The Foreclosure Time Bomb Ticks!

July 16th, 2007 | Tags: Foreclosure

Which came first – rising property rates or foreclosure listings? The simultaneous seesaw continues with no predictable change – down goes prices and up rises foreclosures. The alarming thing is that one is nourishing the other. The result has been South West collapses in mid 80’s, California crashes in late 80’s and New England debacles in early 90’s.

The strength of the hug between foreclosure and price curve differs from one locality to another. The nation wide curve is up by 87% from last year but in 10 states therehas been a year-by-year drop. In other states the malaise is acute – California has skyrocketed to 286%, Nevada to 279%, Arizona to 168% and Florida to144%.

Economist John Silvia groups foreclosures into 3 categories of speculation, second home and localized socio-economic conditions of the Midwest. The latter is an offshoot of the layoffs in the automobile industry. In the second home category are those who invested in another unit while holding on to their previous ones taking advantage of low cost mortgage rates. The main offenders are the speculators whose activities caused the maximum impact.

California coast region will require another six months and the inland belt another 2 to 3 years for things to stabilize. Florida may take even longer.

The figures are staggering - $500 billion in sub-prime and 2 million adjustable rate mortgages. Despite aggressive help the foreclosure number keeps swelling while prices further tumble.

Economist David Wyss of Standard & Poors anticipates an 8% fall in prices nationwide from 2006. It is the darkest prediction so far. Right now with prices eating the dust it is not easy to sell the house. Secondly to get into another home the existing mortgage rate of 5% will have to be replaced for another costing 6.5%. It is just not viable.

Analyst John Burns explains through figures how much change would have to be effected to force the prices to come back to the level of ‘historic affordability’. In Miami and Los Angeles the fall would have to be by 41%, while in Washington DC it would be 33%. It is asking for the absurd. Once the economy picks and people get back to their jobs there will no longer that sense of urgency to sell off homes. But Burns adds that foreclosures will force prices down – it is same seesaw game but rather a bloody one!

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