PERSON OF THE WEEK: This week, MortgageOrb.com caught up with Dr. Alex Villacorta, Clear Capital's senior statistician, to get his thoughts on price trends, REO saturation and the business of property valuations.
Q: There are a lot of mixed signals about housing, although it's apparent that buyer demand is in the doldrums following the expiration of the federal tax credit. Do you believe housing is leading the economy into the dreaded double-dip recession?
Alex Villacorta: Certainly, the start of the present recession was led by the housing meltdown, starting with the precipitous decline of home values during 2006 through 2009. At the national level, prices dropped 40% from their 2006 peak to their 2009 trough, effectively wiping out all housing equity for millions of homeowners and setting up one of the biggest foreclosure crises in American history.
Now, however, the troubles in the housing market are just one of several key economic factors that are contributing to a drag on the overall economy. If there is one area that is leading the economy into a second recessionary period, it is the high levels of unemployment. The bottom line is that without jobs, or the sentiment of job security, consumers are unable or unwilling to spend discretionary income, let alone commit to a long-term financial obligation such as a mortgage.
In addition, the up-and-down behavior of prices over the last two years has shaken the confidence of many would-be buyers, since many feel that the bottom of the real estate market has not been reached. Despite record-low mortgage rates and home prices, buyer demand has remained fragile with government supported incentives accelerating short-term demand. Now that markets are entering a period of self-sustainability, we will be watching closely to see the responses and to monitor which markets are genuinely recovering and which are losing ground.
One point remains certain: If the job outlook remains weak or gets worse, then the multiplicative effect that it will have on the housing sector will add even more impetus to a double-dip recession.
Q: Once again, late-stage delinquencies appear to be feeding into foreclosure buckets, and REO inventories are inching upwards. What are your expectations for real estate owned (REO) saturation in coming months?
Villacorta: Through the remainder of this year and out through 2011, we expect REO saturation to remain at the currently elevated levels, but we do not anticipate a spike in REO sales like we saw in the first quarter of 2009. At the national level, REO saturation is presently at 22% – down nearly half from the peak value of 41.5% back in the first-quarter 2009.
Although foreclosure rates have only recently leveled off, we expect REO inventory to continue its elevated rate for the next few years. In addition, we do not expect the oft-talked about wave of REO listings to suddenly flood the market. Instead, we expect an omnipresent level of distressed transactions hovering around the 25% level for some time.Â
The reason why we feel that REO saturation will not spike again is because of the lessons learned during the initial surge in REO activity. During the height of the housing meltdown, lending institutions that found themselves holding REOs slashed prices dramatically in efforts to cut losses during the panic of the price drops. As a result, home prices dropped by as much as 10% per quarter during the height of the panic, and financial institutions found themselves undercutting each other to move inventory more quickly.Â
Now that the dust has settled and the financial community is slowly coming to grips with the new culture of the real estate landscape, REO holders understand that by flooding the market, they will drive prices down in areas where they may have multiple holdings. From a loss mitigation point of view, it is in the best interest of everyone to maintain an elevated but not overly saturated REO market so that local areas are given the breathing room to build a sustained recovery.
Q: On the topic of valuations, what do you view as the main challenges facing the industry in regard to determining accurate prices for distressed properties?
Villacorta: Pricing any type of property, in general, is a difficult task due to the fluid nature of prices. During stable markets, valuations appear more reliable or supported, because the rate of change of the markets is slow and consistent. In the present housing climate, markets are changing significantly, with some markets seeing price changes of 15% over the course of three months.
Asset managers who must determine a listing strategy must be able to gauge the momentum of the market and price accordingly, even if that pricing is significantly different than the valuation of the distressed property today. On top of this volatility, add in the competition from unprecedented levels of distressed inventory and transaction volume, and you can quickly see how valuing a distressed property is even more challenging.Â
The best way to mitigate risk in this environment is to ensure that valuations are produced by experienced and geographically competent vendors. An appraiser or broker must assess not only the relative price difference between fair market and distressed comparables, but also take into consideration the overall distressed saturation of the market.
Soliciting a valuation professional with experience and market expertise will ensure the highest probability of executing an effective marketing and pricing strategy. Clear Capital has been soliciting valuations based on experience and proximity to the subject since before the market crashed. This approach is continuing to deliver accurate and supportable valuations even in light of challenging market conditions.
We have the same approach with our data products. Clear Capital's Home Data Index analyzes properties based on the most granular market data available – taking into consideration not only the REO saturation of a specific market, but also the price discount and days on market of REOs as compared to fair-market transactions.
Q: Also on the topic of the business of property valuations, what are your thoughts on the Dodd-Frank Act? What is most significant about the bill's impact on valuations, from your perspective?
Villacorta: The bill has created a lot of healthy dialogue but also varying interpretations and expectations. In some areas, the bill provides clarity. For example, the clarification that broker price opinions (BPOs) may be utilized as a valuation tool in transactions other than where the BPO would be used as the primary basis for a loan origination on a principal dwelling.
Unfortunately, the bill is less than clear in other areas. An example is where lenders and appraisal management companies (AMCs) will be required to pay "customary and reasonable" fees to appraisers providing reports for loan originations, with a potential fine of $10,000 a day for noncompliance…that's a big number for not obeying a fairly abstract standard.
Big fines require clear guidelines and clear enforcement methods so lenders, AMCs and appraisers can conduct their business in confidence. Nonetheless, I am confident that the Federal Reserve Board, which is charged with drafting regulations on this issue, will be hard at work over the coming months to add necessary guidance and details on what will be required of all parties to ensure compliance. Once the regulations and their implementation are defined, we can all refocus on what the valuation industry should be: a service industry. Customer service should be the goal of every broker, sales agent, appraiser, AMC, lender and underwriter.
Because of the important role real estate and real estate finance play in our national economy, we look forward to getting more clarity on the implementation of this law.