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The Impact of Foreclosures on Real Estate in 2010

Going into 2010 things were looking rather ‘bullish’ for the housing industry. Sales were up and prices seemed to be stabilizing.  But in the last few weeks we are starting to see how fragile the recovery actually is. Obviously, when the government ends its support after the first quarter (no longer holding down interest rates with their purchase of mortgage-backed securities and ending the tax credit for homebuyers) things could regress quickly. Unemployment is still looming large and securing financing is still tricky at certain price points.

However, there is more and more evidence that the largest threat to a housing recovery may be the impact of foreclosures. The looming ‘shadow inventory’ of distressed properties is estimated at anywhere between 1.7 and 3.2 million properties. If that inventory were to hit the market in 2010, it would surely wreak havoc on any recovery and devastate pricing. And it appears that may be about to happen.

Market Watch, the internet arm of the Wall Street Journal (quoting a RealtyTrac news release) reported on January 14 that the number of U.S. residential properties receiving at least one foreclosure filing jumped 21% in 2009 to a record 2.82 million. They went on to quote James Saccacio, chief executive officer of RealtyTrac:

“In the long term, a massive supply of delinquent loans continues to loom over the housing market, and many of those delinquencies will end up in the foreclosure process in 2010 and beyond, as lenders gradually work their way through the backlog.”

The affect foreclosures will have on real estate in 2010 will be determined by three key issues:

1. What will happen with option arms?

Many buyers in 2005 and 2006 took loans which usually allowed the borrower to make low monthly payments initially—sometimes by just paying interest only. As you can see in the attached graph from Amherst Securities, a large group of these loans willl be adjusting in 2010. Homeowners will be facing much higher mortgage payments. Tomorrow we will look at this category of loan and see what affect it could have on foreclosures.

2. How many of the surging number of loans which are now 90+ delinquent will end in foreclosure?

The delinquency rates in every state are at historic levels. And the percentage of these borrowers who will be able to catch up on their payments are at all time lows. In this graph from Calculated Risk, we can see that delinquencies (the blue section of each bar) far outnumber current foreclosures (the red portion). What if 99% of the blue lines turn red in the next year? On Wednesday we will take a closer look at delinquencies and what they might mean to real estate in 2010.

3. Will an increasing number of homes reaching ‘negative equity’ lead more homeowners to walk away from their mortgage obligation?

Studies have shown that a borrower is much more likely to walk away if the house has negative equity. Law professors and main stream media are starting to question why more people aren’t walking away. Is this going to be an epidemic this year? Thursday, we will look at the table seen here from First American Core Logic and see which areas will have the largest challenges.

We will take this week to try and tackle these topics and bring some light to the issue.

If you have a question about foreclosures, please feel free to leave it in the comment section and we will try our best to answer it.

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