In May, a total of 8,587 units of pre-owned homes and units from foreclosed home auction inventories in the Phoenix metro area got sold. Sales prices also increased, marking the first time existing-home sales price increased on a month-over-month basis since 2007.

In the counties of Maricopa and Pinal, which cover the Phoenix metro area, a total of 9,562 homes got sold, representing a 6.1-percent increase from April sales and a 26-percent increase from sales in May last year.

The increase in home sales in May marked the fifth straight month that home sales increased on a year-over-year basis.

In contrast, sales of new homes in May dropped by 51 percent from May 2008 to only 957 units, marking the lowest May sales in more than ten years.

The record low sales of new homes indicate that low foreclosed home auction prices have been enticing home buyers to find properties in the resale sector of the housing market.

The median home price in May in Maricopa and Pinal was $129,435, a drop of nearly 39 percent from the median in May 2008 and an increase of 3.5 percent from the median in April. The month-over-month increase in May was the first time the median home price increased since March 2007, when the February median of $253,500 increased in March to $256,000.

Real estate analysts said that a higher number of traditional buyers accounted for the increased sales in May. These buyers included families moving to communities where the schools are better and individuals taking advantage of sales promotions typically offered during the May home buying season. But the number of buyers looking for foreclosed home auction units in May was still significant.

Because of the uptick in home sales prices, some real estate analysts are considering the possibility that home prices have bottomed out in Phoenix. Some point out to the median sales prices per square foot in April and in May, which remained at $64 – as a positive sign.

Analysts said that the May per-square-foot price was a decrease of more than 46 percent from May 2008 and a drop of nearly 63 percent from the peak rate in June 2006, which was $171.

Nevertheless, despite the uptick in home sales price, the prices of units in foreclosed home auction inventories in the Phoenix metro area are still affordable to many home buyers.

According to the study, a whopping 125 percent increase was reported in the number of hotel foreclosures and defaults for the past two months. In California, there are currently 175 delinquent hotels and 31 on bank foreclosure list.

About 2,500 hotels in California were either refinanced or financed from 2005 to 2007, the report stated. Also, hotel values in the state are estimated to be lower by 50 to 80 percent compared with the 2006-2007 market peaks.

Added to the woes of the hotel industry is the almost 21.5 percent decline in room revenues this year and the increase in cap rates.

According to Alan X. Reay of Atlas Hospitality Group, the drastic decline in hotel values means that no equity is left in any of California’s 2,500 hotels which were financed between 2005 to 2007. Additionally, California hotels are pressured to generate sufficient cash to cover the operating costs, such as utilities and payroll and to pay for the mortgage.

The report noted that the problem in distressed hotels started with small, non-flagged properties belonging in secondary and lower markets. However, the problem now spreads to affect all types of properties, from luxury to economy.

Real estate specialists said that during the last industry downturn sometime in 1990, there were 2,000 hotels reported on bank foreclosure list. Today, the report suggested that the number of hotels in California that are on the brink of foreclosure is much more than what was reported.

Nationwide, commercial mortgage-backed security (CMBS) loans accounted for a third of the overall debt in commercial real estate, while about one third of the debt is owed to banks and the remaining to lenders.

Meanwhile, another market data showed that mortgage defaults last month were five times higher than the previous year. Market projections showed that default rates by the end of 2009 will rise by 4.4 percent, to a maximum of 5.7 percent.

Florida, California and Texas accounted for 30 percent of hotels that are on the brink of being placed on bank foreclosure list.

Many borrowers chose option ARMs because they were given very low rates for the first months of the loans. Typically, they were given four monthly payment options to choose from: interest-only payment, pre-determined minimum payment, fully amortizing payment based on a 15-year term, and fully amortizing payment based on a 30-payment term.

But to attract more borrowers, lenders emphasized the interest-only payment and the minimum-payment options without warning the borrowers about the consequences of very low initial monthly payments.

What made the situation worse is that many borrowers upgraded their original home purchase plans to higher-priced and larger homes because of the low initial monthly payments. Many of them are saying now that they were made to believe that they could always refinance later to cover the rate adjustments to maintain their monthly payments to affordable levels.

Now, most of these borrowers fear the inevitable conversion of their dwellings into foreclosure homes. Based on mortgage data, more than one million option ARM loans are set to readjust to higher rates next year and in the following years.

