In Come the REO "Shockwaves"

From the Sacramento Business Journal:

Housing price drop looms
Bank-owned homes flood market

There is a certainty with bank-owned real estate: There's going to be a lot more of it on the market, and that's bad news for anybody else trying to sell a home...So far, bank-owned home prices are holding stable. But with the ranks of foreclosed homes rising, that will change. For the time being, lenders are holding homes and hoping their foreclosed homes sell for close to list prices. But they soon could come under pressure from regulators and the market to unload the properties, whatever the cost.

Most in the business expect prices to drop because the inventory of bank-owned houses is growing. Almost 8,000 bank-owned homes were for sale in the four-county area at the end of August, according to RealtyTrac Inc. of Irvine, and that number could easily double by the end of the year. If that happens, and lenders are forced to lower their prices to get the homes off their books, shockwaves will reverberate through the whole housing market.

"The investors and the asset managers have not faced reality, and they think they are going to get a lot more for these homes than anyone is willing or able to pay now," said Ron Leis, broker and co-owner of the Coldwell Banker franchise in Carmichael, the Diez & Leis Real Estate Group. "They are going to have to take huge, huge losses. There is some pain that has to be felt."

That pain could be felt by homeowners and investors looking to sell. The four-county region had 15,927 homes for sale as of July 7, the most recent data available, according to Trendgraphix Inc. With half of those homes being bank-owned, it's easy to see how any drop in prices for foreclosed homes would affect the rest of the market.
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"There's a ratio that shows what is going on: In June, there were 950 homes sold in Sacramento County, and in June there were 630 homes taken back by banks," said Scott Thompson, owner of Mortgage Resolution Services, a short-sale specialist..."The lenders are just now realizing the problem is beyond their ability to fix it," Thompson said.
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Aggressive mortgage companies using subprime lending fueled the housing boom far past when it should have slowed...The housing boom ended with the collapse of a huge foundation of shaky assumptions. One such assumption, that all houses would appreciate, started an avalanche of problems. If someone got into trouble on a loan during the boom, they could cure the problem by selling the home. When valuations stay flat or decrease, a borrower facing problems is stuck in a home that has a mortgage now valued more than the home. That's what is driving foreclosures.

From the Sacramento Bee:

Sacramento-area home builders have long maintained that many of the region's foreclosures are hitting investors who bet big and lost...The MBA, a lender trade group in Washington, D.C., says 21 percent of prime loans that are in default in California belong to people who bought homes without living in them. And 15 percent of subprime loans -- higher-cost loans for people with blemished credit histories -- now in default belong to the speculators...In early 2004, nearly one in four home buys in Sacramento County were by speculators and so-called "flippers," according to DataQuick Information Systems.
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Since they started as a whisper last November, home auctions in the Sacramento region have become a roar. The biggest one yet -- 306 houses lost by owners to the bank -- is scheduled at Cal Expo at the end of this month. This time, it will take the weekend to sell them all. It's proof of how extensive the foreclosure problem has become in this part of the state.