Our Real Estate Blog

If we are to believe the "experts," the economic condition we find ourselves in is a direct result of housing prices and foreclosures.

The global recession is being blamed on housing, foreclosures and financial woes stemming from loans gone bad. Deflated home values make for more frugal owners, which drives down consumption causing retail to suffer.  These facts are why the "experts" are proclaiming that since housing led us into this mess, housing must lead us out of it. Sounds nice, but it obviously isn't that easy.

The Administration and the country at large is losing sight of what they've already told us the problem is. The problem is with housing. We don't need to build roads, and re-sod National Mall ($21MM),  we need to get the foreclosed property, REO property, off the open market so prices will stabilize.

What "stable pricing" actually means is up to the market to determine. In a national market where we're probably going to sell 4.5MM residential housing units this year, we have as many as 2.5MM homes in some sort of foreclosure process. That means a glut of inventory of the REO type, and that means lagging prices for all until that inventory is cleared from the open market. The problem isn't a lack of stimulus from Washington, it's the REO properties themselves. In order to help fix the economy, the foreclosures need to be front and center in the process. How to do it? How sweet of you to ask...

We've already tried loan modification for consumers who are facing foreclosure. I never liked that option, and now that loan modification has proven futile in preventing foreclosures, let's just get past that as being a viable option.  Remember, folks are getting foreclosed on for two primary reasons. Either they lost their job, in which case, buying them 60 days or reducing their rate by a percent isn't going to make much of a difference, or they've just made the sometimes wise financial decision to let the bank take their equity-less home. So once we get past loan modification as a means of stemming the foreclosure tide, let's get straight to the foreclosed homes that now flood our markets with REO property and drive prices downward as banks cut bait and run.

First, you have to understand the REO process, and the condition of most REO homes. As agents, we have little trouble understanding the condition of most of these homes. The process is daunting, consumer unkind, and filled with procedural folly. The homes are generally run down, stripped of appliances, curtains, copper piping (that’s a joke usually) and in general disrepair. Many were winterized improperly by the banks who now own them, and there are plumbing issues just waiting to be discovered.

In short, these homes require capital to purchase them. To say nothing of tightened lending standards, these homes will require money to fix them up once a sale is complete. This is the situation, yet as a nation we're looking to the first time home buyer to bail us out of this REO mess? Not a chance. First time home buyers generally lack the capital and desire needed to fix up the property, and are many times scared off by the process of an REO purchase. The answer isn't in the first time home buyer, as the NAR and Washington would like us to believe, which is why they offered that $8000 first time home buyer credit this year, the answer lies with the real estate investor.

Every market, no matter how small, has a handful of serious real estate investors. Guys and gals, and small investment groups who own rental properties, who buy and sell for a living or for fun, in general, just regular people who just like playing with real estate and making money in the process.

These people have the capital required to pull off an REO purchase and repair, and they have the knowledge to see how the investment can pay off. These are also the buyers that are for the most part sitting on the sidelines waiting for prices to become even more attractive. These are the buyers that can absorb much of the REO inventory in this country should they so desire. These buyers are the answer to our REO crisis. Yet the NAR and Washington don’t realize it. They're throwing money at first time home buyers, trying to throw money at road projects and billions in bank bailouts, but they're not offering incentives to the actual demographic that is willing to get their hands dirty and bail us out of this mess.

Here's the Dave Curry proposal to fix this mess. Stop modifying loans for consumers. If they want to get foreclosed on, let the process begin, and let's hurry it up so we don't string this recovery out any longer than necessary. My apologies to those who have lost their jobs, but please remember, I'm a Realtor, which means I basically lost my income last year but continue to work for free, so I can understand your plight.

Force the banks that have been receiving TARP and bailout funds to lend X% of the money they're receiving. Loans are readily available, but anyone who tells you they're just as easy to get as they used to be needs to go out and get a loan themselves right now so they shut up and realize the lending world has changed- for the worse. Then the piece de la resistance, tax credits and capital gains tax abolition. Investors who are purchasing these homes need motivation to do so, and the motivation is easily accomplished with a two step plan.

First, offer a $15,000 federal income tax credit to any buyer who purchases an REO or short sale property, or a property at sheriff’s sale. Senator Johnny Isakson of Georgia has been championing this $15,000 tax credit for every home buyer from the start, but chances are he's not going to be successful in achieving that goal.  Instead of $15,000 for everyone and every home purchase, restrict the stimulus to those purchasing REO property.  Make the $15,000 good for the tax year that they purchased the home in, and apply it as you would a child tax credit, just take the amount off the tax payers bottom line. That provides an immediate, significant piece of motivation that is realized during the year of the purchase. Next, make the gain from the sale of such a purchase capital gains tax free for a period of 5 years from the date of purchase.

That would apply to short term and long term capital gains, as well as re-sales completed in less than 12 months when the gain would be taxed as ordinary income. Take the capital gain problem one step further, and reduce the overall capital gains tax rate from 15% to 10%. That would give the residential and commercial markets a shot in the arm. The incentive here is obvious, let's just let these people buy and sell these homes, or rent them for a number of years and then sell them when the market improves, and let's let them keep 100% of their profits. After all, they're bailing us out of this mess, so let's throw them a monetary bone. This sort of actual market stimulus wouldn't require capital expenditures by the federal government, it would just result in less tax revenue, which means... gasp... they'd have to spend less money, which I believe is called conservatism.

If we could piece together these two bits of legislation, we could see a dramatic increase in REO sales which would benefit housing prices, the overall economy, and in turn the financial markets. If a buyer buys an REO home for $100k, he is giving business to his lender, insurance agent, utility companies, Realtor, and title company immediately. He's also clearing inventory from the lender's book,  increasing their liquidity along the way. If the investor spends $15k on improvements, he's putting tradesmen back to work, buying materials, and stimulating the local economy. If he sells that home for $160k, he's paying a Realtor, a title company, the State, and hopefully, just hopefully, making $30k or so of 100% profit which he'll in turn spend on the tires that his truck as been needing. See how this works? It's called capitalism, and perhaps the federal government ought to give it a try.

David Curry is a Realtor in Lake Geneva, WI. He blogs at www.genevalakefrontrealty.com/blog