The abruptness of the jump is illustrated by the estimate that a current monthly payment of $98 would readjust to a monthly payment of $3,500 in the next few years, causing another big wave of foreclosure homes.

Susan Wachter, a real estate finance professor at the Wharton School of the University of Pennsylvania, said option ARMs will push up the number of foreclosure homes and will undermine any recovery the housing market has achieved. She said many homeowners will either surrender their homes to the banks or just let them become foreclosure homes.

Based on mortgage finance data, the readjustment of ARMs will worsen the situation of financially troubled California. The state comprised around 58 percent of all ARMs taken out from 2004 to 2008. Around 75 percent of ARMs will readjust next year and in 2011, with August 2011 predicted as the peak readjustment month with around 54,000 home loans readjusting to higher rates.

For borrowers who made very low monthly payments and allowed unpaid balances to keep increasing their loan principal, they have to start now in finding effective interventions to prevent their houses from becoming foreclosure homes.

This year, as 20 of the state’s 95 counties are undertaking home reappraisals, many homeowners have been asking the basis of their reappraisals. In counties like Loudon, Rhea, Bradley, Hamilton and Van Buren, homeowners are wondering why their residential properties are getting valuation increases by 30 percent or higher.

A homeowner in Spring City has claimed that the value of his property has increased by almost 79 percent. He argued that the valuation is perfect if he can sell it or refinance it at that price, but he could not. He is frustrated that the appraisers are ignoring the loss of home values all around because of the bargain prices of foreclosed homes.

But Julene Purser, property assessor of Rhea, insisted that the reappraisals were based on land sales in 2008, when land values stayed strong despite a significant decrease in sales.

Many homeowners are confused because all they hear are steep price home declines, bargain foreclosed homes, deterioration of home values, underwater loans, rejection of refinancing because of low valuations and walk-outs from mortgages because of low house values, and yet their houses are valued differently just to raise tax revenues.

In response to the taxpayers’ complaints, Tennessee officials explained that some counties in Tennessee did not experience the effects of foreclosed homes as severely as in other counties.

According to Tennessee tax assessment law, county legislative bodies must vote to use new tax rates when their counties are up for reappraisal. They must base their real estate tax rate adjustments on the certified tax rate table issued by the state.

David Sherrill, director of real estate assessments, explained that the tax rate table would make tax rate revenue neutral. He said that if residential property values increase, tax rates should decrease.

State official Kelsie Jones told homeowners that they are given 45 days to submit their appeals after they receive their reappraisal change notices from their counties.

A responsible resident of Van Buren County told county officials that he understands why home values should be adjusted and why revenue should be increased, but he explained that he cannot accept an increase of nearly 40 percent in just three years, especially in a recession year and in a time of thousands of bargain-priced foreclosed homes.

They pointed out that REO properties for sale still accounted for almost a third of the total sales, while 29 percent of deals were made to first-time homebuyers who took advantage of the $8,000 federal tax credit.

There were cities that showed a slowing down of home price declines, including Denver, Colorado and Boston, Massachusetts. But in some cities, homebuyers can still take advantage of the further price declines in REO properties for sale.

In Detroit, Michigan housing prices declined 4.9 percent last March, according to the Case-Shiller Index. The March decline was the steepest in the city’s history since January 1991. Currently, houses in the city are selling at prices comparable with 1995. Standard and Poor’s vice president of index services Maureen Maitland attributed the sharp price decline to the collapse of the automobile industry in the city.

New York City saw its steepest monthly home price decline in March at 2.5 percent. Maitland pointed out that the crisis and massive layoffs in the financial markets may continue to make New York City a haven for homebuyers looking for cheap REO properties for sale.

Meanwhile, median home prices in Portland, Oregon declined by 2.1 percent in March. Integrated Asset Services President Dave McCarthy said that the city is trying to stay above the national average of home prices, but is starting to experience some effects of the foreclosure crisis made even worst by its 11.6 percent unemployment rate which is above the national average of 8.9 percent.

In Phoenix, Arizona, home prices dropped 53 percent from their high in June 2006. Last March, the city’s home prices declined 4.5 percent. And the city is still suffering from overbuilding which could delay the turnaround of home prices by two or three years.

On the other hand, home prices in Minneapolis, Minnesota dropped 6.1 percent in March. The Federal Reserve Board’s Beige Book stated that more than 50 percent of March housing sales in the city were REO properties for sale.

