Posted by rebeccax on May 09, 2006 at 12:10:05:
Gene,
loved your post. thanks.
Rebecca
“Foreclosures up 72% over last year” - Posted by rebeccax
Posted by rebeccax on May 08, 2006 at 07:08:32:
I read this article on aol.com news this morning. No big surprise to me that the writer did not include any information as to WHY foreclosures are trending up. Being a novice investor, I have my opinions as to why forclosures are trending up, but I would like to hear the opinions of the experts on this board. What macroeconomic forces are at work here?
Thanks to all!
Rebecca
http://www.realtytrac.com/pub/articles/aol/foreclosure_trends_2006Q1.asp?m=1
For the newbies 101 (long) - Posted by Killer Joe
Posted by Killer Joe on May 08, 2006 at 14:19:10:
rebeccax,
Here’s one way to look at it…I’ll use simple numbers to keep it easy to understand.
Let’s say we are focusing on a neighborhood that is comprised of 1000 houses. Let’s also say that at any given point in time there are 50 houses up for sale out of the 1000. For the sake of our discussion we will use 100 days as the time frame needed to sell all 50 house. In essence it takes 100 days to produce 50 buyers.
Now out of those 50 houses, let’s say 40 are being sold for reasons other than distress. That leaves us with 10 houses that need to be sold to alleviate financial problems for their owners. (I’m being simplistic here, so don’t get lost in the numbers.) Getting back to our 50 buyers in 100 days, we can see that historically there is 1 new buyer coming into the neighborhood every other day, and that buyer has a choice of 50 houses to choose from.
Our example so far allows for a person in financial distress to act in a timely fashion (100 days) in order for them to sell their house and not go into foreclosure. We know this because we have a ?balance of inventory?. In other words, we have enough buyers to match the sellers. And since we have a balance, we have stability in pricing, ignoring such factors as speculation. (We?re keeping it simple here.) If the balance is maintained, a person in financial distress has a reasonable expectation of selling their house at or near market value IF they act in a timely fashion.
One surefire way to increase the foreclosure level is to disrupt that balance. Let?s look at this from a trending standpoint. If the number of properties for sale, for what ever reason, climbs at a faster rate than the available buyers, we now have additional competitive pressures exerted on the housing stock. For the sake of discussion, let?s add 10 more houses for sale to the mix. Now our 50 buyers have 60 houses to choose from, so if our time frame of one sale every other day remains stagnant (no additional buyers) we will have excess inventory, and our balance is disrupted. In effect, it now takes longer to sell a house, in our case it goes from 100 days to 120 days, given the amount of buyers showing up.
The natural consequence of this imbalance is a flattening of the appreciation curve leading to price reductions over time. What this does to those folks in financial distress is compound their problem. There is a reason we add ?time is of the essence? to our contracts. TIME has an incredible influence over how things work out. Time, in this case, works against the distressed seller by prolonging the period it will take to sell their house, and in many cases they need it sold NOW. So what can they do to offset the negative effects of time? They can lower the price of their house, or give better terms, but we know folks in distress rarely can afford to give better terms, so they reduce the price in most cases.
At some point in time, a certain number of distressed sellers can no longer afford to compete with the rest of the market and price their houses to move rapidly or lose it to foreclosure, which gets us back to your question. The reason foreclosures can increase in certain markets is due to competitive pressure. Any time you have more sellers than buyers, those sellers with the least amount of staying power get hurt the most. Distressed sellers who have crossed the threshold of not being able to lower their price without getting into negative equity face a larger chance of losing their house to foreclosure. They can?t sell the property for what they owe, and they can?t make up the difference in negative equity to cover the loan.
In a closed group such as a local market, or in our case our 1000 houses, a downward trend in pricing can develop. More sellers than buyers creates a situation ripe to start the downward trend?lower sales prices means lower comps?lower comps lead to setting blowout prices even lower?and on it goes until an equilibrium is reached. (This took the period from Q4 1989 until Q4 1996 in my market, just as a historical reference.)
