The the third quarter MBA report stated:
"63 percent were cases where the borrower did not live in the home, the borrower did not respond to repeated attempts by the lender to contact them, or where the borrower failed to perform on a repayment plan or loan modification that was already in place"
This suggests a large number of the foreclosures are in fact properties bought strictly for investment purposes. For the savvy investor, this is good news.
However, a recent article from SmartMoney.com on Yahoo would suggest just the opposite. They wrote:
Foreclosures are touted as great deals (especially by services that sell foreclosure listings). In some areas, real estate agents have even started taking potential buyers on "foreclosure tours."
In reality, however, buying a foreclosed property — or even one in a neighborhood plagued by foreclosures — is risky. "A heavy concentration of foreclosures indicates that there's some sort of economic problem in the region that will keep your home value from at least remaining stable," says Miller. "Or that there was some speculation and there may still be some air left to come out of that market."
In addition to suppressing values, foreclosures lead to increased crime and an overall decline in communities. Brad Charnas, an appraiser in Cleveland, says there are some neighborhoods in his area that may never come back to normal. "You can't believe the damage that's been done by all the homes that have been abandoned," he says. "Squatters are taking over, they're using candles because there's no electricity and putting the homes on fire."
If I can tell you anything from watching CNBC and Bloomberg everyday, media is a great contrarian (reverse) indicator. Just look to the last year to see how great of contrarian indicator they have been:
- That the credit crunch on the financial market was just hype, and the stock market was still bullish as ever, what happened?
- That gold couldn't go any higher, what happened?
- That the dollar couldn't go any lower against the foreign currencies, what happened?
If you bet against the media and experts opinions in finance or investing you would be pretty pleased with you decision.
They can only be wrong so much before you start to realize that they report so reactively and behind the game that they are wrong by the time they form their opinion, or it is just disinformation to advantage those who know the reality. You be the judge, but the one thing that is hard to argue is that they report the correct answer.
So back to the MBA numbers and what those mean to us.
When those numbers are dissected, they tend to suggest that around half of the foreclosures may be strictly defunct investment properties. Roughly the other half would then likely be a combination of people who over extended themselves during the bubble or were pre-bubble owners who are in a severely depressed housing market. Unless the local market is devastated, pre-bubble owners should still be seeing enough equity that they would not be facing foreclosure.
This would indicate that once the investor originated supply dries up, and in some areas this is already taking place, one could expect to see prices stabilize. The key for most will likely lay in the local economic factors. That is what will lead to the winning plays. If the area has factories and businesses closing, people losing jobs, then the market is no good and probably won't be for quite some time. Foreclosures will continue in places like those.
But if you have an area with a solid economy, especially one with job and population growth, the foreclosures now are the opportunity, not the "risk". There are markets across the country that are going up right now, especially ones that didn't ride bubble as much as the others.
Not only are they giving you a solid discount, you are able to employ techniques that didn't work when the bubble was taking place.
If you look at this as a zero sum game, in terms of investors, the people who bought high have already lost (on that specific property) unless they can carry the property for another couple years or more until it gets back the prices they paid at the top. That means there is an equal number of potential winners who can buy low now, but like any cycle, the window only lasts so long.
Now here is the caveat that makes it interesting though, instead of a no-brainer. The overall economic woes of the country as a whole can play a factor, from negligent to huge. This is something that again, goes back to local factors. Some states and counties are tied more closely to the national economy than others. If you haven't researched it your area, don't think you can assume the answer because a huge international company is or isn't located there. That is not an indicator either way. It is lots of things: demographics, growth, employment, big and small businesses, industry sectors, etc. If you search online you will can probably find an article that was written in recent history explaining the ties your area has backed by hard data. It is a reoccurring news piece any time the economy is moving in either direction.
Also, unless you have made good gains already, I would take profits when they emerge and not parlay them getting greedy. A lot of data I have seen suggests many markets having a "V" shaped price projection, and not a "U", and even if the "V" emerges (which translates just how it looks visually, a rapid decline, bouncing off the bottom to a rapid incline), it isn't a dead cat bounce.