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Are Foreclosures Coming to the Luxury Market?

$1,000,000 Home In Foreclosure

There is no doubt that prices in the lower end of the market have fallen rather dramatically over the last several years. Much of this loss in equity occurred as people were unable to pay their mortgages, and the homes went to foreclosure. Many were quick to dismiss this dilemma as the result of questionable mortgage practices that allowed unqualified buyers to purchase a house they ultimately couldn’t afford.

Though that is true in many cases, it is not true in all cases. The current economy has put financial pressures on families at every level of the economic ladder. And, because of that, we are beginning to see a surge in foreclosures, not just in the lower and mid-tier price ranges, but instead at every price point including houses above $1,000,000.

Below, are two interesting graphs from data collected by First American CoreLogic. The first shows the percentage delinquencies of homes with different mortgage balances:

As we can see, the highest percentage of houses 90+ delinquent is in the $1,000,000 and above category. And, that number is up over 250% from just a year ago which is shown in the second slide:

Even people at the upper end of the income scale are being negatively affected by this economy. But that is not the only reason homes in the upper end are filling foreclosures lists.

The other reason is a term known as ‘strategic default’. That is when a homeowner has the resources to pay the mortgage but decides not to. (I have posted on this previously.)

However, it now seems more and more people in the upper end of the housing market are deciding that to pay the mortgage on a depreciating asset makes no sense from an investment standpoint.

Even main stream media seems to be giving the green light to homeowners wanting to walk away from their mortgage obligation. The New York Times in an article titled ‘Walk Away From Your Mortgage’ said:

“Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.”

As more and more luxury homes go to foreclosure (either because of economic hardships or because the homeowner decides to walk away), we will see a growing inventory of distressed (discounted) homes coming to the market.

There will be downward pressure on prices even in the most well to do neighborhoods. Even those populated with million dollar homes.

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