Tuesday, February 3, 2009

Foreclosures are driving sales: study confirms housing market is far from healthy

Home values are declining and foreclosure rates are up 81% in 2008. Putting the two together leads to the following conclusion: investors are buying up foreclosed properties driving down the price demand is falling quickly, and it is likely that the only people willing to buy are investors at lower prices. According to Zillow.com, this is true, and worse yet, that conditions are worsening.
According to Zillow.com, the 2008 housing trends were distressing (I highlight the national figures, but you can view city-level data here):
  • 34.6% of 2008 national home sales were at a loss.
  • 19.9% of the homes sold were foreclosures.
  • The New York/Northern New Jersey had the lowest % of foreclosure sales, 3.9%, while Madera, CA marked the highest, 54.6%.
  • 10.9% of the homes sold were short, i.e., sales price was lower than the seller's mortgage obligation.
  • The Albany, New York area had the lowest % of short sales, 0.1%, while Loncoln, NE marked the highest, 14.1%.
  • 17.6% of all homeowners hold negative equity, or the value of the home is less than homeowners' mortgage.
  • This is a wide distribution: Anderson, SC had the lowest % of negative equity homes, 0.9%, while Las Vegas, NV marked the highest, 61.4%. That is a humbling statistic.

Some associated charts: The percentages of sales that are foreclosures and sold at a loss are rising.

Equity is back in the green for sales in 2007 (barely) and 2008, but the average buyer who purchased in 2006 is underwater, i.e., they owe more than the home is worth. That is a troubling statistic.

This report confirms that the housing market is crushed. It highlights that the stress signals - short sales, foreclosures, negative equity - are rising into 2009. The implication is that prices will continue to decline, but worse yet, the economy recovery will be pushed off until this market works out the excess supply of homeowners.

Rebecca Wilder


  1. Rebecca,

    I'm interested in this:

    "investors are buying up foreclosed properties, driving down the price."

    If the properties are being bought, and the supply decreasing, then how can this lead to lower prices? Presumably the investors are overpaying in that case. I understand that more foreclosures could be added than sold, buy doesn't buying need to accompany a stabilization and rise?

    If investors are buying these properties, in which they won't live, then they must want to resell them. What's their strategy?

    Also, this negative equity puzzles me. When I bought my house, the price when down 10%, and remained lower for three or for years. I applied for a reduction in property tax, but I can't remember if I received it. I might have. But, as long as I could make the payments, this never bothered me.

    Finally, about Madera, a city in the Central Valley :

    "Holders of so-called “subprime” mortgages are in danger of losing their homes, especially in the Central Valley, according to a report from the Center for Responsible Lending.

    As much as $164 billion in mortgages is at risk due to foreclosures in the subprime mortgage market, it says.

    With 25 percent of the mortgages issued this year being subprime, Merced County ranks as the nation’s most risky area for foreclosures, according to the report.

    Other Central Valley areas are not much better, it says.

    Bakersfield ranks second in the nation; Fresno is fifth; Stockton is seventh and Visalia-Porterville is 13th.

    In contrast, Yuba City ranks 152; Sacramento 28; Modesto 205; Madera 29; and Hanford-Lemoore( I'M FROM HERE ), 152.

    “We project that one out of five (19 percent) subprime mortgages originated during the past two years will end in foreclosure. This rate is nearly double the projected rate of subprime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the ‘Oil Patch’ disaster of the 1980s,” the report says."

    I don't know who was buying these houses, but it sounds as if the prices would have to come down substantially for people to actually be able to afford homes in the Central Valley. Mortgage rates alone won't do it. I'm not even sure how long it will take for these houses to sell in the Central Valley. It could be a long time.

    Don the libertarian Democrat

  2. Foreclosure Prices Set the Median Price

    When enough foreclosures sit on markets ready for sale, these unsold houses set the price. After all, an unsold house is an unsold house, regardless of its legal ownership status (bank controlling the deed vs a mortgagee controlling the deed).

    Economy Won't Recover Until Buying Power Improves

    Far too many parrots spew the false belief that house prices have something to do with holding back the economy or tanking the economy.

    When persons refuse to buy houses, they rent or they move in with relatives or friends.

    A house is a commodity (a thing for sale), like oranges or steaks or Super Bowl tickets or t-shirts.

    Right now, Americans have said that at current prices, houses are not the things they want to buy. They prefer other things.

    Yet, when Americans cannot pay for living expenses (taxes, food, gasoline) and service debt (mortgages, credit cards, car loans, student loans, home equity ATM loans), Americans lack sufficient buying power to buy all the things they want.

    Thus, Americans shift their buying to what sustains them (food, fuel) and away from what tickles them (fancy cars, fancy clothes, fancy vacation trips).

    Americans need a stronger dollar to pay for oil imports and better still, Americans need to make stuff others cannot, especially foreigners, that they can sell at high prices thus improving their cash flow and buying power.

    Americans Suffer Indoctrination and False Beliefs about Money and Houses

    Americans need to decouple from years of indoctrination and other mind programming into false concepts as "equity", "home", "negative equity".

    First off, we're talking about houses, not homes.

    A house is a structure on land that changes the status of the land to improved land.

    All land parcels have deeds that define them for legal transfer.

    A home is the atmosphere that a family makes.

    "Homeowner" is a sweet rhetoric word to confuse those who rent cash
    to buy the right to control a deed. Such rented cash is called a mortgage.

    "Equity" is a banker's concept.

    It is the difference between the estimated street price of an improved parcel (a parcel with a house) and the amount of outstanding debt owed to bank who has rented cash to a cash rentee (mortgagee).

    Key here is see that such a dollar amount is an estimate, not actual truth, which can become discovered only if the mortgagee sells the deed to another party and relinquishes control of the deed.

    "Negative Equity" is a false concept.

    A mortgagee (cash rentee) owes the money rented from a bank or other lender irrespective of the price of the asset used as collateral.

    The rented cash is a separate issue from the current street price of a used asset -- in this case a house on improved land.

  3. Where's the/a bottom/bounce?????


  4. Hi Don,

    Thanks - the wording was a little strange. I modified it.


    Smack - as always, please tell us what you really think!

  5. That's sounds a lot better...makes more sense.


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