Show For Backups

Last weekend, a glutton for punishment, I went out to see a few Walnut Creek open houses. One was a surprise since it had been removed from MLS. The realtor acknowledged that they were under contract but that if contingencies weren’t removed other offers would be entertained.

Think about that. How confident do you think they are that the offer will actually pan out if they’re holding an open house? For the state of the property I’m guessing that contingencies might not be removed.

Back On The Market

A number of recent properties are showing up as pending “show for backups”. I believe this is because there is more breakage as loans dry up or buyers simply get cold feet and use contingencies as their parachute. Sellers and agents are wise to the fact that offers, even with pre-approved buyers, may not come to fruition in the shrinking credit market.

The breakage on pending sales will cause some delay in showing the true sales activity in the market. In fact, I’m noting at least one pending property returning to the market after 30 days pending.

Do you believe the breakage on pending sales will increase in 2008?

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11 Responses to “Show For Backups”

  1. T Says:

    Definitely. We are just seeing the tip of the iceberg here.

    I’m in Moraga, and the sale of one of the houses in our neighborhood fell through when the people couldn’t pull money out of their money market fund (composed of MBS – the irony!).

    But in general, our area is so expensive that its mainly a market for move-up buyers. For those people to buy, they have to sell the houses they are already in. Since lenders are no longer giving 100% LTV seconds (which many people used as bridge financing so they could so non-contingent offers), I think we will see more contingent offers. And that will lead to more sale cancellations due to an inability to sell the old house.

  2. Janis Mara Says:

    I sure hope not! That could even further undermine the market, don’t you think? In Richmond, another Contra Costa County city, there are some 400 properties on the market and only four sold last month. If credit gets even harder to obtain and deals start falling through, things could get even grimmer.

  3. wcrealestate Says:

    T,

    Yes, I hadn’t touched on offers contingent on the sale of a current home and that IS a big deal. So even those who want and CAN buy could be stuck given the slow market. The average days on market is going up, not down and each pending sale breakage could actually have a domino effect on the market.

    Thanks for chiming in and pointing out this other large factor.

  4. Janis Mara Says:

    T, could you explain about how 100% LTV seconds work? I assume you are talking about loan to value?

  5. wcrealestate Says:

    Janis,

    Well, I think things are grim now. Home values are far too inflated in relation to income. A correction is … inevitable in my estimation – or in any logical, ordered model. The question is how far it corrects and how fast.

    I’d prefer far and fast which would be chaotic but would allow home owners to purchase at a more reasonable price compared to income. That way they’re not socking 40% or more toward a mortgage, not saving and not contributing to the GDP. Too many are too house poor and we’re finally seeing the results of loose credit and overstretched owners.

  6. Janis Mara Says:

    Excellent point, WC – I agree with you completely. I think a correction is inevitable and, though I hate that it will cause pain to many people, in the long run it’s the best thing because so few can afford to buy a house, especially in California and the Bay Area.

    Do you think my plan of selling asap and waiting for the market to bottom out to buy might lead me to getting shut out of the housing market completely, should credit get too tight?

  7. T Says:

    Janis –

    Before we ‘moved up’ the last time (2002), we took out a second for all of the equity in our current house. Let’s say we had a $500k appraised house with a $300k mortgage – so the second loan (basically a credit line) was for $200k. That brought us to a total loan-to-value of 100%.

    We used that $200k to make a non-contingent offer on our move-up house, which was about $800k. Meaning, we didn’t have to sell the first house to come up with the down payment on the second house. We were also pretty confident that we would sell right away, so the expectation was that we’d only be carrying both loans for a few days to weeks at most.

    The trick is, lenders aren’t really offering 90-100% LTV credit lines anymore. Plus, there is a much bigger chance that your first house might not sell right away, so you are taking on a bigger risk of carrying two mortgages. So my theory is that we will see more contingent offers in the move up market, and thus more fall-thrus.

    On your second question, I don’t think credit will get tight for people with good incomes, good credit scores, and +20% down payments. Though rates for jumbos are now over 7% again (and ironically keep going up every time the fed LOWERs rates). So even though you can get financing, purchasing power is much reduced.

    I’m considering exactly what you are suggesting. Sell now and rent for a few years until house prices drop. But I expect rates will start climbing again later this year, so waiting is a double edge sword.

  8. Janis Mara Says:

    Thanks so much, T, for the easy-to-understand explanation. So you think interest rates will start climbing again later this year? That’s interesting. I was a bit disconcertd when Bernanke cut the federal funds rate 75 basis points this week. Seemed rash. What do you think?

  9. T Says:

    The fed is currently in a ‘liquidity trap’ – meaning that even the rash rate decreases are not improving liquidity, since the problem isn’t fund availability as much as credit risk concerns. If you’ve noticed, even though the fed keeps cutting rates, mortgage rates are not changing much, at least for jumbos. Conforming has come down a little to almost 5.5%. Jumbos have gone up to over 7%. The sense is that they are factoring in higher risk premiums and forecast (2-3 years out) inflation/rate increases. Plus you’ve got extremely picky lenders, who are denying all but the best credit until they get a handle on their default rates.

    Anyway, with rates this low, inflation will undoubtably pick up eventually, probably later this year (though maybe not in housing – I expect that to drop or in this area at least stay flat for awhile). And so the fed will have to re-raise rates, though likely more slowly than they dropped rates.

    So I’m torn. Wait for house prices to drop… at the risk of rates going up? A couple things are keeping me still. First, I’m in the jumbo market, so I’m hoping that spreads decrease faster than rates go up (historical spreads are <0.5%, meaning jumbos should currently be around 6%, not over 7%). Second, I’m already in a house in the area, so in a way pricing ups and downs don’t affect me that much, in terms of my purchase power. Surely I’d do best if I can sell high and buy low – but that is a huge speculative risk to take. Plus I’d have to find a safe place to put half a $million for a year+ (not easy right now). Still, if I can find a good rental, I might just be willing.

  10. Janis Mara Says:

    Sounds like you’re in a good position, T, and will make the best call as we roll along. I hope you’ll continue to post and share your insights, not to mention your news about your decision!

  11. T Says:

    An update. After talking with some financial advisors, most seem to agree that selling now and renting would be the best approach. Two main reasons. 1. Prices are expected to keep declining, as more inventory hits and buyers continue to have problems financing (or electing to wait and see). 2. This would allow us to do a non-contingent offer when something we like does become available, and know exactly how much we can spend.

    The only real risk is if prices escalate and we miss out on those gains, which seems remote. The other risk – interest rates going up – is sort of a necessary evil because we simply haven’t found the house we want yet. It took us 6 months the last time, and now we are even pickier.

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