One of These Rallies is Not Like the Others

Submitted by Rich Toscano on September 5, 2009 - 1:50pm

Summer may be winding down, but the summer rally in the size-adjusted median price of San Diego homes continued another month. From July to August, the median price per square foot rose .7 percent for detached homes, 1.3 percent for condos, and .8 percent in aggregate.

This was not much of a month, relatively speaking, but it turns out that the mid-2009 rally as a whole has been unusually powerful.

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Submitted by sdrealtor on September 5, 2009 - 3:35pm.

Given that the decline was quicker and more severe than anything we'd seen before it kinda makes sense that a secular rally would be unusually powerful.

Submitted by Janimal on September 5, 2009 - 3:39pm.


It just looks like volatility increased proportionally to the size of the bubble to me.

Since you don't have absolute values in the charts, only percentages from the peak, it's hard to be exact, but it seems the swing is roughly proportional to earlier rallies based on the magnitude of the drop from the peak.

In the 1990s, the first major rally gave back a 2.3% rally on a total peak-to-trough drop of 17%.

In the 2000s, the first major rally gave back a 6.8% rally on a peak to maybe-trough drop of 42.5%.

If your rally % gain figures are quoted as percent of peak price and I'm comparing apples to apples, then 2.3/17 = 13.5% of the total drop given back in the first rally in the 1990s vs. 6.8/42.5 = 16% in the 2000s.

So it's a little bit bigger bump proportionally to the size of the peak-to-trough drop, and if there's more downside to go before the true trough, it might be more.

But it doesn't look 3x out of line based on the total magnitude of the decline from the peak.

If anything, your first chart from the 1990s gives me hope that prices will eventually find a level based somewhat on fundamentals, and that people haven't totally lost their minds and started another bubble...

As a renter with hopes of someday owning, I was getting scared there.

Submitted by capeman on September 5, 2009 - 5:42pm.

I agree with SDR. Major momentum in any direction in asset pricing will have very powerful retrace waves in the other direction.

Submitted by SD Realtor on September 5, 2009 - 5:44pm.

The more I learn the less I know...

That is how I feel about things lately. I think that using the previous runup and downturn as a model for this ones behavior shall be classified as well.... it is all we have so we may as well use it. However the more I think about the less I am inclined to believe that this recovery will look anything like the previous recovery. I believe that the circumstances now are so much different, mostly due to securitization that there are way more chips to be lost. There is no previous model in our history where our government has been so involved in subsidizing the market. I am still putting my money on a W shaped recovery but I am not so sure that prices will far fall below where they were previously for certain ares. Yes the high end will still come down.... other spots? not so sure... plus they will have to drop 10 or 15% just to get to where they were! Pray for rate hikes if you are a bear pigg.

Submitted by paranoid on September 5, 2009 - 7:46pm.

Social Mood follows a structure that can be described by the Fractal Math. If you compare the general wave structures of the previous crash (90's) with the current one, there is a lot of similarity. Those familiar with Elliott Wave Principle will know what I'm talking about.

We are currently in wave [iv] of (3) of [1]. Wave [iv] is ending, and wave [v] is starting now which will erase not only all the gain of the last few months, but should generate a new low (probaly 5-10% below the low of ealier this year). Then wave (4) will start which is expected to be a rising triangle with alternating a,b,c,d,e, with e marking the end of wave (4). Then a wave (5) of [1] will finally bring the price to the bottom.

If this prediction is correct, we should see a new low (v) within the next 6 to 9 months, followed by price oscilation for probaly 9 to 15 months, and a final plunge to the bottom of this whole crash toward end of 2011 to the H1 of 2012. By that time, nobody will want to buy a house, because everybody will believe that "it's better to rent than buy". Th final bottom could be 20% below the low earlier this year.

There is another possibility according to this theory. This possibility gives an even (much) worse (lower) price target which few people on this board will believe, so I'm not going to present that prediction here (I'll present this scinario once I have strong evidence that it is indeed to be the case. But here is a hit for those inquiring minds: the final bottom will not only come back to 2000 price, it will come back to 1980's price!).

