The Miami Herald reported yesterday:
“The number of U.S. homes facing foreclosure surged 58 percent in the first six months of the year, with Florida ranking second after California among states with the highest numbers of troubled borrowers, data firm RealtyTrac said.”
“One of every 81 homes in Florida were sent foreclosure notices in the first half of this year, RealtyTrac said.”
“In Florida, the number of foreclosures is up 77 percent compared to the same six months last year, RealtyTrac said.”
What does this mean for our local real estate market?
To determine its effects, let’s outline the foreclosure process. Credit Suisse explains:
“After a homeowner misses his/her mortgage payment, the loan servicer begins its collection efforts. This process typically lasts for 90 days. If payment is still not received after 90 days, a notice of default (NOD) is filed. In some states this may be referred to as lis pendens (LIS), although the two classifications are essentially the same.”
“Approximately 90 days after the notice of default (again, this varies by state), a notice of trustee sale (NTS) or notice of foreclosure sale (NFS) is made, which serves as a public announcement of an upcoming auction for the home. Homes in this stage of the foreclosure process are still at least 30-90 days away from hitting the resale listings.”
“Roughly three weeks after the notice of trustee sale, a public auction is held for the property. If the home sells at the auction, then the foreclosure is removed from the foreclosure data. Still, it may take several months for the winning bidder to gain occupancy or control of the home (depending on the condition of the home and whether eviction is necessary). If the winning bidder is an investor, then the home may end up back on the market after the sale is closed.”
“If the home is not sold in the auction, then the property becomes an REO, which stands for real estate owned. This is when the title of the property is passed on to the lender, and it is the bank’s responsibility to sell the home. These foreclosed homes are ‘must sell’ homes and typically enter the MLS inventory system in about two months after auction. Given the fact that banks are not in the business of selling homes, prices are usually slashed significantly on these homes, which in turn may pressure pricing elsewhere in the market.”
The graph below, illustrates this process graphically (click on the graph to see the detail):
RealtyTrac.com tracks each of these stages separate for the local market. The current number of homes in some stage of the foreclosure process in South Florida is staggering. Here are the RealtyTrac.com totals as of today (click on the graph to see the detail):
While these numbers may seem high, we have only seen the very tip of the iceberg. The problem lies in Adjustable Rate Mortgages (ARMs), the mortgage of choice for the riskiest borrowers. MSN.com explains:
“This fall the adjustable-rate mortgages (ARMs) that millions of Americans took out during the recent housing boom will be reset, and many homeowners will see their monthly mortgage payments shoot up by as much as 20%. According to the Mortgage Bankers Association, of all mortgages financed in 2005, 36% were ARMs -- the highest ever.”
“This is a matter of concern because ARMs are typically initially made at a lower rate and then increase after a fixed period of time, usually one, three, five, seven or 10 years, after which the rate will more closely reflect current rates. As interest rates increase, mortgage payments increase. Between $400 billion and $500 billion in ARMs are due to be reset by the end of 2006. The following year will be even more dramatic, when more than $1.5 trillion will be reset.”
“For many Americans, this is scary news, if hardly unexpected. Everyone who took out an ARM or another equally appealing low-rate mortgage over the past few years to buy a house, at times beyond their means, knew that someday their payments could balloon. Those home buyers may have thought they would be able to flip their houses quickly and avoid the rise in their mortgage payments. But now, many of them are finding themselves stuck in a house they may soon no longer be able to afford, and, as the real estate market peters out, there's little they can do about it.”
So, how bad is it? Consider the following graph, also from Credit Suisse (click on the graph to see the detail):
This reset schedule shows that we are just in the very early days of the REO flood. Right now, the South Florida market is starting to see the homes with March 2007 ARM resets hitting the market as REOs. Yet, there are already an astounding 21,413 REO homes on the South Florida market right now.
The real flood of REOs has not even started to hit the market. ARM resets peak in November 2007. Because it takes at least 120 days from the initial late payment until the foreclosed home hits the market as an REO, we can expect the real deluge of REOs to start hitting the South Florida market in March 2008. Still, as the graph shows, REOs will continue to saturate the market through December 2009.
What does this mean for those considering a home purchase? It means they should definitely wait. The market has only begun to see its initial correction. Because of the constant saturation of REOs, the supply of homes on the market will remain outrageously high through December 2009 (see my previous post on the high inventory levels).
This doesn’t mean that all potential buyers should wait until December 2009 -- other market conditions may make advantageous to buy before that, but they should at least hold out at least until the peak of new REOs listing hits the market in March 2008.
Stumble It!
4 comments:
Cool stuff. Personally, I'm waiting until 2010. I really think it's going to take that long for us to hit the bottom. It's going to be a huge mess until that time.
I've been snooping around looking at
foreclosures in the eastern region of Miami-Dade. REO's are still priced at pie-in-the-sky levels. When banks
finally decide to auction off or drastically reduce prices then houses will start to move. When this happens, you will see dramatic reductions in reported median prices which of coarse Realtors will spin. You are going to see remodeled 3br houses in desirable neighborhoods going from 450 to 250 . Its going to be a bloodbath.
I don't think that the fault lies only in ARM'S but in a combination of thingss. ARM'S at teaser rates not relecting current market, over inflated housing prices, the current deflation of market prices leading to neg mortgages and the flood of inventory that his hit the market making it difficult to impossible to "sell" property, and the increase in interest rates. All of these combined have made the ability of home to move into the foreclosure stage much easier. If a homeowner has a property worth less than the mortgage balance, the ability to market that property is impossible..walking away is the only solution..in the future these people will be able to buy again in as little as a year thanks to private pools of money that will be marketed just to this group, at a higher interest rate of course..but to properties that are more inline with income...
I also don't think the ARMs were to blame. ARM have been around forever and they didn't cause problem.
The real problem was 100% and easy of stated-income loans. While both of those have existed for years, they didn't co-exist until recently.
Once people were about to get 100% financing on stated income, the dams were wide open for fraud, irrational investing, and moronic behavior. People are MUCH more rational when the have to gather money up to make an "investment."
When they have no skin in the game whatsoever, they take wild risks.
That's what ulimately happened in this bubble. Unfortunately, there were a few dumbasses who got caught up in the ride and got suckered into teaser rate and will end up losing their homes. But, just like the investors, they will not lose a cent of their own money.
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