Now add to that all the toxic loans that are slated to reset in the next year, and you have a recipe for lots of upside down properties, and a flood of distressed sellers. This, in turn, adds to the cycle and has the ability to push marginally distressed sellers, (those who need to relocate for job reasons, as an example) further into relative distress, increasing the chaos in the market.
I hope this helps in your understanding of why foreclosures are likely to skyrocket, and in fact have already passed the lift-off phase. It can get a lot more complicated than what I have described, as I only wanted to touch on the basics.
KJ
Reality vs. Realtytrac - Posted by JD
Posted by JD on May 08, 2006 at 10:10:41:
The Realtytrac numbers are almost meaningless. It is clear that the primary purpose of the Realtytrac report is to generate advertising and business for REALTYTRAC. A quick survey of the three largest counties is my state (CO) indicates that the Q1-2005/Q1-2006 forecosure rate increase is about 20%. Said three county survey would encompass more than a third of the State’s population and be representative of the entire State. Realtytrac claims there was a 96% increase in foreclosures in CO during that same time period. There is no basis in reality for the Realtytrac numbers, so I don’t see the point in presenting macroeconomic theroys to explain them.
Re: For the newbies 101 (long) - Posted by Ellyn
Posted by Ellyn on May 08, 2006 at 15:31:39:
KJ - Thanks for your insight and for taking the time to educate those of us who are new to REI. One question though - when you refer to the “toxic loans that are slated to reset in the next year”, are you referring to the ARM ‘teaser rates’ that when adjusted will be much higher, or to something else. Thanks.
Re: For the newbies 101 (long) - Posted by Ellyn
Posted by Ellyn on May 08, 2006 at 15:30:24:
KJ - Thanks for your insight and for taking the time to educate those of us who are new to REI. One question though - when you refer to the “toxic loans that are slated to reset in the next year”, are you referring to the ARM ‘teaser rates’ that when adjusted will be much higher, or to something else. Thanks.
Re: Reality vs. Realtytrac - Posted by Joe
Posted by Joe on May 08, 2006 at 22:49:06:
They could be playing all sorts of games as well, like counting each county equal. So while 1 county out in the boondocks might have lost the only factory in town and foreclosures went up 120% … there may have only been 5,000 people living in the town. Yet they could have counted this equal to a major metro county with 500,000 people with a 10% increase in foreclosures.
Re: For the newbies 101 (long) - Posted by KJ
Posted by KJ on May 08, 2006 at 20:49:54:
Ellyn,
Thanks for the kind words. Yes, I am referring to loans where the consumer will now be in jeapordy when thier rate resets.
Btw, how many of those folks who stretched it to the limit ever thought their big SUVs would be sucking gas @ close to $4.00 a gallon on top of everything else? I hope they got that raise they were banking on…
KJ
fun with statistics - Posted by Gene
Posted by Gene on May 09, 2006 at 10:05:34:
Reminds me of a saying…
Statistics are used as drunkard uses a lamp post, for support rather than illumination.
Gene
?Oh, people can come up with statistics to prove anything. 14% of people know that.? - Homer Simpson
Great insight. - Posted by Wayne-NC
Posted by Wayne-NC on May 08, 2006 at 22:04:29:
My thoughts on the subject agree with yours but were much longer than your original post, also much more than I’d care to type. Thanks for the synopsis. Add to the mix rising property insurance costs for obvious reasons, medical insurance and it’s associated costs along with rising interest rates. Inflation? What inflation? Buy gold, guns and silver. BTW, have you checked the appreciation rates on those three lately? When everything crashes, the guns will protect the potatoes that you bought with the gold and silver. Food and water have the only real value as it sustains life itself. Without that, REI is worthless. Just a wild thought for now but hopefully not a reality in our lifetimes. Sounds like something Cletus would write. Invest on.