Wednesday, June 9, 2010

RealtyTrac: Less Than Half of All Foreclosures Have Negative Equity So Why Are Defaults Soaring?

Whether it's due to loan owners doing the math and realizing that they can rent or buy a similar residence nearby for a fraction of what they are paying monthly; or because of wage deterioration, job loss, and the inability to make the monthly nut -both situations come down to this one very simple and sometimes painful economic reality:

Monthly Cash Flow!

Rick Sharga, senior vice president at RealtyTrac reported today at the REO Expo in Dallas, TX that less than 50% of all foreclosures are actually underwater. The reality of the situation is that loan owners either can't pay due to wage losses, or have done the math and are unwilling to pay in order to protect their monthly earnings.

"The RealtyTrac database covers foreclosure filings from notice of default to REO properties across more than 2,200 counties in the US. Sharga said while underwater borrowers are beginning to explore the possibilities of strategically defaulting, unemployment, not negative equity, is driving the current wave of foreclosures.

"We estimate there is one foreclosure to every six to 10 jobs lost," Sharga said.

The overall unemployment rate dropped slightly to 9.7% in May, from 9.9% in April, mainly due to the labor force shrinking by 322,000, according to the US Department of Labor Bureau of Labor Statistics. This has caused foreclosures to increase in places previously thought safe from the crisis, including Provo, Utah and Portland, Ore."

"With so many reasons for default, Sharga said the month-to-month levels of foreclosures should not return to more normal levels until after 2012.
" We are in the midst of an unprecedented cycle," Sharga said."

For loyal and devoted 04-08 loan owners, making bubble era mortgage payments can be a stressful, punishing, and increasingly impossible task in the wrong set of wage loss circumstances. For those who can afford such payments, but are aware of what's happening around them, strategic default can be a very lucrative option, especially in a non-recourse state like Oregon.

The NY Times recently reported that the average number of days in mortgage default and foreclosure in Oregon is 341 days. Folks that decide to stop paying on bubble era mortgages in Oregon are living payment/rent free for nearly one full year before moving on to a lower cost option:

Regardless of whether foreclosures occur because loan owners cannot pay, or choose not to pay, the outcome will be the same. Home price appreciation will be non-existent for the next several years in the PacNW, and private sector job creation looks to be stagnant at best going forward. Real incomes are declining, and the invisible hand of the market will do what it does best. Consumers of housing (rented, mortgaged, or purchased outright) will migrate to the option that best protects their hard earned monthly cash flow.

Darwinism will rule the housing market, and consumers will seek out lower costs either by choice or by force. Regardless, incomes are still out of alignment with home prices and Portland's housing market price correction is inevitable. 2010 will probably see single digit YOY price declines, but in 2011 and 2012 home prices here will bear the brunt of monthly cash flow reality.