Real estate experts agree that trends once again showed that where REO properties for sale are abundant, home prices are languishing below market values.

Every house sold in a home foreclosure auction represents a series of failures on the part of the borrower – failure to pay several monthly payments, failure to respond properly to notices of defaults and foreclosure and failure to work out a foreclosure prevention strategy with the lender. On the part of the lender, there is failure to work out a way by which the borrower can cover the missed payments and failure to use options offered under the Making Affordable program of the Obama administration.

To first time participants, the foreclosure auction is chaotic, with everyone pretty much left to his own devices. Most are scanning foreclosure listings given by a foreclosure tracking service and making computations. The others are comparing notes about potential profitable properties in hushed tones.

Other participants who have already studied the listings and have already made their estimates just wait for the trustees and county officials to begin the foreclosure auction.

In Travis County, the foreclosed home auction is usually held behind the old court building.

Enticed by stories of bargain homes that can be easily acquired, first time participants usually crowd the auction during the first hours. But as other bidders outbid them in each of the properties they were hoping to buy, most of the first timers would be gone by the middle of the day.

The foreclosed property auction is typically ruled by the investors – the ones with cash and cashier’s checks or the ones backed by real estate investment companies. Before the bidding, these investors have already made their calculations and have already decided when they should buy and when they should stop bidding.

At the foreclosure auction in June, based on the commotion and the fierceness of the bidding war, the most desired property was a large beautiful house appraised at $776,000 with the former owner having a mortgage balance of only around $300,000.

The winning bidder can make thousands of dollars in profits if he can get the house close to half of the appraisal. The bidding started at $298,000 and ended when a local investor raised his bid to $505,000.

Just like any other county auction, such are the ways of a foreclosure auction in Texas.

U.S. Department of Housing and Urban Development inspector general Kenneth Donohue said that the increase in demand for loans guaranteed by the FHA will most likely take its toll on the agency’s oversight resources and make its programs vulnerable and susceptible to fraudulent schemes.

Donohue pointed out that the surge in demand for FHA-backed loans came at a time that repo homes for sale rose to a record high which, for the first time since 1934, threatens to level out the insurance fund of FHA below the statutory minimum.

The self-sustaining insurance program of the FHA has always been relying on premium payments made on its fund to cover whatever loss that may be incurred due to fluctuating delinquencies and foreclosures homes.

If the FHA fund falls below the required level, it would need a rise in premiums or tax injection to bridge the shortfall, Donohue said.

Congress mandated that FHA’s insurance fund should maintain a ratio equivalent to 2 percent of its insured loans. The September 2007 ratio of 6.4 percent dropped to 3 percent in 2008.

According to Donohue, FHA-supported mortgage was one of the five purchase loans reported in the last quarter of 2008, representing a 6 percent rise from the previous year.
The market share of FHA rose by 63 percent when refinancing was added on its program.

Meanwhile, an estimated 7 percent of properties taken out using FHA-guaranteed loans are in danger of becoming repo homes for sale. Donohue explained that while the deepening economic crisis and precipitous decline in home prices have pushed default rates to a record high, his office is also concerned about the ability of FHA to monitor lending institutions, identify and stop frauds.

The total number of lenders approved by the FHA rose by almost 525 percent since September 2006. Donohue said that the reliability and integrity of several FHA-approved lenders are unproven and may pose a threat to the government’s program to contain the number of foreclosure homes for sale in the country.

Due to foreclosures, home prices have dropped to 2002 price levels, with many sellers accepting price reductions of 25 percent or more if the buyers are ready with their cash payments or have fully pre-approved home loans.

Although mortgage rates have returned to their upward direction, rates are still low compared to previous years. First time home buyers are also helped with the $8,000 federal tax credit.

The housing market is currently ruled by home buyers, according to many property sellers and analysts. With prices pulled down by foreclosures, buyers are able to purchase larger and more beautiful homes in better neighborhoods with more amenities.

Based on homes for sale records in Chicago, the number of first time home buyers has increased in 2009, comprising more than 50 percent of all home buyers. In previous years, the share of first timers was below 35 percent.

Recently, a couple planning to retire sold their house in Homewood and then bought a two-bedroom 1,400-square-foot condo unit in River North. The condo was first offered for sale at $599,000, dropping to $550,000 in 2008. When the couple saw the condo unit, they thought the price was out of their range, but they tried making a low-ball offer of $475,000 which was surprisingly accepted.

