Milestones
By Miles H. Barber

Residential real estate has been gasping for breath on the economic operating table and looking at the heart monitor, may soon be moved from the ICU to the recovery room.

It does not have so much to do with supply and demand as it does with restrictive regulations.

The Dodd-Frank bill nearly killed the patient and it may just be coincidental that Senators Dodd and Frank are both retiring this year.

Their legacy to the real estate world may not be remembered in ten years and the impact of their onerous legislation will be an albatross hanging on the industry for decades.

Banks have been placed in a precarious position of having money to lend and getting beat up by the regulators if the borrower doesn’t meet every criteria of the Frank-Dodd legislation. Borrowers that would normally be loan approved even in tough times prior to 2007 are being left out in the cold.

This has left us a real estate market with lots of properties and fewer qualified buyers to absorb those properties. Smart folks with cash have been using their funds to literally steal property at prices not seen in the last decade or two. In fact, 40% of the properties currently being purchased in California are paid for with cash.

The reason is quite simple. When you are getting 1% or less from your savings account and you can buy a rental home that produces 6 to 8% return in cash flow with the possibility of additional return over the next few years in appreciation, why not?

One of the hot oversubscribed markets working well right now is foreclosures. Banks are releasing foreclosed properties from their inventories at bargain prices. However, for every foreclosure coming out there appears to be five or more buyers waiting to snatch it up with cash.

The good news is, this is a hot market. The bad news is, someone lost their home or rental property and values will not move up until the foreclosure numbers move down.

The banks inventory of foreclosed homes is still high relative to a normal market and will remain this way for the near term. The banks do not want to flood the market with low priced foreclosures and dampen the market further. Another reason for the slow release of these properties is the legal requirements of regulators.

Remember, we went through a very crazy time a few years ago and loans were bundled and sold in blocks to investment bankers. The ownership of these loans now need to be tracked down and verified, signatures on documents certified and assurances that notifications to borrowers were made properly.

The recovery room is just down the hall and it may be just a matter of time and better medicine that permits real estate to be moved from ICU. Congress has promised to review and update the Dodd-Frank debacle this year. However, since it is an election year, they may elect to do nothing as usual and let the patient recover on its own.

Either way, current buyers will be well positioned when real estate returns to good health.