Hope somebody will check back this prediction in 3 years.

Submitted by temeculaguy on September 5, 2009 - 10:03pm. Good luck with that evidence. The first part of the theory has some traction for some markets but the 1980 price? Wanna bet?

Let's not bet money, that's too easy and probably illegal, here's the bet: This only works if you are a guy. Loser has to wear a thong to one of those spray on tan places, and hike it up well above the level of where a man's bathing suit would be so the whale tail is ridiculously visible when wearing a bathing suit. then you get like three or four tans worth of spray so it's visible from a hundred yards. Then I'll drag you along on one of my boys trips, where we golf in the morning and hang by the pool in the afternoon, at a crowded hotel pool. If you win, i'll buy a borat thong and wear it while shopping for properties. here it is 1988 price of 750k, 1980 is probably sub 500k but who knows, none of the sites list it that far back, I'm cool with 1988. you get me this for 750k and i will go to costco every week for a year, wearing a borat thong, shoes and nothing else.

Submitted by Rich Toscano on September 5, 2009 - 10:14pm.

capeman wrote:
I agree with SDR. Major momentum in any direction in asset pricing will have very powerful retrace waves in the other direction.

I'm not sure I agree with this. Homes aren't a momentum market with Jim Cramer types chasing them all around... what is the mechanism by which a steeper decline would cause a steeper spring rally?

It could absolutely be the case; I just don't off the top of my head see why it should be so.


Submitted by 4plexowner on September 6, 2009 - 3:41am.

paranoid - I assume you are talking about the housing market in your application of Elliott Wave theory

let's apply Elliot Wave theory to the Dow - first, some assumptions:
- the Dow is in a primary bear market which means it will complete a 5 wave primary move in Elliott terms (as opposed to a 3 wave corrective pattern if this were only a cyclical bear market)
- Wave I is never the shortest of the 5 waves
- either Wave III or Wave V will be 1.6 or 2.6 times Wave I

OK, Wave I started at 14,198 and ended at 6,469 for a decline of 7729 points - Wave II is in progress now - it may have topped already at 9,630 or it may manage to move higher before topping - let's be generous and say the Dow makes it to 11,300 before starting down in Wave III

if Wave III is 1.6 times Wave I we have a loss of 7729 x 1.6 = 12,366 points

with Wave II topping at 11,300, a decline of 12,366 means that the Dow ceases to exist!

and we haven't even gotten to Wave V which will be another down wave


I share this example in support of your prediction that the final bottom in housing is still to come and that the bottom will be lower than most people are expecting

I think most people are under-estimating the magnitude of the economic correction currently underway - we could be correcting the economic expansion that started in 1982 just for starters - we could be correcting the economic games that started in 1913 with the creation of the Federal Reserve - it is impossible to know ahead of time how large the correction will be

IMO it is better to over-estimate the magnitude of the correction and be pleasantly surprised than to under-estimate and take a severe (and possibly non-recoverable) financial loss


what do you think about this application of Elliott Wave theory to the Dow?

Submitted by Eugene on September 6, 2009 - 4:26am.

As far as I can tell, there's no economic correction underway any more.

We overshot the fundamentals last winter, because big money was too busy deleveraging and there was no one around to arbitrate. Okay, we were there to arbitrate, but most of us are sheeple and we were too scared to go long when S&P broke through 700, even when P/E ratios were screaming "buy". Heavy-hitter guys who are supposed to do that under normal circumstances, Bear Stearns, Lehman, etc. etc. were either dead or out of capital. But that was a rare event.

For the time being, we're back in efficient-markets paradigm. S&P is worth as much as the market says it's worth. No more and no less.

Also, Elliot Wave system and, more generally, technical analysis, is nothing but financial astrology. You might as well decide to buy & sell on the basis of conjunctions of Saturn and Venus. The odds of a positive outcome are exactly the some.

