hit a record high: October foreclosures increased 38% over September, and almost 50% from October 2006.

The value of all of those homes? $1,076,975,783.00.

Cue Doctor Evil: One Billion Dollars.

Are we there yet?

More bad news in housing: August pending home sales figures are out, and they're awful. Down 6.5% from last month, and down 21.5% from last year according to the National Association of Realtors. It was a drop much larger than expected.

What else have we missed?

Let's see: Mortgage applications are down, particularly for those looking to buy homes. August foreclosures are up. Oh, and home prices? They're down as well.

And homebuilders? They're having fire sales and offering steep discounts, just to get potential buyers in the door.

Douglas County, Smyrna Taxes

2007 Douglas County taxes are now out, as are the City of Smyrna's.

2007 Forsyth County Property Taxes

Forsyth County taxes are now out. All closings for Forsyth county properties will collect for 2007 taxes.

2007 Fayette County Taxes

The 2007 Fayette County property taxes are now out.

All closings for Fayette County properties will now collect for the full tax amount.

More Bad News on the Home Sales Front

According to the National Association of Realtors, this past July saw the largest drop on record for pending home sales. Contracts to buy existing homes fell over twelve percent, over ten percent more than expected.

The only time when sales have been this bad? September 2001.

Home Prices? Timber!

Well, home prices are down.

As Captain Renault might say: I’m shocked, shocked!

OK, maybe we’re not so shocked. What, with home sales dropping, more houses being listed for sale, and potential buyers having difficulty getting loans, it’s not surprising that prices are taking a beating as well.

Overall the S&P/Case-Shiller national home price index fell 3.2 percent from last year. It’s down to the lowest levels since the Index began in 1987.

While here in Atlanta, we’ve seen a slight rise in home prices, with a 1.6% year-over-year increase, overall the picture is pretty bleak.

So what does this mean for a real estate investor?

First: Deals can be found out there. For an investor who is looking to buy and hold, it’s definitely a buyer’s market. Competition among an increasing number of sellers is pushing prices down – and a savvy investor should be poised to take advantage of the good deals that are out there.

Second: For those investors who are looking at a quick turnaround on a property, it’s now extra-important to measure your equity well. Retreating property values can eat into an investor’s equity pretty quickly, and no one wants to end up upside-down in a house.

Third: If you’re selling, and most real estate investors are, now’s not the time to be greedy. We’ve said for years that a good deal is one in which you end up ahead: If you walk away from closing with money in your pocket, then you’ve done all right. Competing against all of the other homes for sale means that most investors have to be price-aggressive against desperate sellers wanting to unload homes that they can’t afford anymore. This is especially true given that most investors, if not holding long-term, are now marketing to prime-credit borrowers.

It’s always been important to have a good exit strategy when buying a house for investment property; the current marketplace is showing us how important that exit strategy is.

Home sales fall... again.

Just released today: existing home sales have dropped again.

This isn’t, and shouldn’t be, a huge surprise.

What is a bit interesting is the increase of listings. More people are trying to sell their homes, fewer of those homes are in fact being sold, and we now have the largest inventory of homes for sale since October 1991.

People will often list their homes for sale when they first recognize that they can no longer afford to make the monthly mortgage payments. With access to home loans significantly restricted; and unable to refinance into a more attractive loan, homeowners are left with few other options then to try and sell their house.

However, with this increase of sellers into an already-crowded marketplace, competing for fewer and fewer finance-worthy buyers, we should see additional downward pressure on home prices. And when these sellers are unable to find purchasers, a number will fall into foreclosure – and foreclosure rates are already at record levels.

The housing slump isn’t over. Not by a long shot.