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The Positives of Negative Equity..is it misleading us?

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The Chris Williams Radio Show

The Chris Williams Radio Show


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The positives of negative equity.  Is it misleading us into a false impression that the housing market is improving because it's causing home prices to increase?  That's the topic of discussion on this episode of the Chris Williams Radio Show.


0:05 Introduction

Welcome to the Real Estate Report with Chris Williams of Blue Sky Capital. This is where you can learn about what's happening in real estate and how you can make big money in today's real estate market.

0:24 Tony Vignieri

Hello! And welcome to the Real Estate report with Chris Williams. I am your moderator, Tony Vignieri. On today's show, an interesting and somewhat confusing topic. The positives of negative equity. Is it misleading us to do a false impression that the housing market is improving because negative equity is causing home prices to increase. Well, throw that topic on the table for discussion with real estate expert, Chris Williams, the CEO of Blue Sky Capital in San Diego. Hello, Chris!

0:54 Chris Williams

Hi, Tony! It's so great to be on the show and of course thank you so much for moderating.

0:59 Tony Vignieri

Great! Good to hear your voice, Chris. As I mentioned, Chris is the CEO of Blue Sky Capital and he is an expert in real estate investment, finance, and syndications. He is the proud recipient of the Prudential President's Award, an award he won nine years in a row. In his 13 years in real estate, he has managed and directed real estate teams and handled more than 300 real estate transactions. In 2011, Chris formed Blue Sky Capital, a private equity firm in San Diego. Blue Sky Capital is helping to rebuild neighborhoods through their systematic and disciplined approach to buying and selling distress real estate. Chris, we are starting to hear that negative equity in homes, homes of course that are underwater are helping to inch-up home prices and that plan words here the positive of negative equity. Sort this out for us. Is that really happening here or they just a clever pairing of words that sounds good?

1:55 Chris Williams

Well, Tony it's a great question. As really as I am -- I've been doing some research on this. There is a great research company called CoreLogic that just came out with the report on this here is what's happening. See, there is currently a lower supply of homes right now and as a lower supply at homes right now anytime will grow and demand and that of course it's positive for home prices. But you see, the lower supply of homes right now is driven by all these negative equity. What am I talking about? There are sellers that want to sell their home, but can't because their underwater and they can't stomach the thought of a short sale. They don't wanna take the credit hits. They don't wanna deal with that long and very difficult task. So, they're just not going on the market. As a result, we had a decrease of supply of listings and with the loss of supply and demand, if there is a decrease in supply and there's demand, then prices will rise and that is what's happening and it's driven by the negative equity. Another way to look at it, there are people that want to sell but can't sell because their houses are not worth the loans that are on them.

3:06 Tony Vignieri

So, isn't that given us a false impression of -- I mean negative equity against it, the positives of negative equity it's a plan words and it's -- help me out there.

3:20 Chris Williams

Yeah. It really is. So, the negative equity not only makes consumers more reluctant to buy, but it also discourages homeowners from selling leading to a smaller number of homes listed on the market day in and day out. So, this is right from the CoreLogic report. It's a data from the analytics from this firm revealed that among the 50 largest markets in our country. Those with the higher share of negative equity have on average a lower months supply of inventory and the converse is two. For example, markets with negative equity share at or greater than 50%. Have an average months supply of 4.7 months, which is a low number of months. But markets with less than 10% equity have an inventory supply of 8.3 months. So, there is an interesting correlation to the negative equity against the number of the months of supply on the market. Another way to look at this is, it's a very clear conclusion that the more negative equity there is the lower number of listings. So, it's counterintuitive. The high share of underwater homes is actually helping the market by at least keeping the supply at homes for sale low. However, we have sellers that need to sell. You see, Tony, I think this is temporary. Here's why. The market is not coming back anytime soon. So you got these sellers that are underwater. Their paying on a house does not worth what their paying. How long will they continue to do that? Not very long, I predict.

4:54 Tony Vignieri

Right. So, again this is what's causing the inventory that we're seeing in the headlines and you know, in the paper, you know online, etc. That's really what it's all tied do?