The couple contended that the seller accepted because they were paying in cash. Property analysts said that the couple made a good deal because the condo unit had a prime Chicago address, a parking space, a large walk-in closet, a big tub and stainless steel appliances.

Foreclosures made possible what the couple could not buy in previous years.
People buying their second or third homes are also taking advantage of the market made affordable by foreclosures. A surgeon and her psychologist-wife recently purchased a large corner condominium in Water Tower for $1.2 million, almost one-third down from the initial $1.7 million listing price.

The couple and their children live in Dyer, Indiana and they plan to rent out the condo unit at break-even level while waiting for foreclosures to slow down. Their agent said they can resell the unit for $2.2 million when the housing market recovers from foreclosures.

BanglaTown. This is what people called the north Detroit neighborhood where a mix of artists, African-Americans, Bangladeshis, Ukrainians and Polish, live and set up their businesses. They heard about the city’s cheap homes and snapped up one for their own.

According to April data from the Detroit Association of Realtors, the average property price in the city dropped to $11,533. Market analysts attributed the drastic decline in average home price in the area to the growing number of abandoned and vacant homes on REO property listing.

Before the massive layoffs at General Motors and other corporations in the state, Detroit has already the lowest home value in the whole of Michigan.

Investment adviser Mike Shedlock said that those artists living in BanglaTown are doing the city a great deal of help by stabilizing neighborhoods that are falling into deterioration.

Most of the houses in BanglaTown were vandalized and stripped to the bone. But this did not deter some artists who took the risks, bought houses on REO property listing and renovated them to make them livable.

Take for example the case of an artist couple who bid on a property for $100. This couple rehabilitated the 1920s brick property and installed energy-savings materials such as LED lights, solar panels, high-end insulated windows and recycled wood.

The couple also plans to install a security system with steel doors and hurricane-proof windows and experiment with using a car battery to power an air-conditioning unit.

Meanwhile, Michigan will offer $25,000 to individuals who purchase a property in the city, provided that they pay about 1 percent of the total amount and make it their primary residence. Under the program, speculators and landlords are not eligible.

Michigan State Housing Development Authority director Mary Townley said that the funds are part of the $263 million money allocated to various states under the Housing and Economic Recovery Act of 2008. The grant is intended to encourage buyers buy deteriorating houses on REO property listing and to help them bring these homes up to code.

A report released by Brookings Institution showed that Detroit is one of the U.S. cities with the lowest economic performance, ranking among the worst in terms of average wages and unemployment, had high foreclosure rates and low market value homes.

President Obama said that his administration will release its recommendations concerning Freddie Mac and Fannie Mae next year, after putting in place a better system to regulate the financial industry. The financial sector is largely blamed for the flood of repossessed houses that battered the housing market and ultimately the national economy.

The president said that the Department of Housing and Urban Development and the Treasury Department will gather proposals from the citizenry and other government departments concerning the future roles of Freddie Mac, Fannie Mae and the entire Federal Home Loan Bank system.

Although Freddie Mac and Fannie Mae incurred huge losses and had to be rescued with government funds last year, the two government-sponsored enterprises helped in containing the problem of large numbers of repossessed houses.

When Federal Reserve bought $500 billion mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, mortgage rates started to drop to their lowest levels in many years, allowing many distressed homeowners to refinance their costly mortgage loans to prevent them from becoming repossessed houses.

The Fed’s program of buying securities to maintain mortgage rates at low levels was enlarged in March when the Fed increased its mortgages, which are backed by securities, acquisition to $1.25 trillion.

The president said that it needs to keep Fannie Mae and Freddie Mac under government control for a time because investors are not acquiring mortgages, which are backed by securities, that are not guaranteed by the two GSEs.

Ginnie Mae, on the other hand, has always been government owned. It was created to back mortgage-backed securities guaranteed by the Department of Veterans Affairs and the Federal Housing Administration.

Among the options being considered by the Obama administration for Freddie Mac and Fannie Mae is their return to their former status as private entities earning profits in the home ownership sector, liquidation of their assets, and conversion into corporations that will insure covered bonds.

The two GSEs are also being considered for operation similar to the public utility system, with the federal government controlling their profit margins and establishing guarantee limits.

Lastly, the GSEs are also being considered for incorporation into another agency, such as the HUD. Whichever of these options is chosen, analysts hope that they will still help contribute to the mitigation of the effects of the avalanche of repossessed houses.