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Thread: extrapolation on recent real estate foreclosure rate

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    Default extrapolation on recent real estate foreclosure rate

    An investor's website has recently totalled up last month's mortgage foreclosure announcements, and it appears that the total is in the ballpark of 100,000 homes nationwide. If future foreclosures continue at this rate, this would result in an annual total of about 1.2 million foreclosures and forced sales over the next year.

    In perspective, 1.2 million is pretty close to the total amount of new homes sold last year.

    The point of contention, assuming that the foreclosure rate doesn't increase any further, and also assuming that the ability of willing home buyers to qualify for and obtain mortgage financing under acceptable terms doesn't decrease any further, is that the total demand for new home purchases next year can be met via housing stock that will be put up for forced sales due to mortgage foreclosures - with most of that forced sale housing stock having been recently constructed !

    This does not bode well for homebuilders who are trying to market newly constructed homes, nor for speculators who are trying to get out from under second homes bought on 'spec', nor for any other potential seller of a recently constructed home.

    It does, however, imply that rental properties are going to be the one remaining 'hot sector' in real estate, as 1.2 million families are likely to be forced to find apartments to rent !

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    Default Re: extrapolation on recent real estate foreclosure rate

    link, please.

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    Default Re: extrapolation on recent real estate foreclosure rate

    ^^^ sorry, it's a subscriber service ... which is why I paraphrased their content rather than quoting or linking it.

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    Default Re: extrapolation on recent real estate foreclosure rate

    Isnt this how the roller coaster ride usually goes . Lower the interest rates to pep up the market , get all the small investors involved who are really counting on the market to stay at a fast pace and want a spec / flip house . Raise the interest rates to slow the growth hence the market falls on its face . Then the prices fall or rather come back down to earth where the working class can actually afford a home once again . Once this levels all out in 5 or 10 years it will start all over again .

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    Default Re: extrapolation on recent real estate foreclosure rate

    ^^^ sort of ... but this time around there is a huge new 'wrinkle'. Historically speaking, over the past umpteen years about 64% of American families were able to afford a home. However, because of US gov't policy on interest rates and gov't directives for the GSE's to offer focused subsidies to allow certain groups of people to obtain mortgages which they could otherwise never qualify for, and because of lack of 'regulatory supervision' re minimum down payment / creditworthiness standards for mortgages offered by newly created 'creative' mortgage finance institutions, some 69% of American families now own a home.

    The new 'wrinkle' is that the additional 5% of American families who were able to buy a home in the last few years thanks to gov't policies and subsidies, and/or 'creative mortgage financing', arguably were not and are not able to afford the home they are now living in. Thus this 'new wrinkle' constitutes a subsidized shift of 5% of American families from the rental market to the homeowner market. During some of the worst real estate busts of the past century, distressed homeowners started from the 64% ownership level and descended to a level in the 50's. However, today distressed homeowners will be starting from a 69% level, probably still descending to a level in the 50's. Thus the new 'wrinkle' is going to significantly increase the number of distressed home sales which take place in the next downward cycle swing, with all of the consequences that implies.

    On the flip side, if a significantly larger number of homeowners wind up going 'belly up' and evicted from their houses than in past cycles, the sudden demand for rental properties (and particularly for affordable apartments) is likely to be higher than has ever previously occurred. As posted earlier, this would tend to indicate that the rental property market will be the next opportunity to profit from real estate (providing of course that the gov't doesn't start regulating rent prices at unrealistically low levels).
    Last edited by Melonie; 06-28-2006 at 10:44 AM.

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    Default Re: extrapolation on recent real estate foreclosure rate

    Ya I was wondering about the last part of your explanation and if the rent will be so low that the home owner could not afford to make a mortgage payment . It's a difficult balancing act to try and be fair to all isnt it .

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    Default Re: extrapolation on recent real estate foreclosure rate

    ^^^ I was thinking in more blunt terms ... that homeowners who wind up going 'belly up' on their mortgages are going to be evicted when their houses are foreclosed on - that these 'former' homeowners are never going to be approved for another mortgage to purchase another house during the typical 5-6 year Chapter 13 bankruptcy cycle - thus they will be forced to seek apartments / houses to rent in order to have a place to live.

