From coast to coast, headlines were recently announcing lower foreclosure rates, even in some of the states that have been ravaged by the bursting of the housing bubble. Some would like to see this as an indication that recovery is just around the corner in the real estate market. However, many experts disagree with this point of view, pointing to a variety of factors that they expect will further depress home values and contribute to rates of foreclosures rising again.
On June 11, 2009, a Herald Tribune headline announced “Regional foreclosures buck a state trend” and opened its article with a sentence about the decrease “adding to the hope that the worst of Southwest Florida's housing crash is over.” Similar headlines were seen throughout the nation, citing data from RealtyTrac's May 2009 U.S. Foreclosure Market Report, which indicated the US foreclosure rate in May was 6 percent lower than it was in the previous month.
However, not all of the news reports gave as much play to the other data in the RealtyTrac report and some, like a Fox43.com story from June 11, 2009, failed to mention the other information in the report at all, something that could easily lead one to an inaccurate conclusion about what the May numbers could mean in the broader picture. While certainly the foreclosure rate was lower when compared to the prior month, the rest of the story is that, when compared to the rate of May 2008, RealtyTrac reported “an increase of nearly 18 percent.”
The states that suffered the brunt of the bubble burst continue to lead the nation in foreclosure rates, according to the RealtyTrac report. In fact, just over three quarters of the foreclosure activity in the United States is taking place in the ten states most affected by the bursting of the housing bubble. In the top three foreclosure states – Nevada, California, and Florida – there are foreclosure pockets with rates far above the national average. In Las Vegas, for example, “one in every 54 housing units — more than seven times the national average” received foreclosure filings.
The slight tick downward in foreclosures seen from April to May 2009 is most likely a temporary thing, according to many industry experts who, taking into account the other factors at play, expect that the foreclosure rate will soon be moving upwards again. These factors include a variety of economic problems making it more difficult for homeowners to stop foreclosure, such as rising unemployment and heavy consumer debt, as well as those more directly relating to mortgages and housing market issues.
Option ARMs (adjustable rate mortgages) are one of those issues, one that is exacerbated by falling home values. On June 11, 2009, Bloomberg.com reported that “about 1 million option ARMs are estimated to reset higher in the next four years,” citing information from First American CoreLogic of Santa Ana, California, a real estate data firm. According to the article, “about three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011. One of the downfalls of those type of mortgages is that the resets can result in a shockingly high monthly payment, particularly painful for those who may have recently become under-employed or unemployed. This is expected to be a major contributing factor to higher foreclosure rates.
Many people taking this type of mortgage did so believing that they'd be able to refinance at a better rate before they were adversely affected by a reset. However, the falling of home values has put many in the position of owing more on their homes than they are currently valued at. According to a June 11, 2009, CNNMoney.com article, one in five homeowners are in this position currently. Home equity has fallen to a record low, as well. A June 13, 2009, article published on AllGov.com reported that “homeowners had only 41.4% equity in their homes in the first quarter, the lowest on record dating to 1945.” Falling home values and low home equity have made refinancing opportunities difficult to find for many, forcing some into foreclosure.
Home values continue to fall, and are expected to do so well into the near future. According to a June 6, 2009, article in the New York Times “even the federal government has projected price decreases through 2010.” While there are many factors contributing to this, one of the main issues is the flood of short sales and foreclosed properties hitting the market and pushing home prices -- and thus values -- downwards. Furthermore, as pointed out in a May 22, 2009, article published in the Christian Science Monitor, “only 30 percent of foreclosed homes are currently on the market.” If banks released all of their foreclosed homes to the market, prices would be further depressed and their losses even greater. Eventually, however, this backlog of homes will have to be worked through.
While the slight fall in foreclosures in May 2009, as compared to the prior month, is a pleasant surprise, considering that decrease to be a harbinger of recovery is far too optimistic. Current economic circumstances and a variety of factors at play in the housing market indicate that there will be another surge in foreclosures. Most industry and economic experts expect that true recovery is still a while away, with many believing that we have not even reached bottom yet.
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