Foreclosures chilling many U.S. housing markets

The American dream has some cracks around the edges, and they are worsening. RealtyTrac, a California-based firm that tracks the state of the national housing market, says default notices to bank ownership, i.e., foreclosures, rose 45 percent in January from the same period a year earlier. There was one new foreclosure for every 1,117 U.S. homes.

Rockford and Winnebago County has at least 204 foreclosures, while Stephenson County has 43. In contrast, Boone County, where explosive growth is most noticeable, had about 20 foreclosures.

RealtyTrac said, although the number of foreclosures is low from a historical perspective, it has been rising steadily in the past year. With the rate of appreciation dropping and interest rates rising, a number of economists and industry observers expect the pace of foreclosures to speed up this year.

The highest foreclosure rates, according to MSN Real Estate, on a per capita basis are Georgia, Nevada and Colorado. In Georgia, the rate leaped 88 percent in January from the previous year. The publication also reported Georgia was No. 5 for the total number of foreclosures.

Nevada came in second with 1,795 properties going into foreclosure; one for every 483 households and 2.5 times the number reported a year before. Colorado was No. 3 with a 36 percent rise (3,747 properties) or one for every 488 households.

Realtors report the hardest-hit places appear to be houses in lower-income urban neighborhoods, primarily African-Americans and Hispanics. The states with the biggest total number of foreclosures are: Texas (14,669), Florida (10,334) and California (9,354).

In many of these cases, the higher numbers were a function of population and not any evidence of homebuyers being overextended. In California, for instance, the rate of default was still below the national average.

“There are definitely more foreclosures out there,” said Duane Duffy of Metro Brokers Duffy & Associates in Littleton, Colo. When he took a client out to look at homes in a part of Denver, “one out of every four homes we were looking at seemed to be a foreclosure,” he said.

John Tuccillo, of JTA Inc., a real estate company in Arlington, Va., commented: “You have a lot of people who stretched to get into a house.”

So what is causing this spreading collapse of the U.S. housing market? cites prices disconnected from fundamentals. Home values are inflated way beyond any logical relationship to rents or salaries. Rents in the San Francisco area are less than half what mortgage payments are. Salaries can’t cover mortgages, except in the immediate future by using adjustable interest-only loans.

Another factor is that interest rates are going back up. If they go from 5 percent to 7 percent, that’s a 40 percent increase in the amount of interest the buyer must pay. House prices would have to drop proportionately to compensate. In the San Francisco area, some 82 percent of recent loans are adjustable. That means a big hit every time interest rates rise. It will only get worse as more adjustable rate lenders turn up the monthly payments to cover the higher rates.

A significant factor is a torrent of risky “home equity loans.” An adjustable-rate loan of this type lacks any specific limits on interest payments. It could cause the monthly payment to double without much warning.

Other factors affecting this situation are large job losses. In San Francisco, some 300,000 jobs are gone, the worst percentage job loss in the past 60 years, coupled with salary declines. Salaries in the Bay Area reportedly have skidded back to 1997-98 levels, aggravated by population loss. San Francisco is losing population faster than any other city in the U.S. Much of that is due to outsourcing of professional jobs as employers of technical workers realize they can get the work done in India for 20 percent of what they pay American workers.

Besides these influences, NASDAQ is only 40 percent of the 5,000 it stood at the peak of the stock market bubble. In the stock market extreme use of leverage (using other people’s money to make money) is common. The method amplifies gain all right, but it amplifies losses as well.

There’s also a shortage of first-time buyers and a surplus of speculators. Nationally, 25 percent of the houses sold last year were bought on speculation. Today, you can buy a house with more than 100 percent financing. The extra amount is to cover closing costs and other expenses. No money down. This practice is predicated on the assumption that housing will soar ever higher, and appreciation will cover the interest costs.

Government lenders Fannie Mae and Freddie Mac are being made to tighten up their sloppy lending practices. They will not be able to keep buying low-quality loans from banks, and money available for houses is dropping.

Business Week wrote: “Today’s housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra low rates of a weak economy. Either the economy’s long-term prospects will get worse, or rates will rise. In either scenario, housing will weaken. Caveat emptor.”

Of course, some don’t believe house prices will continue to plunge. Real estate businesses don’t, because if there are no buyers, they make no money. Buyers’ agents want clients to overbid, so they make more on percentage commissions. If there is no sale, they get no cut. Mortgage brokers also take a percentage of the loan, so they want buyers to sign for the biggest loan possible. Appraisers need the brokers for their business, so they are going to give appraisals that brokers and agents want to see. says banks get origination fees and will lend far beyond what buyers can afford. They sell most loans to Fannie Mae or Freddie Mac. Conversion of these low-quality housing debts into quality Fannie Mae debt with the backing of the federal government is what’s propping up the housing bubble. That will end as Fannie Mae shrinks.

Those glowing newspaper stories about a booming real estate market and how great homebuying is right now, and those full-page real estate ads in the Sunday editions paint a picture that is misleading. Newspapers make big bucks from the ads placed by Realtors, so there is a strong motive for promoting unrealistic forecasts from those same advertisers.

One newspaper in San Jose, Calif. has stopped publishing the usual colored map showing areas where median prices were up or down. That picture would be too embarrassing to the Realtors right now.

Most newspaper articles about housing, Patrick says, aren’t news at all but thinly disguised ads. They quote heavily from real estate people whose income depends on parting you from your money. Their purpose is not to inform, but to get you to buy.

In Philadelphia, The Washington Post reported, on a single block on one street, 18 of the 42 rowhouses have gone into foreclosure in the last three years.

Mike O’Mara, a truck driver, took on too much debt, then lost his job and got behind on his mortgage payments. He told The Post: “Mortgage companies convinced us to refinance, and each time our bill went up. You fall behind, and they swoop down on you.” Philadelphia and its suburbs are experiencing a foreclosure epidemic.

In 2000, the sheriff there auctioned 300 to 400 foreclosed properties each month; today, he handles more than 1,000 per month. Allegheny County, which includes Pittsburgh, had record auctions of foreclosed homes, and officials there talk of a “Depression-era” problem, The Post said.

Foreclosure rates were up in 47 states in March, said, an online listing service for foreclosures. Even in New York City and Boston, both white-hot real estate, markets, working-class neighborhoods foreclosures are rising.

Foreclosure rates are relatively low in Virginia, Maryland and the District of Columbia, and analysts say distressed homeowners in those markets—wh

ich also are booming—still can sell their homes before facing the prospect of foreclosure.

Many economists and federal officials expect the nation’s housing bubbles to burst. If they do, the foreclosures could herald a national crisis. Americans are carrying record levels of housing debt. More than 8 percent of homeowners spend at least half their income on their mortgages.

“We are clearly seeing a spike in foreclosures in a number of our major urban areas,” said Julie Williams, acting U.S. comptroller of the currency, the agency that regulates our banks. “It can lead to a downward spiral for neighborhoods. If we are not careful, the American dream can quickly turn into the American nightmare,” she said.

From the March 22-28, 2006, issue

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