Sunday, July 12, 2009

Monthly foreclosure rate 8% higher than last year; homeowner's strategically walking away

This may not come as a surprise: the LA Times reports that 26% of home mortgage defaults are strategic, with 22% of homeowners holding negative equity (current home value smaller than the mortgage obligation). But the numbers are quite staggering. From the LA Times:
The study found that 26% of the record numbers of home mortgage defaults across the country are "strategic" -- that is, calculated economic decisions to bail out of loans by owners who actually have the money to make the payments but can't handle the negative equity they're carrying caused by local property value declines.
...
Among the study's sobering findings:

Moral precepts keep large numbers of financially struggling homeowners out of default, but only to a point. Fully 81% of household heads said they believed intentional defaults on mortgages to be "morally wrong." But that high percentage begins to crumble as negative equity grows increasingly larger.

When negative equity rose to $50,000, 7% of those who consider strategic defaults to be immoral said they'd walk away. At $100,000 negative equity, 22% would do so. At negative $200,000, 37% of those with moral objections would nonetheless default, and at $300,000, 38% said they would.
Homeowners are simply weighing the costs associated with foreclosure alongside the benefits of holding the home on balance; and in many cases, the costs are winning out. And as more and more homeowners foreclose, the banks will be faced with new losses. All else equal, this reduces the available (i.e., willingness and ability to lend) credit to potential homeowners/consumers, which then depresses potential sales. It is a vicious cycle.

Zillow.com relates the percentage of homes that go into foreclosure each month across state and metro areas here. Nationally, 0.07% of all homes were foreclosed upon in the month ending 4/30/2009. If that rate holds over the next year, then roughly 1 foreclosures would be added to over the next year based on the Census' 2007 127.9 million estimated stock of homes. The bad news is: the monthly foreclosure rate is 8% higher than it was last year. The good(ish) news is: that the monthly foreclosure rate is 9% lower than it was the month before.


The chart illustrates the monthly foreclosure rate of single-family homes by state (x-axis) and the growth in that rate since last year (y-axis). Arizona, Nevada, and California have the highest foreclosure rates, but the monthly pace is down since last year. The bubble is working its way through. Going forward, though, the monthly foreclosure rate is likely to grow in some economies, like those seen in Connecticut and Hawaii, as recessionary pressures of rising unemployment and falling income pass through to the housing market.

Oh man. It's bad out there.

Rebecca Wilder

3 comments:

  1. Interesting article. I think there may be a problem with people who can afford their mortgage payments just walking away because they are upside down.

    These homeowners must be able to prove some sort of Hardship to the bank.

    If there is no hardship then I think the bank has a good case to continue to collect on a mortgage.

    The bailout of home loans is not for everyone.

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  2. Hi jacklewitz,

    "These homeowners must be able to prove some sort of Hardship to the bank."

    I agree - you take out a mortgage, you pay for it! Moral obligations obviously only go so far.

    Thanks for commenting. Rebecca

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  3. The banks are at fault here. If a drunken sailor hands somebody $1000 and says 'go have fun', do you take it? Of course you do. This is essentially what the banks did. I have a hard time believing that homeowners "tricked" lenders into handing out loans. Its more like selfish short term profit ambitions that lenders had, not caring about if the mortgage would be repaid because it would be sliced up and sold off anyway.
    "Strategic Defaults" are nothing more than common sense decisions. Banks do it all the time and nobody criticizes them for it. Heck banks were arrogant enough to ask for federal bailouts for problems they created themselves.

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