How Do You Predict The Next Real Estate Crash? Mine is...

[Wendell De Guzman]

Mine is foreclosure filings and REO sales.

Let me explain.

In 2007, I was working on 20 shortsales and a business partner of mine was working on about 40 shortsale cases. None of the shortsales were accepted. This was unusual. In 2005-06, we made a lot of money on shortsales and we were able to get banks to approve a big percentage of them.

We worked on some cases for 1 year. When we asked the banks why they are so slow in approving these shortsales, they said they are working on too many foreclosures. At that time, home prices were still rising.

IN 2008, the real estate market crashed.

A foreclosure filing is defined as someone who is behind 3 months or more on their mortgage and they have received a Lis Pendens or Summons to Foreclosure. Of course, there are instances where someone in foreclosure can catch up or do a loan modification and now he is no longer in foreclosure. However, more often than not, someone who is behind on their mortgage is unlikely to get caught up. Eventually, the house gets foreclosed on and becomes banked owned or REO.

My hypothesis is that if the rate of foreclosure filings is higher than REO sales, then the number of REOs will rise to a critical level that it will push prices downwards.

If you're selling your house and you have 3 or more neighbors which are REOs too, there's a good chance you will be forced to sell at a discount. It becomes a vicious cycle: the bank sells their REOs at a discount, pushing the market downwards forcing the banks to sell even lower.

Foreclosure filings is NOT the only indicator. If the banks are able to sell their REOs quickly at a good price (just like what's happening now) and they are ahead of new foreclosure filings, the critical mass of foreclosures won't be reached and the real estate market will continue to rise or remains stable.

So, I track both FORECLOSURE FILINGS and REO Sales.

What about you? What metrics do you track to predict real estate price movements?