U.S. Foreclosures Surge

The number of U.S. homes in foreclosure jumped 9% from June to July, having climbed almost 93% since the same time last year. Data released Tuesday by RealtyTrac showed that Americans were filing one foreclosure for every 693 households last month. A total of 43 states had an increase in foreclosures since July 2006, but nearly half of them came from just California, Florida, Michigan, Ohio, and Georgia. Nevada had the highest foreclosure rate, filing one per every 199 household. Detroit, filing a foreclosure for every 99 homes, topped the list of metropolitan areas. Rick Sharga, RealtyTrac's executive VP of marketing, said his firm estimates about 2 million foreclosures are going to be filed this year as variable-rate mortgages reset higher, and added, "if they default like the subprimes have been defaulting this year, we won't be out of the woods for another nine to 12 months."

Sources: Press release, Bloomberg
Commentary: Let the Markets Crash • Treasury Bill Yields Collapse • Flight To Safety Has Barely Started
Stocks/ETFs to watch: XHB, ITB, IYG, XLF

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Comments

[Efrain Rojas]

If we get out of this mess in 9-12 months it will be a miracle. As more subprime properties get dumped back on the market it will diminish the value of all properties. Even the most credit worthy borrowers will be under water on their homes if they have purchased them within the last 3 or 4 years. In California, the difference between the outstanding balance on the mortgage and the current market value of a home could be a difference of several hundred thousand dollars. It would actually be more beneficial for many people to just walk away from their mortgages than continue to be eaten alive for the next 30 years, We could be in for a replay of the Japanese real estate bubble hangover.

[Malkiel]

Efrainrojas highlights a key point here that I think will decide how far the current crisis drives home prices back to the current median. We're all familiar with the behavior of homeowners who stubbornly stay in a house longer than they want to if they are upside down on the mortgage; I watched this behavior during the real estate bust of the '90's when people tenaciously held on to their houses for years rather than take even a modest loss. But if the paper loss is of a frightening magnitude, perhaps several times the homeowner's annual income, will that encourage the homeowners to instead quickly extract themselves by default? The mass behavior and psychology behind it will be interesting to watch unfold...

[NO DooDahs]

The national foreclosure rate in July was one filing for every 693 households, or about one seventh of a percent (0.1443% or 0.001443) of all households. Oooh, vayweee skayweee!

At that rate, by the year 2065 we'll ALL be in foreclosure! ROFLMAO!

[brynaw]

NO DooDahs,

Yes, the foreclosure rate --though up from last year-- is still relatively low by historical standards.

Problem #1 is, the prevailing trend going forward is up --way up, and we are only 1 year or so into the the correction phase of this RE cycle. RE corrections typically last several years or more (Japan's land bubble took a full 15 years to deflate). So... we're in the first or second inning at most, this game is far from over, and the trend is not your friend.

Problem #2 is, foreclosures aren't evenly spread out across the country. They (and the toxic loans that spawned them) are heavily concentrated in a few highly speculative markets, such as CA, NV, AZ & FL. Just because the average depth of a lake is only 3 feet, doesn't mean there aren't parts where it's deep enough to drown in. If you happen to be one of those foreclosed families in a formerly hot market, you won't feel so "lucky" about that "national" average.

But, hey, if you feel so bullish on residential RE right now, go lever up.

[NO DooDahs]

RE is local, agreed. For most of the U.S. this is a non-issue, and those who specialize in real estate investing for the leverage, tax benefit, cash flow, and long-term appreciation (i.e. the "slumlord approach") are absolutely loving life right now. You may not realize it, but seeds are being sown for millions to be made by today's savvy foreclosure buyers!

I have no sympathy for anyone stupid enough to buy a home they couldn't afford, or who got stuck holding a bag trying to turn inventory in a (formerly) hot market. #$@#$^% them. Somebody's gotta buy at the top.

That being said, the fearmongering about this move in foreclosures is out of hand.

(1) A few members of a small speculative element is getting spanked, but many don't realize that many if not most members of that speculative element have already made their money on the deals.

(2) Another segment getting spanked is the marginal buyer, who should have been a tenant, but got greedy.

