Eve of Destruction: Real Estate

In the 1930's banks loaned money to home buyers, but the loans were all what we call "balloon."  That is, only interest was paid and the balance was all due in, say, five years. This was very attractive to the buyer, who it turns out was really a renter.

The banks had an overt, clever plan to take advantage of people so the banks could take the real estate. Yes, as I say to clients:  the bank is NOT your friend.

When financial trouble hit, this best laid plan backfired. Since the "owners" had no capital in the house and there was no concern about TRW, they dropped off the keys on the way to California.

It has been said that we cannot have another great depression, like the last one, because of the current amortizing mortgage system - people will not just walk away because they have serious equity in their homes, hence a reason to stay and fight.

This is a reasonable observation, but read the article below, then consider that housing demand will continue down and who knows what will happen to the dollar.  (Consider deflation:  your house could decreases in value 50% when your mortgage does not and your taxes go up, for a while.)

A report covered in yesterday's news noted in the last quarter of 2009 the housing market was down the greatest amount in its record keeping history.  (Usually followed by: "... but the market was up [HAPPY FACE] on the Fed's advice that it would not raise rates soon...." I am thinking journalistic schools are competing with educational colleges for challenged students.)

By Rex Nutting, 

WASHINGTON (MarketWatch) -- More than 11.3 million homeowners -- nearly one-fourth of all Americans with a mortgage -- owe more on their loan than their home is now worth, according to a report released Tuesday by FirstAmerican CoreLogic.

More than 10% of people with mortgages owe 25% more than their home is worth.

The number of underwater mortgages increased by about 620,000 from the third quarter, the firm said. Another 2.3 million mortgages had less than 5% equity in their home, which could be wiped out if home prices fall further.

In the fourth quarter, national home prices fell 1.1% compared with the third quarter, Standard & Poor's reported in a separate report on Tuesday. See full story on Case-Shiller home price index.

Once the mortgage is underwater, owners cannot easily sell their home or refinance their loan.

Underwater mortgages are concentrated in few states: California, Florida, Nevada, Arizona, Michigan and Georgia. In Nevada, 70% of mortgages were underwater. In California, more than a third of mortgages were underwater.

"The rise in negative equity is closely tied to increases in pre-foreclosure activity," CoreLogic said. Once a homeowner owes 25% more than the house is worth, foreclosure rates rise sharply.

Negative equity exceeded 25% in six states and topped 20% in six others.

Rex Nutting is Washington bureau chief of MarketWatch.

A little more from Realty Track:

Foreclosure Activity Hits Record High in Third Quarter

U.S. Foreclosure Activity Sets New Quarterly Record, Up 23 Percent From Q3 2008

IRVINE, Calif. – Oct. 15, 2009 — RealtyTrac® (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its U.S. Foreclosure Market Report™ for Q3 2009, which shows that foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 937,840 properties in the third quarter, a 5 percent increase from the previous quarter and an increase of nearly 23 percent from Q3 2008. One in every 136 U.S. housing units received a foreclosure filing during the quarter — the highest quarterly foreclosure rate since RealtyTrac began issuing its report in the first quarter of 2005.

Foreclosure filings were reported on 343,638 properties in September, a 4 percent decrease from the previous month but a 29 percent increase from September 2008. Despite the monthly decrease, September’s total was still the third highest monthly total since the RealtyTrac report began in January 2005, behind only July and August of this year.

“Bank repossessions, or REOs, jumped 21 percent from the second quarter to the third quarter, corresponding to jumps in defaults and scheduled auctions in the previous two quarters,” said James J. Saccacio, chief executive officer of RealtyTrac. “REO activity increased from the previous quarter in all but two states and the District of Columbia, indicating that lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts and high volumes of distressed properties.”

 I would think even a bottom fishing buyer will want to wait.  The bubble is shrinking fast.  There will be few buyers, uncertainty, higher taxes, less income, and no lending.  


Now tell me, over and over again....