In Les Christie’s article [Foreclosures spiked in August [CNN/Money]](http://money.cnn.com/2006/09/13/real_estate/foreclosures_spiking/index.htm?postversion=2006091305) foreclosures are beginning to be a worry. According to Realty Trac, 115,292 properties went into foreclosure in the month of August, up 53% from last year. Florida saw the highest year over year change in the nation at 62%.
The takeaway here is that foreclosures are way up on a percentage basis and the market is looking at a large number of mortgage rate resets this year. Actually mortgage resets will probably be a way of life for the real estate economy and not a new phenomenon anymore if mortgage rates trend up further or remain where there are since they are still above levels of a few years ago.
While this sounds like a lot of foreclosures and it seems scary, the numbers still need some perspective. Realtytrac provides a great service but since it is only a few years old they don’t seem to have historical data beyond a few years ago. In other words, I want to know how these numbers compare to the last couple of recessions, rather than to last month or last year.
So do the August foreclosure numbers seem large? Not really.
The National Association of Realtors’s existing home sales and new home sale stats total about 7 million homes. With 11,292 forclosures nationally for August or 135,504 annually, thats about 1.9% of all homes sold this year would be in foreclosure.
Since the 1.9% figure I estimated is only based on 1 year’s worth of sales, and assumes that no sales from any prior years have mortgages (which is silly), the demoninator in the equation should be significantly larger, so the foreclosure rate should be a far less than 1%. That might be another interesting way for RealtyTrac to present their results. They could compare their numbers to the national housing stock that has mortgages.
Most lenders I talk with are experiencing foreclosure rates of less that 1/2% of the loans outstanding yet the number is rising slowly. In the bleak foreclosure years of 1990-1991, the national rates were averaging 3-5% if memory serves me correctly.
My assumptions are consistent with the findings of [Property Shark](http://www.propertyshark.com). For example, [in Miami, the posterchild for housing bubble markets, the foreclosure rate [BW]](http://www.businessweek.com/the_thread/hotproperty/archives/2006/09/a_mixed_message.html?campaign_id=rss_blog_hotproperty) is four times that of New York yet the rate is still only .066% of the housing stock. If the foreclosure rate doubles over the next 6 months, its still only 0.13%. Thats not 1.3% nor is is 13%. Its 0.13% That seems pretty small.
I am not suggesting that foreclosures are not a growing problem, but please, lets keep things in perspective.
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I have come to belive all news is presented in the most negative light possible, especially news about the economy. I have also come to belive that most people who post comments to blogs or news stories want the sky to be falling (I don’t know why – but it appears to be the case). I expext that you will be bashed for trying to “keep it in perspective”.
You definitely pinpointed the limited usefulness of the RealtyTrac report in that the comparison should be to the national housing stock that has mortgages. That’s exactly what the Mortgage Bankers Association did in a survey out today, which puts the foreclosure rate for the second quarter at .99 percent — up 1 basis point from last quarter, but down 1 basis point from the same quarter last year.
If you have a lot more people taking out loans, as they did in the boom years, the (raw) number of foreclosures is naturally going to go up, even if people are just continuing to default at the same old rate. The real question is what’s the number of homes in foreclosure as a percentage of all loans.
The MBA survey did show a pretty good bump in the number of delinquencies on subprime and FHA loans, however (and even prime ARMs), but chief economist Doug Duncan said he doesn’t expect “order of magnitude” increase in delinquencies next year.
Companies like RealtyTrac are in the business of selling info about foreclosed properties to investors, and maybe the raw numbers mean something to that crowd — like more opportunities to cash in on others’ misfortunes. Which doesn’t mean their numbers aren’t true. They just, as you say, lack perspective.
Here in Southern California, foreclosures (Notice of Defaults, actually) are sky-rocketing.
In the first year of this housing market down cycle, the monthly number of NODs is already nearing the worst monthly levels of the 1990’s housing market down cycle.
Yes, this is perspective. This is going to get very ugly before the sun starts to rise again.
But you DON’T have perspective until you can answer the question, “What is the impact of NODs (or foreclosures) on the market?”
Are they affecting inventory? By how much? What other pressures are there on inventory?
The RealtyTrac survey reports 12,506 California homes entered into foreclosure in August — up 25 percent from July and 160 percent from the year before. That sounds pretty serious, right? Well, maybe not if foreclosures were at historic lows. Maybe not if some 500,000 homes change hands in the state every year.
Which is not to say that the market’s not soft, especially in particular areas. Inventory in the state is up — CAR puts it at 7.5 months in July, versus 2.9 months same time last year.
But what is causing inventory to rise? Is it because more homes are going into foreclosure, or because houses are just sitting on the market because they are overpriced?
The bottom line is that the raw number of foreclosures, by itself, doesn’t tell you that much about supply and demand.
This foreclosure rise is different from historical foreclosure figures because of 2 new factors: Interest only loans, and unprecedented investor speculation. Anybody with a little bit of money thought they would become a real estate investor by buying up condos. Any many used a new tool: the interest-only loan. These factors have never been seen before and hopefully won’t again.
You left out a digit in your analysis: 115,292
properties went into foreclosure in the month of August, not 11,292. That is 1383504 annually, not 135504.
Jeeze – you are right. Thanks for telling me. Nevermind.
So this that means that the equivalent of 20% of all homes sold each year go into foreclosure?
Jon:
Yes and no. Keep in mind that our (RealtyTrac) report includes new monthly filings in all 3 phases of the foreclosure process. Last year, there were over 850,000 such filings. This year, we’re on pace to see more than 1 million. But the majority of those properties (about 60%) will exit the process before the foreclosure auction, so the number of homes that are actually “foreclosed” should be significantly lower.
I see. However, the stats you are using and the way it is presented give most readers the impression that such a large number of houses are actually foreclosed. It would seem to me that the language could be tweaked. Fore example “pre-foreclosure” is a term that lenders in our market call such a process. Otherwise, its inflammatory and while it gets great press, its not giving the correct impression.
The important metric is how many homes out of the total inventory are currently in foreclosure. Why? Because homes in any stage of the process are under pressure to be sold quickly. In a market with 7+months of inventory, that means even Notice of Default homes (not yet foreclosed) will have to be discounted to sell before the Notice of Foreclosure goes out.
According to Realty Trac, 7,487 San Diego County homes listed for sale have entered the foreclosure process.
There are currently about 21,000 homes for sale in the county.
So roughly a third of the homes need to sell within the next 60-90 days.
Seems to me the amount of pressure to sell is the best perspective on where prices will head. Problem is, if prices head down, it creates more foreclosure inventory, which creates more price pressure, etc. That’s why real estate credit cycles are hard to stop once they get started.
By the way, when I said the homes have, “enetered the foreclosure process” in my previous post, I meant that they have received a notice of default or are at auction/REO.
You can check this data yourselves (for any zip/county) by conducting a realtytrac search, and then comparing the results either by looking at the inventory for sale in ziprealty, or by going to the inventory tracking site http://bubbletracking.blogspot.com