    If the foreclosure stats and calculations are accurate, this would tend to indicate that an unprecedented number of people are going to be forced out of their houses thus seeking apartments / houses to rent within the next year. Combined with the likely effects of all of these foreclosures on real estate market prices, it's also very likely that many non-distressed 'spec' homeowners and home builders will wind up renting their properties instead of selling them now at a 'loss' in the hopes that real estate market prices will improve over the next X years. This of course will involve new risks for these non-distressed homeowners i.e. market prices for rents versus mortgage + insurance + maintenance costs, costs of evictions, vacancy, damage done by tenants etc. These sort of rental conditions are likely to favor more 'efficient' units such as apartment complexes, though, rather than single family homes, in regard to actually turning a decent profit.

    In regard to gov't rent controls, you are exactly right based on previous experience in cities that have rent controls in place. Owners of apartment buildings thus risk having to continue making mortgage payments, plus having to pay every higher property taxes, insurance premiums, utility bills, building repairs etc. while at the same time they are prevented by law from raising the rents they can charge. In the past these rising 'costs' versus fixed 'income' potential has squeezed the profit margin of rent controlled apartment building owners down to nothing (and in some cases below nothing). This in turn led to owners simply abandoning their buildings, resulting in the property being condemned and the renters evicted, rather than the property owner continuing to hemorhage money on a monthly basis.
    ~
    Last edited by Melonie; 06-28-2006 at 06:46 PM.

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    Default Re: extrapolation on recent real estate foreclosure rate

    I recall that about twenty years ago after the high mortgage rate period, of rates exceeding 12%, home ownership had declined below 60 per cent. In fact wasn't it approaching an all time low of about 55%?

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    Default Re: extrapolation on recent real estate foreclosure rate

    ^^^ yes that's in the correct ballpark. At that time, a decline in home ownership from 64% of American families to say 56% represented foreclosures and forced sales of enough houses to accomodate 8% of all families in America. Today, if we start at 69% home ownership and decline to the same 56%, the resulting foreclosures and forced sales will throw enough additional houses on the market to accomodate 13% of all families in America.

    Viewed another way, this translates into a statistic that 13/69 = 19% or about one in every five homeowners in America is likely to be foreclosed on ... that one in every five houses on a given street are likely to be put on the market as a 'distressed sale' ... that one in every five mortgages held by lenders is going to go 'belly up' ... in the near future. This compares to an 8/64 = 12.5% figure during the worst historical instances like the one you mentioned. 12.5% or one in eight had some very serious negative consequences the last time around i.e. the S&L crisis/bailout where the profits from seven performing loans could not 'cover' the loss from the eighth loan that went 'belly up'. Attempting to 'cover' the losses of a fifth loan from the profits of just four performing loans this time around will create even more extreme losses for the mortgage lenders.

    However, banks and S&L's have learned a lesson from the events of 20 years ago. Instead of holding the loans themselves as was common back then, today mortgage loans originated by private financial institutions have been repackaged and sold by the million to the GSE's i.e. Fannie Mae, Freddie Mac. Thus instead of privately owned financial institutions being in danger of bankruptcy as with the S&L crisis, this time around the GSE's will be the ones facing bankruptcy with the US taxpayer nominated to cover their financial losses. The potential losses which would be incurred by the GSE's (given that a higher than average percentage of their mortgage holdings are in the 'subprime' sector pursuant to gov't directives to subsidize home ownership for certain groups of would-be 'subprime' homebuyers) would actually make the US trade deficit look small in comparison. Hey, this problem can be fixed easily ... by a 10% increase in Ameican income taxes for say the next 30 years ... that should be a real 'easy sell' given the likelihood that one in every five former American homeowners will already be in bankruptcy !

    The alternative, i.e. the gov't allowing the GSE's to default on their mortgage bonds which are widely held by institutional investors throughout the world, with a resulting mass exodus from these and other US dollar denominated bonds and equities, and resulting exchange rate crash of the US dollar, would essentially create worldwide financial panic. A variation of this alternative is for the US gov't to simply print up the US dollars that the GSE's owe in bond payments to their institutional investors to keep the GSE's from defaulting, which avoids a worldwide panic but still tanks the US dollar. If either of these were allowed to happen, the resulting crash of the US dollar exchange rate would translate here in the USA to gasoline priced over $5 per gallon, prices of energy / food / anything imported going up by at least 50%, widespread business and personal bankruptcies ... in short a replay of the 'great depression' of the 1930's.
    ~
    Last edited by Melonie; 06-28-2006 at 08:34 PM.

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