Just my 2c.

Submitted by 4plexowner on September 6, 2009 - 4:32am.

Eugene - you just reminded me of a Zig Ziglar saying:

"I'm so optimistic I'll go after Moby Dick in a row boat and take along the tartar sauce!"

Submitted by pemeliza on September 6, 2009 - 7:28am.

"the final bottom will not only come back to 2000 price, it will come back to 1980's price!"

Such predictions completely ignore the discrepancy between interest rate levels of today and those in the 1980's. I think this is one of those situations where we can really say "it is different this time".

I agree with SDR that how this plays out depends on interest rates. However, unlike SDR I am not holding out much hope that rates are going to move back up during my lifetime. If anything the political will seems to exist for even lower interest rates and more government subsidies. I hope I am wrong.

Submitted by justinmac on September 6, 2009 - 4:15pm.

Rich Toscano wrote:

I'm not sure I agree with this. Homes aren't a momentum market with Jim Cramer types chasing them all around... what is the mechanism by which a steeper decline would cause a steeper spring rally?

It could absolutely be the case; I just don't off the top of my head see why it should be so.


Agreed. Don't think Elliot Wave is reasonable to apply. Housing market is just far less liquid and more opaque...

What's more likely to happen is that any collective gain in housing prices will be met/offset by gov't fed action-- ie: raised rates: Any true gain will be pared/parsed down by gov't action to reclaim some of the money that's been printed/ reclaim some of the dollar value that's been compromised.

IMHO, any substantial gain will be met by a loosening of the rates to head off inflation. Net effect will be a long, slow recovery. Said it before and I'll say it again. 0% interest, $8k home buyer incentives combined with increase gov't loans = delayed pain (read: Robbing Peter to Pay Paul). There is simply NO wiggle room for the Fed and the fiddler will have to be paid eventually. If you buy a home now, it should not be for immediate return IMHO. We'll be in the same place several years from now as 0% interest won't/can't last forever. I think, that any equity appreciation, over the next several years, will, in effect, be absorbed/swallowed by Uncle Sam to pay back the treasury, stave off inflation and pay the tax payers back.

Also, SDR, quality post. Thanks. One point, though: Bears don't have to "pray" for rate hikes, they WILL happen as there's no where else for rates to go.

As soon as the economy is on the mend, they'll be ratcheting up the rates. Don't think we'll be replicating what happened over the last decade in zero growth Japan.

6.8%...Did they have rates this low and $8k buyer incentives (which run out in 8 weeks) back in the 90's? I think the 6.8% bump is far better explained by the sense of urgency that's been (artificially) created by the gov't programs along with a bit of pent up demand from people waiting for the first shoe to drop (and these exaggerating effects on the seasonal bump) rather than any sort of sustained comeback from the bottom. Respectfully disagree with you, Rich. Think the way this article is set up leads one to believe that we're in the grips of a strong comeback here. What happened to you, man, you used to be The Ultimate RE Bear...Lol...

Submitted by Rich Toscano on September 6, 2009 - 4:59pm.

justinmac wrote:

6.8%...Did they have rates this low and $8k buyer incentives (which run out in 8 weeks) back in the 90's? I think the 6.8% bump is far better explained by the sense of urgency that's been (artificially) created by the gov't programs along with a bit of pent up demand from people waiting for the first shoe to drop (and these exaggerating effects on the seasonal bump) rather than any sort of sustained comeback from the bottom. Respectfully disagree with you, Rich. Think the way this article is set up leads one to believe that we're in the grips of a strong comeback here. What happened to you, man, you used to be The Ultimate RE Bear...Lol...

You respectfully disagree on what? I agree with everything you wrote in the beginning of that paragraph. Of course it's the government programs propping things up -- but the government programs are propping things up, should I pretend that's not happening?

The article isn't set up to "lead one to believe" anything. I simply point out the undeniable fact that this rally is unlike anything we saw in the 1990s. That's it. Nowhere did I say that this means it's a sustained comeback.

