An apocryphal story: there was once a law in Kansas that if two trains running on parallel tracks met at a railroad crossing, neither could move until the other was gone.
In light of the latest hiccup in the foreclosure crisis - the discovery that thousands of foreclosures may have been done in a slipshod manner (to put it kindly) — that’s an apt metaphor for the real estate industry right now. It’s not clear what has to happen to get real estate moving again. It could be stuck like a Kansas locomotive for quite a while.
Let’s start with Realtors. They list properties for sale. Clients call, get qualified. Realtors negotiate the contracts. But with anywhere from 40 to 60 percent of transactions involving some sort of foreclosure, the robo-signing crisis slows the process down. If banks actually start confirming that they own what they’ve foreclosed on, that’s going to take some time. Realtors who specialize in these homes won’t be getting as much inventory.
Let’s move onto title companies. They are a crucial component in the process, because without their confirming that the previous owner legitimately holds the title to the property, there can be no legitimate transfer of said title. Title companies have a vested interest in selling title insurance. And they don’t want to become party to their own version of the class action lawsuit that’s bound to hit the banks.
Lawyers aren’t normally part of the real estate cycle in this state, but they’re likely to show up too. Some owners or former owners are going to claim that their lender defrauded them. No one wants to buy a property that’s tied up in a lawsuit.
Of course, there are the lenders and the buyers. The lenders seem to be flummoxed into paralysis by this whole mess. They’ve instituted rules about lending that seem to eliminate a good portion of the potential buyers who, even though housing prices AND interest rates are down, can’t take advantage because their own income or net worth has been impacted.
The pace of transactions is stalling, and there’s no way of knowing how long the stall will last. The irony here is that real estate drives the economy. When people buy new houses, they buy new furniture. They hire exterminators. They hire landscapers. They hire painters. Without consumer demand, the economy isn’t coming back. If the economy isn’t coming back, companies aren’t going to hire more employees. And neither locomotive could get going again until the other was gone.
What’s the takeaway from all this? Real estate has changed from the way it was in the 20th century. If you’re lucky enough to be sitting on some cash (perhaps you own Apple stock), and are thinking of investing in real estate, move with more prudence and caution than you’ve ever exhibited. Know the income potential of the property in the new context of the wider market. Know your tax implications. Know your exit strategy. Don’t get stuck at the railroad crossing waiting for someone else to make a move.
