Are There Over Seven Million Foreclosures Coming?
There have been some extraordinary numbers being bantered about when talking about the number of foreclosures that will be coming to market over the next 18 months. Different studies have estimated that number to be between 5-8 million. Let’s take a look at one of these studies today and see how these totals are being calculated.
The Financial Analysis Journal last month posted an article titled Dimensioning the Housing Crisis in which they break down how they arrived at the number of 7.13 million foreclosures about to come to market.
When looking at foreclosures, it is important to realize we are not talking about only those homes currently owned by banks (REOs) but instead the probable number that will be owned. To decipher that number, we must look at two things:
- The percentage of foreclosures and the percentage of homes in delinquency
- The probability of liquidation (cure rate)
THE PERCENTAGES
The article breaks down the percentage of foreclosures and the percentage of homes in each delinquency category:
At the end of the third quarter of 2009 (last data available), a staggering 14.1 percent of mortgages in the MBA survey were in some stage of delinquency: 4.47 percent of units were in foreclosure, another 4.41 percent were 90+ days delinquent, 1.67 percent were 60 days delinquent, and 3.57 percent were 30 days delinquent.
These percentages put the actual number of homes in danger at 7.89 million.
THE CURE RATE
Cure rates measure the percentage of loans exiting delinquency and returning to their current payment status each month. These percentages have plummeted over the last several years as the housing market has suffered.
The cure rate is most negatively impacted by unemployment and negative equity. Neither of these are expected to improve in the near future.
THE FINAL TALLY
Below is a table using both the percentages and the cure rates to determine the number of potential foreclosures coming to the market.
The first column shows the percentage of homes in each category of delinquency. The middle column are the current cure rates for each category. The last column is the total percentage of each category that will wind up as a distressed property.
The study estimates 7.13 million distressed properties will come to market.
What does this mean to you?
Whenever there is an increase in supply of an item, there is downward pressure on pricing. The houses coming to the market will be sold by the banks at discounted prices. Home values will be impacted dramatically.
| Members: Sign in now to set up your Personalized Posts & start sharing today! Not a Member Yet? Click Here to learn more about KCM’s newest feature, Personalized Posts. |
Great Blog and an excellent article. Negative equity is a HUGE problem. Many homeowners who are paying their mortgage would LOVE to refinance, but can’t because their property will never comp out for what they owe. If that problem could be solved, it would go a long way to prevent the 4-5 million homes that are currently underwater from shifting over into the delinquent category.
The equity problem is also impacting short sales. Just last month we had a short sale with a certain lender, and the original offer was countered at a higher price. The buyer elected to try to get financing for the higher amount and was told by the SAME LENDER that the house wouldn’t comp out for that much. So here you have a lender trying to get paid on a deal that they wouldn’t even fund themselves. And it is NOT getting any better.
Great data, Steve. The fact that it is taking an incredible 16 months for a delinquent homeowner to be foreclosed on is incredible. The ‘shadow’ inventory is enormous and it WILL come to the market. Pair that with a high unemployment rate, which is some key states is in double-digits, marks a very possible dip in market prices.
Fabulous article. I’d like to use your data in a blog entry. I’ve retweeted and shared on FB. It is so important to share this type of information with our clients so they can be informed.
Keep the information coming!
We post the information to help people understand today’s real estate market. Feel free to share the information in any way you see fit.
Hi Steve, Thanks for telling us the truth. I have excerpted your article on my blog and linked back to this post. I deeply appreciate your generosity in allowing us to share this information directly with our clients.
Thanks, Steve. Good stuff.
Thanks for the post. The only question I have is on the chart it says that defaults is based on 55.9 million homes. What does this mean? Does that mean that these percentages are based on the assumption that there are 55.9 million homes in the usa?
I thought there were a lot more than that. And, if it’s because you are not including condos, etc. then I wonder what the foreclosure total will be if you take into account single family homes, multi-family, etc.
Thanks,
Matt
@Matt
This is the actual number of homes (whatever category) which have a mortgage on them.The actual report says: “Thus, around 55.9 million homes in the United States have a mortgage.”