In Detroit real estate right now we’re seeing reduced inventories of foreclosed properties, increased bidding on the remaining foreclosure properties, and an increased price paid for these houses. That sounds like a turnaround to me, doesn’t it? We’ve hit bottom and we’re moving ahead. Expect housing prices to increase and for Detroit real estate to be getting better now. or… should we actually look at what might have caused this?

There are actually a couple of key events that happened in February 2009 and they both have to do with bad policy. In Detroit we had Sheriff Evans institute a foreclosure moratorium for Wayne County and we also had all of the large mortgage lenders including Fannie Mae and Freddie Mac agree to suspend foreclosures. On the surface these seemed like very reasonable and humane acts. If you dig further, you’ll find that all it did was give false hope and will probably lead to a longer down market.

As Jeremy stated back in February when discussing the Foreclosure Moratorium in Wayne County,

I have a significant amount of experience with short sales and loan modifications and it has been my experience that most people are not capable of making any considerable payments towards their mortgage. Most people have had something catastrophic happen that stopped them from being able to pay their mortgage. There is no loan modification program in the world that fixes a lost job, divorce, or death in the family. Often their debt to income ratio is so poor that a foreclosure now is better than a loan modification that ends up in foreclosure in the near future.

Furthermore,

If we stop foreclosing on houses and we know that most of the loan modifications will be unsuccessful resulting in more foreclosures; we in essence dammed a river. When the moratorium is over, we will have a flood of foreclosures further wiping out property values and creating even more problems.

This is no longer speculation, it is fact. We have seen foreclosures go down and we have seen prices increase on these foreclosures. But wait. Look at the graph below from RealtyTrac. It shows foreclosure filings decreasing quite a bit until May of 2009. What happened in April to make foreclosure filings spike so high in May? Yes, both the national and local foreclosure moratoriums were lifted.

You might ask why we’re still seeing a decrease of foreclosure inventory and an increase in prices. In Michigan we have a 6 month right of redemption on houses. What that means is that once a mortgage company has foreclosed on a house, the lender has to wait 6 months before they can take ownership of the house, put it on their books, and get it listed with an REO agent. Given that it takes the lender a month to foreclose on the property after the filing, we’re looking at a minimum time of 7 months until they can get the property listed. In all reality, we’re probably looking more like 8-9 months for a bank in Michigan from foreclosure filing to being listed.

When lenders decided in April to lift the foreclosure moratorium and start foreclosing again, they had a huge back log of foreclosure filings that they had put on hold and every other property that had come along since then that needed to be foreclosed on. That’s when the time line started. Looking out 7-9 months from that date and we’re looking at November 2009 to January 2010 for the flood of foreclosures coming on the market. Right during the slowest time of year for real estate in Michigan.

What this is going to do is flood the market with an oversupply of foreclosure properties. Using simple supply and demand rules, if demand stays the same and supply increases, prices will fall. Is this all bad? Definitely not. It’s a necessary correction in the market from the false bottom that was created. It also brings a tremendous opportunity for those that are ready to take advantage of it. I have been buying houses in Detroit steadily this year and I will continue even though I’m buying less houses because of the prices right now. All that it’s going to mean for me and the investors that I work with is the opportunity to purchase more properties at excellent prices.

Of course there will be doom and gloom spread in the national media outlets about the fall in prices in Detroit and the average person will think the world is going to end but two things will remain the same. 1. Investors will still be identifying opportunity and making great money and 2. there will still be many retail sales (as there are today) that will help keep the non-foreclosure market from dipping too much. With Detroit rental markets and first time home buyer programs being stronger than ever, this is definitely the best time to start or to continue investing in Detroit real estate.

Successfully Yours,
Jared Pomranky
Detroit Real Estate Listings
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