Is the foreclosure crisis yesterday’s news?

With all of the optimistic reports coming out these days, it is reasonable to wonder whether the “foreclosure plague” as one writer put it, has peaked and is now a thing of the past.  The impact of foreclosures is especially important this time around, perhaps even more so than in other recessionary downturns.

Initially, foreclosures stemmed from the defaults associated with subprime borrowers and their inabilities to keep current after a round of aggressive mortgage rate resets.  This period was followed by declining economic conditions due to job layoffs and weakening demand in other than the “high foreclosure zones” of Nevada, California, Arizona, and Florida.

The combination of laid off borrowers and mortgage defaults was made even more painful by falling property values nationwide. Any incentive borrowers had to maintain ownership in their homes was evaporating as negative equity grew in millions of households.  A recent study reported borrowers were likely to walk away from their homes (so-called “strategic defaults”) whenever home values fell 15% below mortgage balances and that this “strategy” accounted for at least 25 percent of all mortgage defaults.

Now, some observers are predicting a new round of foreclosures stemming from the large number of option-ARM resets scheduled over the next several months.  Rick Sharga of RealtyTrac, a private firm which specializes in foreclosure sales, fears that the recent good news is a lull before the option-ARM storm.

Recent RealtyTrac data shows that 29 of the top 30 foreclosure rate cities were located in the four states above.  Thus, the incidence of high foreclosure rates has centered largely in these few markets. In addition, some cities have slowed down considerably over the past six months (first half of 2009) such as Boston (-40.7% decline in foreclosures from a year ago), Houston (-31.3%), New York (-23.5%), Baltimore (-22.5%), and even Cleveland (-30%) and Detroit (-16%).  On the rise are Seattle (+72%), Minneapolis (+58.6%), Phoenix (+51.7%), Miami (+40.9%), Chicago (+30.3%) and others.

In terms of incidence, Las Vegas has toppled Stockton, CA as the current foreclosure capital with one foreclosure for every 13 homes!  Cape Coral/Ft. Myers, FL is close behind at one in every 14 homes. (The national average is reported as one in every 84 homes.)  Newcomers to the list such as Seattle and Minneapolis have a high growth rate in foreclosures but only one in 107 and one in 90 respectively.  Phoenix has grown in percentage terms but also is sizable: one in every 22 homes saw a foreclosure filing during early 2009.  Philadelphia, the only Pennsylvania city in the report, had 6% fewer foreclosures recently and the rate was only one in 168 homes. As we reported earlier in this space, we are fortunate in the Commonwealth to have avoided considerable foreclosure pain relative to many other states.

However, the crisis is not over and more foreclosures are expected. The housing market evidence in the past suggests that Pennsylvania may grow in the number of foreclosure filings as have other states which lagged behind in this dubious race. Conditions are certainly improving but we are not in the out of the woods yet.

Related posts:

1. Foreclosure crisis isn’t over yet

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Tags: crisis, foreclosure

This entry was posted on Tuesday, August 11th, 2009 at 9:29 am and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed.