As bidding wars return, cash wins in the Washington region

During the housing boom in the Washington region we faced inflated prices and bidding wars forcing buyers to pay more than they wanted or expected or be shut out from the dream of home ownership. Interest rates were low and credit was flowing. Times were good – or so we thought.

A few years later, as America struggles to pick up the pieces of a crumbling housing market, the Washington Post, did an article – Cash-rich real estate investors trigger bidding wars, frustrate other buyers – on what appears to be the latest craze.

Investors are scooping up houses for bare bottom prices by paying cash, shunning many first time buyers. Investors are putting a bit of work into them and often renting or flipping quickly for a higher price from impatient and desperate first time home buyers. Whether it’s smart business or not – it mirrors the same issues we previously faced – simply too many investors and not enough stable home owners. The good part is these investors are less likely to walk away from properties, the bad part is they can sell for much less leaving the rest of the community with low sales comps or rent the units to those with less investment in the community.

Reasons ranging from irresponsible lending, deceptive home buyers, joblessness,  and overextended developers resulted in waves of foreclosures and a huge loss in taxes for local jurisdictions. This forced those who purchased responsibly in a huge bind because the value of their largest purchase was now sinking daily. It wasn’t fair, but it’s all part of the game.  Homeowners who purchased within their means now had to compete with homes that had been abandoned and often sat empty for months, if not years, resulting in a significantly lower asking prices and value. Regular sales were now competing with foreclosures and short sales – homes where an owner still resides but the banks are willing to take less in a sale.

Over the past few years, there have been plenty of initiatives attempting to ease the housing crisis but it appears that money still trumps long-term community stability. The Obama administration introduced refinancing options for owners that were facing foreclosure due to job loss and adjustable mortgages but only for FHA insured loans. A large amount of subprime loans were FHA but this did not extend to owners with conventional financing. This initiative did stabilize communities for a period but it didn’t quite work out as planned. Investors, who owned multiple properties and had very little experience – D.C. housing market’s collapse lessens developers’ swagger -  simply walked away resulting in an abundance of empty properties. The problem is local governments are not being held accountable for approving so many development projects as local areas did not see an increase in resources, such as schools, libraries, or community centers.

FHA guidelines have now become so stringent that even those with excellent credit and those who have been making their payments on time are faced with challenges obtaining home loans. FHA guidelines are constantly changing with the most recent requiring home owners interested in purchasing a second home to have 20% equity. Yes, 20% equity in a declining market in an area as transient as Washington, D.C. . Lenders are afraid homeowners will purchase a new home, for a fraction of the cost they paid for their existing home, and will let their current property go into foreclosure referred to as the Buy and Bail scheme.

The greater challenge is the impact on communities. I’ve seen investors who have let properties go into foreclosure but failed to notify tenants. Since the process takes awhile, the owners are pocketing rental payments and creating a nice little nest egg while the tenants are in shock when they receive a notice to vacate. One property in Alexandria, VA rented individual rooms to immigrant families for around $500 per month. The owner was pocketing around $2,500 monthly while allowing the property to go into a lackluster short sale and finally into foreclosure which can take three to six months to finalize.

The next challenge will be competitive home sale prices with recent homeowners (those who purchased within the last six years) now having to compete in sales with homeowners that purchased for a fraction of their value.  The challenge arised when the stable homeowner who purchased a home in 2003 for $450K now faces a homeowner who purchased a similar property in 2009 for $250K. Someone’s going to win or lose big. And so the housing crisis continues and will for last a lot longer than we anticipate in my opinion.