Foreclosure Filings Fanaticism

By Michael Douville - Real Estate Market Analyst:

Foreclosure filings were reported last week to be almost 304,000 for the month of August. The excesses of housing mania are working through the system, and in very public fashion across national headlines as well.

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This devastation comes as absolutely no surprise to any rational American. Housing prices in the Inland Empire of California, the suburbs surrounding Las Vegas, Nevada, the Maricopa and Pinal Counties of Arizona, and Miami, Florida, all experienced unprecedented price spirals of 3-4% a month during the record years of 2005 and 2006. Homes appreciated 30-50% from 2005 through 2006 alone.

The lure of quick riches resulted in a stampede to own property. During these years many speculators were purchasing 5, 10 and 15 homes from builders as owner-occupied dwellings with no intention of ever occupying these homes. Many, many, speculators employed acquisition strategies based on "no money or very little down"; if the investment property crashed, they simply walked away. The use of "no doc" and "no verification" loans, which placed the underwriting of mortgages on the honor system, was a recipe for disaster. These two facts alone should be enough to understand why there are record foreclosure filings today. Perspective is needed...

We expect there will be over 1.5 million completed foreclosures in the US before the market normalizes. However, foreclosures, divorces, bankruptcies, estate sales, and job losses have always been evident in the real estate market, and they contribute to market anomalies that produce discounted purchases. These problems will always be with us, just not in this magnitude.

The additional inventory sourced from foreclosures needs to be absorbed. Here in Maricopa County where I am headquartered, the total homes listed for sale peaked on October 26, 2007 at 57,845 units (in the Phoenix Metropolitan Statistical Area) as reported through the Arizona Regional MLS. Every week since, the inventory total has declined, and as of September 8, 2008, the total, although still high, is down to 52,050 homes for sale. There may be many reasons for the decline in homes listed for sale, but the downward trend is REAL nonetheless. Normal inventory, where supply and demand would find balance, is considered to be around 35,000 units for sale.

Over the life of this housing down turn, most estimates place the number of foreclosures in the neighborhood of 1.5 million. It's a huge number for sure, and tragic if the foreclosures affect you personally. However, the last US Census Housing Survey of 2005 counted a total of 124,377,000 homes in the US. If the total indeed reaches 1.5 million homes foreclosed upon, then these represent about 1.2% of the total. Conversely, 98.8% of the total will not be affected. The statistics report Nevada as containing some of the worst impacted areas, with 1 in every 91 home owners receiving a foreclosure filing. California is close behind with 1 in 130, and Arizona is third with 1 in every 182 households stricken.

The statistics could be reported differently than newspapers' sales efforts prescribe: 97%-98.5% of home owners in the problem States of Nevada, California, and Arizona are paying their loans as contracted. The news is not as sensational when it is reported that the vast majority of the loans extended are NOT in foreclosure. Also, what is lost in the statistics is the fact that many homes redeem these foreclosure filings and cure the problem before possession ever changes hands. Also, the problem can be pervasive, with multiple filings on the same property impacting the statistics. What the media does not report is the fact that although the problem is huge, it still represents a relatively small portion of the whole market.

"Let's remember that these events have a beginning and an end, and their usual duration is about 36 months."

Lenders are having trouble, that's a fact. Fannie (NYSE: FNM) and Freddie (NYSE: FRE) are losing billions. However, 98.5% of their $5.5 trillion portfolio is paying back as agreed upon. If the average mortgage rate at these lenders is 6%, the return is over $300 billion dollars a year, every year. This year, and probably in '09 too, losses will exceed earnings though, and thus the bailout. As a long-term investor, the US Treasury will eventually be paid back.

History repeats itself; in the late 1980's it was the S&L Crisis; in 2000 it was the "Tech Bubble;" now it is the "Sub-Prime" problem creating the "Housing Crisis." Let's remember that these events have a beginning and an end, and their usual duration is about 36 months. Regardless of the headlines, regardless of the fear, we are halfway through the unwinding. Subtly and quietly, the healing process is underway.

Please see our disclosure at the Wall Street Greek website, and Mr. Douville's upon his bio page.