Article Courtesy of the Herald-Tribune
By Josh Salmon
Published November 1, 2013

Sean Galaris doesn't consider himself a pessimist.
  
But the president of LM Funding, which recovers delinquent dues for struggling condominium and homeowner associations, sees some troubling trends in the housing market.
 
When housing is at full health, his Tampa-based business suffers, because generally fewer homeowner associations have to grapple with foreclosures.
 
But that's not the case for LM Funding these days: Calls for help are pouring in.

collect bad debt owed to associations and works with third-party attorneys to go after delinquent homeowners and banks that have foreclosed.

The firm, which collects its profits through interest and late fees, has recovered association dues on more 11,000 units in Florida, including in the Sarasota area.

While many industry participants believe residential real estate's resurgence will continue unabated for some time, Galaris has noticed disturbing trends from both the lenders and homeowners he works with. He believes a slew of influences, ranging from the dominance of investors to the stockpiling of shadow foreclosures, could each push the market back into a downturn early in 2015.

Galaris also is concerned about rising interest rates, and what effect that might have on future buying capabilities.

"What I get to see is this unique prospective of what the banks are dealing with, and I see it from the homeowner prospective," Galaris said. "And by and large, banks are still taking in more delinquent units each month than they close out."

To Galaris, those defaults are the primary danger.

It's certainly good for his business, but another potential wave of shadow foreclosures -- an immeasurable inventory that's been speculated about for years -- could prompt home values to slide. It also would add more discounted units to the distressed housing stock, easing the tension between a tight supply of homes and fierce demand from buyers that's fueled this year's rebound in prices.

"We see it in the courthouse," Galaris said. "Judges just can't keep up with the backlogs, and a lot of these cases are simply being tossed without any real prosecution. They will come back at a later time. We know it because we see it in our own files.

"If these banks were to drop their inventory on the market, it could cause another oversupply and prices would crash."

Another threat Galaris sees lurking in the housing market is manipulation from large hedge fund investors. These institutional investors -- such as Wall Street's giant Blackstone Group -- have gobbled up homes across Florida as part of a real estate shopping spree that began in the hardest-hit areas more than a year ago.

But now, the hedge funds have begun tapering their pace of home buying here, and if they stop supporting the market altogether or find softer rental demand than they anticipated, Galaris believes they alone could prompt another crash.

A new twist to some investor strategies is that the groups are now starting to purchase large numbers of units in condominium communities, with the purpose of controlling the boards, Galaris said.

Once these investors gain control, they are moving, in some cases, to significantly raise monthly assessments on residents. Galaris believes this is an orchestrated attempt to force struggling owners, whose units are already underwater, to abandon their homes because of additional financial stress. Then the investors can convert the condo complexes back into rental apartments, he said.

"These investors think they have an angle on the market, and we're seeing others try to follow them, but all it is doing is creating this false secondary market," he said.

"Is it sustainable? I'm not convinced. Once these institutional investors let their inventory go, it will create another crash in areas like Florida, Nevada and Arizona."

Galaris predicts home prices will creep up modestly again in 2014, before interest rate increases brake housing demand.

Investors, meanwhile, will not continue buying forever, and stringent financing requirements, rising interest rates and higher home prices will all make it more difficult for average families to purchase a house in the future, he said.

"It's not time to panic, and I still feel certain properties will be a good investment going forward," Galaris said.

"I think we will continue down the road we're on right now, but there will be something that changes the industry, and the consistent vote in my office is interest rates.

"When you look at the market from 50,000 feet up, as we do, it is just not as good as it seems."