BTW I agree with you that rates will go up -- I've been pounding that drum as loud as anyone. (Though I think the Fed will be behind the curve as always, and the serious rate increase will eventually be forced by our foreign creditors). But that's just one piece of the puzzle, and it might not happen any time soon. Meanwhile, the government is putting immense amounts of support under the housing market. Simply immense. And they're not going to stop any time remotely soon. (If that's the only thing that's keeping the market from collapsing, do you really think they're going to just let all those programs lapse?) So for now, the fact is that they are successfully propping up the market -- I'm not going to pretend otherwise.

I don't know how it will end -- and nobody else does either. So in the meantime I'm trying to at least figure out what's going on in realtime.

BTW I realize your ultimate RE bear comment was kind of a joke. But aside from the fact that the printing press is now being directly employed to prop up housing, look at this chart -- it wouldn't make sense to be as bearish now as I was when the price to income ratio was in the teens.


Submitted by justinmac on September 6, 2009 - 6:03pm.

Hi Rich,

Yes, I was just kidding about the Bear comment...You've called it pretty well...

I guess I disagree with the concept that the magnitude of this rally is indicative of where the market is heading. But, I know, you let people draw their own conclusions.

As far as it not making sense to be bearish now...I think we are in completely unchartered territory where we have zero lending aside from gov't, extremely high unemployment along with many MACRO problems with our economy that have yet to even have a handle put on them. For cripes sake, the Fed is at nearly zero percent and they can't budge even though most serious economists predict inflation around the corner. I don't think past trends will be as useful this time round. Don't think the bottom will fall out-- you're right the gov't won't let it happen, but, at the expense of sounding like chicken-little, past trends won't hold true. I think the historic graphical "bounce backs" are going to be missing in the near future. The problem is now the MACRO environment-- the whole forest.

Here's an interesting article I just read on the extent to how much the gov't is really propping things up...They will certainly have to gradually divest. Although guidelines are more stringent, they've been lending where private companies wouldn't dare-- ie: inferior credit, higher ratios, only 3.5% down. I wonder what the lending playing field will look like once taxpayers decide they don't want to be in the lending business anymore. Also, which private companies will lend with the knowledge that the gov't won't buy/guarantee the loans they make anymore?

If it's a bad idea to post this link here, please delete. Thanks.

Submitted by Rich Toscano on September 6, 2009 - 6:57pm.

I think we are probably largely in agreement, especially that "past trends will not be as useful this time around." I see the same problems you do, but given the unprecedented factors I am just not so comfortable making a prediction that it will necessarily play out one way or the other.

BTW you said this: "As far as it not making sense to be bearish now."

But I had said this (emphasis added this time around): "it wouldn't make sense to be as bearish now as I was when the price to income ratio was in the teens."

That's not the same as saying that it doesn't make sense to be bearish. These are all good debates but I'm just trying to keep it clear what I did and did not say.


Submitted by SD Realtor on September 6, 2009 - 8:37pm.

Good postings guys... Yes mac I think we all agree about the rates. As usual Rich made an insightful statement about the fed being behind the curve. I am so far removed to be able to figure out what pushes rates that I should not even hazard a guess. All I can say is that in 2004 I was saying we should be seeing 8% rates soon... Guess I was just a little off base there eh?

I think like all posts different readers get different things out of each thread. I feel this is a particularly important thread because it is showing that yes... yes this (almost unlawful) stimulus by our government/fed/treasury/wall street, (I take them almost as this amorphous glop) are working. People are buying homes. Some days I am more bummed about it then others. Sometimes I think, what the hell, why even TRY to forecast a bottom, or figure out when the best time will be? It is really really hard to do under normal free market circumstances and ridiculous under these circumstances. I feel like anything I say will be so full of qualifications and disclaimers that why say anything at all?