These are of very little impact in the grand scheme of things. The fear has actually wound up producing a buying opportunity in equities.

[brynaw]

No DooDahs,

I too have no sympathy for greedy speculators and the willfully ignorant, who ignored all warning signs and common sense. The only thing is, I would caution against laying 100% of the blame on homedebtors alone. There were many dodgy lenders & brokers out there outright lying and manipulating people into buying homes with NINJAs (passing off a neg-am special as a conventional "fixed-rate" loan, etc.). Not everyone who is going to lose their home is a speculator, and the "well meaning but clueless" segment may be larger than you think (hint: up to 80% of houses in CA were purchased with IOs or neg-ams in 2006). The mortgage industry is ripe for some serious regulation (Sarbox for the REIC, anyone?).

As far as the impact of the housing bubble on the grand scheme of things, I certainly hope you're right about that. However, I'm not certain that the housing/easy-credit implosion won't have a significant impact on consumer spending (70% of the economy), as MEW (refi's, cash-outs, "wealth effect", etc.) has largely been driving GPD growth since the Dot.com meltdown. Fyi: Calculated Risk has some excellent graphs & data demonstrating this.

[NO DooDahs]

*Everybody* who stepped up and bought more home than they could afford is a speculator. If they were a first-time buyer "suckered" in, they should've stayed a renter. You can't cheat an honest man!

*Everybody* who took a HELOC that they couldn't afford to pay back is a speculator. Barnum had a word for those who wanted something for nothing, I believe it was "sucker."

Consumer spending may be some quantifiable percentage of G-D-P, but that is not the same thing as "the economy."

Let's play your flawed "econ-numbers&quo... game for a minute, just for the sake of argument. You appear to be forgetting that economics is a marginal analysis, and not a light switch. Some small portion of the consumers curtail spending slightly because of foreclosure issues, because they still need to eat, drink, wear clothes, have transport, send their rugrats to school, etc. So a small portion cuts a small bit out of another fraction of G-D-P, and everyone wants to yell "recession!"

And remember, for those in not leveraged and in fine financial shape, even a downturn presents an opportunity.

[brynaw]

<i>*Everybody* who stepped up and bought more home than they could afford is a speculator. If they were a first-time buyer "suckered" in, they should've stayed a renter. You can't cheat an honest man!</i>

Can't agree completely with this --you paint with too broad a brush here. I know many friends and colleagues that saw prices shooting up 20-30%/year (SCAL) and basically panicked about being "priced out forever" --I was *almost* one of them (but for the grace of God and Ben Jones go I...). And it wasn't like the REIC wasn't actively promoting this fallacy either. Anyone out there recall David Lereah's book depicting a house literally floating away?. FUD has always been a powerful and effective selling tool and will continue to be.

Again, ignorance does not = malevolence. Not everyone out there is an economics expert, and for that matter, quite a few "experts" got it completely wrong too. Nowadays, everyone's on the revisionist history "it was a speculative bubble --Duh, I *always* knew that!" bandwagon. But when you look back at all the bubble-denying articles from even a year ago, it's obvious that tons of people --even economists-- missed the call.

<i>*Everybody* who took a HELOC that they couldn't afford to pay back is a speculator.</i>

Again, I'm sure this is true for a large % of those who did, but not 100%. Again, the industry was really pushing the idea that rolling your revolving debt into a low-low rate HELOC was the *smart* thing to do. Not saying that makes the homedebtors completely blameless for their actions, or automatically deserving of a bailout --far from it. Just saying there's plenty of blame to go around:

Reckless borrowers &amp; outright speculators counting on endless 20%/yr appreciation.

Reckless lenders selling risks downstream to MBS/CDO sucke--, er... "investors".

Asleep-at-the-switch "regulators" that not only didn't regulate, but actively spiked the punchbowl at the exact wrong moment (Fed's 1%).

Cartel-esque NAR, always attempting to hide information from buyers, pressuring appraisers to "hit the number", and actively manipulating market statistics to give the illusion of perpetually rising prices (bogus DOM, cooked "medians", "affordability&qu... metrics, etc.).