Acquiring real estate through foreclosures is not exactly the type of transaction banks relish. That’s especially true in a down market that is overloaded with raw land and homes — and a paucity of potential buyers.
Estimates of the amount and value of acquired real estate through foreclosures are difficult, if not impossible, to come by, an industry insider says. A lot of the banks don’t want to talk about it.
“It’s ugly for everyone involved and you can’t even get the Federal Reserve to talk about it,” the insider says.
Anthony B. Sanders, professor of finance and real estate at Arizona State University’s W. P. Carey School of Business, sums up the somewhat dismal situation: “Banks are not in the business of being portfolio managers, either vacant land or housing.
“The way they’re trying to get rid of properties is that most banks are doing packaging. They sell packages of defaulted properties to investors around the United States,” he continues. “They started with national lenders, but there was very little interest in that. Then they went to regional packaging. That didn’t work either. Let’s face it, nobody really wants a Detroit-area loan or housing package.”
What’s happening is that hedge funds and equity funds are looking for very specific types of properties. Raw land value is highly dependent on where the land is.
“That’s why they don’t want to buy large portfolios,” Sanders says. “Because on the urban fringe, when you get way out west or southeast of Phoenix, some of that land they cannot literally give away. The reason is there is no foreseeable development going on in those areas.
“They’re looking for anything related to water rights or mineral rights — anything with natural resource implications still has a positive value,” Sanders says.
Until housing makes a comeback, banks are not finding a lot of interest in 40-acre tracts of desert that someday could be converted into a housing development, Sanders says. Some banks have defaulted single-family homes, often in remote areas.
“During the boom, and until fairly recently, a lot of starter homes were built in areas near Queen Creek, where land prices were fairly inexpensive for the Phoenix market,” Sanders says. “That market has really gotten beaten up pretty hard.”
National and regional bidders for those packages are few and far between.
“It brings back the old adage of location, location, location,” Sanders says. “If you’re planning properties located on major golf courses, or some properties in Scottsdale, there’s interest in that. In the classic subprime neighborhoods, which tend to be lower income, there’s not a lot of interest.”
In the meantime, banks are running around trying to peddle their packages. It’s more feasible to sell packages instead of marketing individual properties, because bank real estate portfolios are overflowing.
“Packages provide a good indication of which areas of Phoenix are likely to keep dropping like a rock,” Sanders says. “It’s those areas where there isn’t any interest in bank packages, which means the market doesn’t think they’re near the bottom. In some areas of Phoenix, the bottom may be a little ways away.”
With packaging of perhaps as many as 200 properties at a time, come discounts.
“The nasty part is that some of these properties are being offered at a big discount and they still can’t get rid of them,” Sanders says.
Even so, there continues to be interest in Ahwatukee, Scottsdale and Paradise Valley, which Sanders says means the housing market is showing some signs of life. But he adds this ominous observation.
“This is very reminiscent of the RTC (Resolution Trust Corporation) fiasco after the savings-and-loan debacle. It’s just like when the RTC was putting together packages. That’s the tipoff. Anytime you see packaging, that should make the hairs stand up on the back of your neck.”
At the Arizona Department of Financial Institutions, which regulates state-chartered banks and none of the large national ones, Tom Wood, division manager for banks, also recalls the S&L collapse.
“We had a lot of raw land in the 1980s,” he says. “Thank goodness we don’t have much of that now.”
Most of the real estate banks are trying to get rid of consists of single-family homes, Wood says.
“Very rarely do we see raw land,” he says. “Some banks don’t want to own it because it takes longer to get rid of. If they foreclose on raw land, they probably sell it at a sheriff’s sale.”
Wood expects a continued uptick in bank acquisitions of real estate, but sees very little of that among state-chartered banks. He suggests that some larger banks might be bundling foreclosed properties and attempting to dispose of their holdings through auctions or developers.
Depending on which economist you talk to, a substantial housing turnaround won’t happen until 2010. Some say 2009; and yet, as Sanders says, there are signs of life in 2008.
“For certain areas, recovery is there,” Sanders says, “but if I’m sitting in Buckeye, Avondale, Queen Creek and parts of Gilbert, I wouldn’t look for a speedy return.”