So it is a tough game to play right now. All I say to my clients is that I don't really know what advice to give. My best indicator for inventory is the work I am doing watching the trustee sales. These are the only concrete things I can hold onto at the moment. One of the good men I work with says he sees a large swell of opening bids for the next two weeks and this indeed would indicate a break from the behavior we have been through this summer. I guess we will see but 2 weeks does not a change make.

Rich good point about the programs. If the govvy has done this much so far why would they abate? There is to much at stake. To much money, to many political footballs in play right now, to many people out of work. To me this means that one of the primary messages that will be conveyed from the president on down is, DONT LET THINGS GET WORSE. So however it will need to be gotten done, it will get done.

I guess we will see how it plays out but I am pretty much not gonna be using the previous cycles as a benchmark. Just as a maybe a placeholder.

Submitted by pemeliza on September 7, 2009 - 3:55am.

Asset backed interest rates are supposed to reflect default risk. Since all of the default risk has been passed to the taxpayer, mortgage rates are low and are likely to stay that way until houses in SD are back up beyond what some of us on this board want to pay.

One thing I will say about the government is that they were CLEAR and PLAIN regarding their intentions to resurrect the housing market by whatever means necessary. Many of us (myself included) had their doubts regarding the ability of the FED to pull this off. Obviously they have found a combination of tactics that worked (at least for SD). It is natural that if the government sets their sites on a national housing recovery that certain ultra desirable parts of the country will feel a disproportionately higher impact and have particularly acute rallies.

I remember last year being surprised at all the cash buyers. They were smart because they bought when the inventory of good homes was plentiful. They were able to buy cream puff homes with virtually no competition because the FED interventions had not yet taken hold. Now the cream puff deals are gone and the rest of us are fighting for scraps.

Submitted by jcarter04 on September 7, 2009 - 8:26am.

The only thing our government is able to do is pull future buyers of real estate into the present at the expense of future purchases using an incentive. Just like cash-for-clunkers, once the program ends, may see the next leg down for residential real estate.

If we are in a secular bear market in things we consider assets, then it would be wise to consider the possibility that this rally in both stocks and residential real estate is simply the expected cyclical rally separating phase I down (2007-2008) from phase II down (2010-2011) of the secular bear market.

Will another credit crunch return with the one-two punch of option-arms, alt-a's, increasing primes defaulting in 2010 and 2011 plus the coming debacle in commercial real estate? The Elliot-wave prognosticator may not be far off. 1980's pricing seems only possible if we entertain thoughts of worldwide economic collapse. That can't be ruled out, especially if one follows Kress and Kondratieff cycles.

Submitted by justinmac on September 7, 2009 - 3:17pm.

Yes..."as" bearish...Sorry, Rich...Cursory read- happens with me sometimes.

Great post SDR, although IMHO:

"...the primary messages that will be conveyed from the president on down is, DONT LET THINGS GET WORSE. So however it will need to be gotten done, it will get done...."

The screaming from the right for the gov't to do less is getting louder and louder. It would be easier, politically speaking, for Obama to back away from (artificial/ephemeral) gov't propping up.

Submitted by an on September 7, 2009 - 10:59pm.

SD R, I was also one of those people who thought in 2004-2005 that rates can't stay in the 5% forever and it must get back to 8% soon. I was completely wrong there too, just like you. I was naive in thinking the government will let free market work itself out. As we also saw, there were very little, if any, objection shown against the idea of stopping the housing crash (besides RE bears of course).

justinmac, home owners are also a large voter base; I don't foresee Obama changing the game plan right now that would cause the housing market to crash again, he needs those votes for his reelection. How many right winger do you see screaming against the $8k tax credit? I don't remember seeing too much objection from the press about it.

Submitted by JerseyGrl on September 8, 2009 - 5:33am.


Congratulations on getting your letter printed in the Economist a few weeks back.

Submitted by 4plexowner on September 8, 2009 - 6:13am.