5:08 Chris Williams

Precisely. You see, most of the time when you see prices rise in the market is because there was an increase in the point at base, so people made more money. Therefore, they went out and started to buy more homes which consume the inventory. As a result of that inventory consumption, prices go up. That's not what's driving this. What driving this is, people cannot sell, although they want to sell, however, you've got the lowest interest rate from the history of our country. In fact, the affordability index says that it's cheaper now to buy than this to rent. So, you've got this borrowers coming in and buying houses on this at FHA loans 3-1/2% down and consuming what is already a low inventory numbers. So, it's all very skewed. The customary market economics that would be a play are not at play here. This is volatile and it is temporary.

5:59 Tony Vignieri

How do you sort this out from the standpoint of -- I mean you've been in the real estate a long time. You see this. You lived with it. You breathe it. You really know what's going on. For the uneducated or even that someone educated about what's happening in housing in the housing market. I mean, just this morning in today's paper it's saying, "Oh! It looks like everything is getting rosy." Everything -- you know home prices are up, foreclosures are down -- you know, sort that out because that's really not case, is it?

6:33 Chris Williams

It's really not the case, Tony. Things are not what they seen. You see, there is a supply constriction of what we just talked about from the negative equity, so sellers that want to sell can't. There is another supply constriction which is the banks are postponing an unbelievably high number of their foreclosures. Somewhere around 90% or so are postponing. So, you've got literally, in San Diego for example, thousands and thousands and thousands of properties that are in foreclosure that the bank postponed that doesn't do it. So, that creates another supply constriction for the market. And with now, that supply constriction is artificial because the banks are holding the bag, but the impact is very, very real. You see...

7:15 Tony Vignieri


7:16 Chris Williams

Those properties are still underwater and the only way to send them back to market value is to get those things to foreclose or complete a short sale.

7:25 Tony Vignieri

Why would the banks do that? Why would they neither this homes out?

7:29 Chris Williams

Well, there's a couple of reasons. One reason is that with the rules dictated by the FDIC which is the government entities that controls the banks. The banks just have to show that at some point that house will be a performing loan and then they don't have to carry on their balance sheet. So, as a result of that -- you know, you see, the banks saying they have record profits. Well, they do because of the accounting tricks that they legally get to do, they've got all these non-performing loans that don't show up on their balance sheet. So, there's no government pressure for them to dispose to these assets and there is no investor pressure because the way the book show up, the banks look like they're making money.

8:09 Tony Vignieri

Now I got it. So, again we see -- you know the prices increase on homes for sale because of negative equity. We have the supply situation that's artificial and the other reasons as you've explained. Is it healthy for the needed recovery or maybe I should rephrase that question. This is unhealthy, isn't it?

8:30 Chris Williams

It is definitely unhealthy because you see, it's artificial. You know what got us to the collapse of 2008 was a bubble. The pricing just couldn't keep up. The underlying economics were not found. There was no integrity to the market that was happening. Well, we now have another bubble, what am I talking about? This is a pure market manipulation by the banks with the government's approval. It's market manipulation, they have millions frankly of homes that need to foreclose that they are not foreclosing on. As a result of that we have a lower supply and as a result of that we have prices creeping up. Tony, this cannot sustain itself. It can't. It will not. At some point, this is gonna have to end, I predict, we will see another drop in prices.

9:16 Tony Vignieri

You're right. And another coming way for foreclosures of -- were around the corner from what you're indicating.

9:24 Chris Williams


9:25 Tony Vignieri

How about Blue Sky Capital? How does Blue Sky Capital helped in, in this overall process in all this in the housing market?

9:34 Chris Williams

Yeah. Well, you know, Blue Sky Capital we're experts in buying and selling real estate. Now, we buy and sell real estates in numerous ways. We purchase short sales and -- so we're part of the solution that we're actually driving short sales. We go door-to-door. We knocked on doors and we talk to home owners that we know are underwater and we talked of them about the short sale and we helped them through their process. So, we -- just to the short sales that we do, we are one house at a time, rebuilding San Diego neighborhood. We also do participate in the foreclosure auctions and we buy properties there. I will tell you that with the supply constraints that we've seen over the past six months or so, I am finding fewer and fewer opportunities there, but our goal here at Blue Sky Capital, Tony, is one house at a time to rebuild the San Diego neighborhood and then ultimately we'll be a part of the solution throughout California, throughout the entire country.

