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Wednesday, October 14, 2009

Foreclosure Overhang

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Foreclosure Overhang

real estate marketForeclosures will be affecting the housing industry through the end of 2010. The rate at which the mortgages in America become foreclosures is at a record; reported to be approximately 4.35% as of the 2nd quarter of 2009. This rate has increased from 3.85%, reported in the 1st Quarter of 2009. The historical foreclosure rate just 10 years ago hovered around 1% for all mortgages. With the advent of sub-prime loans, option-arms, and the worst recession since the Great Depression, the rate was destined to go higher.

The question most asked now is: how many foreclosures will need to be absorbed before recovery?

Many factors affect the reason a property goes into foreclosure. However, the two main ingredients have been the steady and relentless decline in home prices and high unemployment. In recent days, almost all regions of the US are reporting that home prices have turned to the upside. Due to the nature of these indexes, the data is always slightly behind "real-time" data, and are telling us what took place a few months ago.

The Real Estate Market is getting better; inventory is being cleared and prices continue to rise. Home prices should have bottomed and a slow and steady rise should be underway. Many economists and analysts, myself included, believe the recession has ended; and as the economy improves, employment will improve. A case can be made for a surprising recovery based on the current improving conditions, with trillions of dollars poised to give the economy a push. These are mitigating factors that in my opinion should bring down the foreclosure rate, which has probably peaked. If the rate would hold steady, how many foreclosures are left?

The US Bureau of Statistics claims 48,394,000 homes had mortgages in 2005. New construction added 1,051,000 homes in 2006, 776,000 new homes in 2007, and 485,000 in 2008; most would have been financed. Mortgage rates have been good, and would have been an incentive to add a mortgage to an unencumbered property; but most free and clear properties seem to stay free and clear. Another additional 2 million would seem reasonable, if not perhaps overly generous. No one has exact data as it is always changing, but approximately 52,700,000 homes in the US have mortgages. Simple math would state there is a potential of 2,292,000 foreclosures in the next year. This is 50% more than the 1.5 million foreclosures estimated prior to the triggering event of the Lehman Brothers Bankruptcy, which seems to have accelerated the decline. Many believe this total will not be reached.

Four states are driving the delinquency and foreclosures!

Four States are driving the delinquency and foreclosures. Florida, Nevada, Arizona, and California account for 46% of ALL foreclosures. The housing markets in these troubled MSAs are improving. Furthermore, the US Government is developing a policy to prevent foreclosures and reduce lender losses through loan mitigation. Another factor to consider is the increasing use of "Short Sales," whereby a seller can remain in their home while it is being sold, rather than bearing the painful and EXPENSIVE process of foreclosure. This procedure to sell and accept a lower mortgage payoff is being streamlined and becoming much more effective. Once again, the use of loan mitigation and "Short Sales" will save enormous amounts of capital and vastly reduce the collateral damage of vacant foreclosed homes scattered throughout neighborhoods, and thus allow for a return to historic prices.

In conclusion, as the economy rebounds, prices of assets, particularly homes, will start to rise. Employment is a lagging factor and will not mitigate until well into 2010. As trillions of dollars pour into an economy that has already begun a new business cycle, surprises to the upside are very possible. As the economic stress on individuals abates, the foreclosure rate and the delinquency rate should drop significantly. By the end of 2010, the Housing Crisis will be winding down and the foreclosure rate should return closer to its historic rate of approximately 1%. Just a 1% decrease in the foreclosure rate will reduce the total homes foreclosed by 500,000. As new construction has been severely constrained, the additional foreclosures will not increase the supply of properties; the continuing absorption of excess housing which has been underway for the past 12 months will not be impeded. As the US Demographics imply, through population growth, there still exists a scenario of a future housing shortage. Beyond 2010, there is a potential for rising inflation, and housing would hugely benefit.

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