"Don't think Elliot Wave is reasonable to apply"

as Robert Prechter worked with Elliott Waves he came to realize that the waves that show up in any given market are just reflections of the behavioral patterns displayed by the humans participating in the market

after writing several books about Elliott Waves, Robert wrote, "The Wave Principal of Human Social Behavior and the New Science of Socionomics"

since humans are the participants in the housing market, Elliott Wave theory IS applicable

Submitted by 4plexowner on September 8, 2009 - 6:25am.

"Kress and Kondratieff cycles"

Kondratieff cycle theorists think we are headed into the Winter phase of the cycle sometime between now and 2016 - as I understand it, the Winter phase is when bad debts are repudiated and asset values fall dramatically - basically a cleansing or resetting of the economy so the cycle can start over

"The Fourth Turning", by William Strauss and Neil Howe is another 'big picture' viewpoint that suggests we are at a significant turning point in history - this book suggests that a major shakeup of the societal norms occurs every four generations - and that we are due for this shakeup now - any thoughts on this book or idea?

what does the Kress cycle theory suggest is upcoming?

Submitted by capeman on September 8, 2009 - 10:54pm.

Rich Toscano wrote:
capeman wrote:
I agree with SDR. Major momentum in any direction in asset pricing will have very powerful retrace waves in the other direction.

I'm not sure I agree with this. Homes aren't a momentum market with Jim Cramer types chasing them all around... what is the mechanism by which a steeper decline would cause a steeper spring rally?

It could absolutely be the case; I just don't off the top of my head see why it should be so.


Sorry, I missed a few days here. I didn't clarify on where I thought the retrace waves would take pricing so you got me there. I agree that housing is normally too illiquid and slow moving to adopt wave theory but that is based on more fundamental movement in pricing. There were very very small retrace waves in the previous housing busts of the last 3 decades but they were small. Since we wound the rubberband beyond where physics should allow it you'd expect the unwind to be a lot heavier (It obviously is!) and the retraces to be much bigger and apparent than the previous busts (looking like it but we'll see when they have passed.)

Submitted by justinmac on September 9, 2009 - 3:45pm.

Looks like the Fed won't wait too long to start raising the rates...

What will happen to all these folks who took out 5 yr ARMs who'll be adjusting every 6 months?

"....Although rate hikes are still some time off, "as the economy continues to improve, and when we see rising inflation pressures, Fed policy will respond aggressively," Evans said...."

Submitted by capeman on September 9, 2009 - 9:30pm.

The million dollar question is... Will it be the Fed that raises rate or the rest of the world and the bond market that does it?

Submitted by justinmac on September 11, 2009 - 12:33pm.

If there's any doubt about growing shadow inventory, as Rich has written about, one need only look as far as the discrepancy of the correlation between July year over year foreclosure rate to REO rate in LA County: The foreclosure rate clearly increases from July 08 to July 09, but somehow the REO rate significantly decreases.

Rich, is this a statistical anomaly, is it purely attributable to bank saturation/building shadow inventory or is the explanation somewhere in between in your view?

IMHO, there is a monstrous shadow inventory building that, once the depths of which are fully plumbed, will shock the masses.

Submitted by jpinpb on September 11, 2009 - 1:42pm.

justinmac - there is no questions there are a tremendous amount of Notices of Defaults twisting in the wind. What I can't figure out is what will become of them all.

I read somewhere that only 12% of these people have been helped by loan mods. I do see that many are actually getting foreclosed upon. However, the banks are really taking their time releasing them for sale. They are trickling in. I just today drove by a place that is sitting empty and bank owned since February.

So some people live for free in their home for a year plus; low percentage get modified; some get foreclosed and listed for sale and the remainder sit empty in perpetuity. Is the game plan to sit on inventory until inflation takes hold?

Submitted by justinmac on September 11, 2009 - 3:03pm.

Hey, jpin.

When inflation "takes hold", I'd be inclined to think it would exacerbate problems --what with all the index driven payments and what not.