10:27 Tony Vignieri

And as you're saying you're on the street, you're knocking a door. You're talking to homeowners. What the -- you know, give me a sense of what they're saying in the situations that they're in?

10:39 Chris Williams

Yeah. Well, the homeowners that we're talking to most of them don't know that they have an options called either a loan modification which generally doesn't work but they can attempt it. They don't understand the short sale process and they're mostly intimidated by their bank. They don't know what to do. You see, here's the interesting stat, 75% of the houses in San Diego to foreclose were never listed with the realtor.

11:02 Tony Vignieri


11:04 Chris Williams

75%, yeah! So, 75% of those people they went to foreclosure, never listed with the realtor, never try to get the short sale done and they didn't know what to do. So, mostly Tony, we're educating consumers. There's has been some new changes to the credit score with FICO that if the homeowner doesn't miss the payment, has never been delinquent and does a short sale, FICO says that they will report that is credit neutral. Now, that's good stuff. Something else for -- we're forming homeowners on is that December 31, 2012 a very important log goes a way for a short seller. Now, right now, if you're short sale you're gonna get a 1099 from the bank but you don't have to report that is income, it's called relief of debt income. It used to be you had to pay taxes on it. You currently don't have to pay taxes on that, but at the end of the year unless the folks on Washington D.C. make a change and extend that, then that's gonna go away. So, anybody after the end of this year that does do a short sale will likely have to pay tax on whatever was discounted by the bank. That is a bad thing for the sellers in the market.

12:11 Tony Vignieri

So, you know from what you're saying as you're helping you know rebuild San Diego neighborhoods, that there is a lot of intelligence that you have and your team has to help people with some of the things you just explained, correct?

12:26 Chris Williams

That's exactly right. That's what we do. We're talking to a seller, we're educating it, we're talking to investors, we're educating -- you know, we put together the right group people, there is 116 years of licensed experience on our team. Really, we're just a knowledgeable group of people and we like to share that knowledge with people.

12:44 Tony Vignieri

And let's bring that -- we only have a couple of minutes left. Again, as we started the program talking about the positives of negative equity, kind of sum that up. Again, your take on it and really work things are at in that regard.

13:01 Chris Williams

Yeah. The positives of negative equity are that is driving prices up. That is the positive. The downside of that is that in my opinion it is unsustainable. There is too much distress in the market place. There are millions of people that are underwater. 38% of all the loans in San Diego are underwater. There are about 8 million properties in foreclosure nationwide with another 2-1/2 million that only have 5% equity. So, with all that distress in the market place that those properties must foreclose or must go to the short sale. So, this artificial constriction is unsustainable and I do believe that will come to an end.

13:40 Tony Vignieri

And again, these all has to happen. I mean, it can be sobering news, but it has to happen for the housing market to really yield itself and really to start a new.

13:52 Chris Williams

It really does. Look, this federal government is try to keep rate down to try to have the healthy market heal that hasn't work and so the only thing that's gonna do it is basic supply and demand. The supply called all in these underwater homes must move through the process and with this artificial constriction it is just unsustainable. I know I said that numerous times but I just wanna get that out to the consumers in the world.

14:12 Tony Vignieri

Great. Well, thanks a lot. That's really great information today. Thank you Chris and thanks again. Let's mention the Blue Sky Capital website which is blueskycapital.com or you can call them at (877) 424-7479. An easy way to remember that number is (877) 4CHRISW. Well, thank you for joining us today on the Real Estate Report with Chris Williams. We're on the air weekly to keep you updated and informed about what happening in real estate today. I'm Tony Vignieri. For Chris Williams and the Blue Sky Capital team, have a great real estate day.

14:51 Closing

Thanks for joining us on today's Real Estate Report with Chris Williams of Blue Sky Capital. Join us again next time and remember this is where you can learn all the insights about how to make big money in today's real estate market.