I think the banks are trickling the housing stock so that they can slow the depreciation: If they can get a few more dollars for foreclosure sales from some pent up demand, from buyers that have bought into the perception that we've hit bottom, or get a few more folks to stay where they are (since they're not "that" underwater), it gives the banks some liquidity with which to pay back gov't loans and keep their heads above water-- for the time being.

Banks will do whatever they can to perpetuate/create the perception that it's a good time to buy since the bottom is here-- It's like their second bailout...Lol. Again, this is purely my opinion.

Submitted by CA renter on September 12, 2009 - 1:12am.

I firmly believe the REO inventory is being sold off in bulk to large investors. None of this is being recorded, from what I'm hearing. Everything is "off the books" and, if what I'm hearing is correct, the government is behind it.

OTOH, I've also seen and heard a number of complaints from bulk buyers who say the TARP has enabled the banks to sit on the inventory for awhile, instead of selling it in bulk. Not sure what's really going on, but there are enough people out there complaining about the lack of REO inventory from banks, that we have to consider all possibilities.

Still looking for the smoking gun, but everything I'm seeing/hearing is falling into place. It makes perfect sense, as they are cleaning up the banks' books, and using TARP(?) money to make up the difference -- covering some portion of the losses banks take when selling off the inventory in bulk. Since the govt (we, the taxpayers) are covering some portion of the losses, the banks are able to offload the inventory at a fairly low price to investors who agree to hold some portion of the inventory off the market, either by leaving it empty or renting it out.

What will eventually become of this "shadow inventory" that is not officially on anybody's books is the trillion-dollar question. Are they waiting for inflation, or????

The following links are NOT related to the people I've been dealing with and talking to, but the information in these links match up with what I've been given regarding how the process works. $10MM minimums, with many "tapes" (lists of properties being sold in bulk) being valued in the billions:

AND [bold is mine]:

G8 Capital, founded last year by former MoneyLine Lending Services CEO Evan Gentry, said it is looking at acquiring more than $500 million in REO and non-performing loan portfolios next year. But it’s far from the only firm that’s seen its fortunes revitalized by the government’s change of heart in asset purchases.

“We have been approached by an ever-increasing number of banks interested in selling REO in bulk, so it is not surprising that several funds have closed deals in that area,” said Jacob Benaroya, managing partner at Rochelle Park, New Jersey-based Biltmore Capital Group, LLC, a bulk buyer and seller of non-performing mortgage portfolios. “Most banks been very tight-lipped about their REO exposure, preferring that potential investors tell them exactly where they are looking, and what price they are willing to pay before even seeing a list of properties.”


Bank Bulk REO Sales
I’ve seen quite a bit of email and postings about bulk bank REO sales and most of it, in my opinion, is wishful thinking and promotional rather than being based on actual portfolios available. An interesting article from the North County Times (hat tip Calculated Risk) talks about one property as part of a bulk sale:

For example, a unit of Citigroup, the troubled financial giant, sold a foreclosure in Temecula to an Arizona investment firm for $139,000 when comparable homes in the area were selling for $240,000 to $260,000.

The firm listed the home for $249,000, received multiple offers and the property has entered escrow, said Amber Schlieder, the real estate agent who handled the listing.

CR Capital was the firm that flipped the Temecula foreclosure property, an investment group based in Tucson, Ariz. Calls to CR Capital were not immediately returned.

The group typically purchases 200 to 350 foreclosures at a time from banks for $50 million to $100 million, said Schlieder, a Riverside real estate agent. Schlieder said her business has turned entirely to representing such foreclosure resales for bulk investors.

While the numbers seem rather amazing, and it doesn’t seem to make a lot of sense from the banks perspective, it doesn’t seem too out of line to me. A portfolio of 300+- foreclosed properties will have some properties with very good profit margins, some properties will be breakeven and some will be lucky to breakeven. That’s why a portfolio is sold in bulk, and at a discount to the face value of the notes/property. Cash now almost always gets a discount.

If my memory is correct, the last major downturn had distressed portfolio purchasers paying something around 65% of face value, so this really isn’t a new phenomenon.

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