Foreclosure 'crisis' is overblown

[Lauri]

Sure, there are pockets of pain around the US, but it's not as if most Americans are losing their homes. More than 99% of homes aren't in foreclosure.


By Scott Burns
A recent list of year-end mortgage foreclosure rates in 100 top metropolitan areas drew a lot of attention. Released by RealtyTrac, a company that compiles data on home foreclosures, the list showed the number of foreclosure filings in each metro area, the percentage of homes being foreclosed and the percentage change from the previous year.

Though the report had some dismal news -- such as the nearly 4.9% foreclosure rate in the Stockton, Calif., area -- a close look at the data also provides some reassuring information. It tells me, for instance, that the foreclosure crisis is a regional problem, not a systemic one. It could become a systemic problem, of course, but we're a long way from that now.

This news will disappoint the gloom-and-doom crew and all those seeking the excitement of financial upheaval. But it may be time to temper our worry and take a closer look at some of the year-over-year foreclosure statistics:

Though the national rate of foreclosure increased by a whopping 79% between December 2006 and December 2007, the rate was still only 1.033%. Because about 30% of all homes are owned mortgage-free, this means that for all the noise about a crisis, only seven-tenths of 1% of all homes were in foreclosure.

In the top 100 housing markets, the average foreclosure rate was somewhat higher -- 1.38% -- and it was up 78% over the previous year. But if you rank-ordered the list of the top 100 areas, only 34 had foreclosure rates above the group average. Fifty-one areas had rates of 1% or less.

Foreclosure rates actually fell in 14 of the 100 areas. More important, many of the areas with the highest increases in foreclosure rates were rising off rates that were tiny. The Bethesda, Md., area, to offer the most extreme case, saw foreclosures rise 1,288% -- to a rate of 0.682%. In other words, foreclosures there were virtually nonexistent the year before. Today they are still well below the national average. The same can be said for the Albany, N.Y., area (up 638% to 0.25%), the Baltimore area (up 544% to 0.73%) and the Providence, R.I., area (up 354% to 0.41%).

Another pattern emerges if you cross the foreclosure rates with the Office of Federal Housing Enterprise Oversight (OFHEO) index of home prices. It shows that the top 10 foreclosure areas in America are areas of extreme price change -- changes far from the national average of 46.92% over the past five years. (See the table below.)

Talk back: Do you think the foreclosure crisis is overblown?

Seven of the top 10 foreclosure areas had experienced major price spikes in the past five years. Three of the top 10 foreclosure areas had experienced price increases that were dramatically lower than the national average. That pattern continues when you examine the top 25 foreclosure areas.

[graph snipped out]

The seven areas with the top price appreciation for the past five years averaged a stunning 91.6% increase, nearly double the national average. The national average, in turn, was about triple the inflation rate for the period.

Small wonder the foreclosure rate is booming as well. Anyone who bought in the past few years with a 5% or 10% down payment has a good chance of being upside down as froth comes off the market. In those areas the problem is about irrational price spikes and the hazards they bring to homeownership.

Some would call this "a Cadillac problem" -- a great problem to have, like having more boats than you have water-skiers. Though 5% of the homeowners may be losing their homes, most of the other 95% probably feel significantly richer.

Smart Spending blog: When is it OK to walk away from your home?

How much richer? Try this. Suppose you paid three times your income for a house and it nearly doubled in value over five years. What does that mean? It means your net worth grew by nearly three years of income. Try achieving that with your 401(k) plan. Even if you bought halfway through the surge, your gain is likely to be well more than one year of income. However you cut it, the change compares quite favorably with working and saving.


Owning your own home is an idea so popular that it's known as the American dream. But as prices fall and foreclosures rise, for many it's become a nightmare instead.

The three metro areas with low price appreciations are a different matter. Homeowners in Detroit have actually lost money on their homes over the past five years. That, in turn, has limited their ability to make up for income shortfalls by borrowing against home equity. Add a shrinking job market, and places such as Detroit are coping with a perpetual surplus of sellers over buyers.

One indication is the cost of renting a U-Haul truck. It recently cost $1,447 to rent a 26-foot truck to move from Detroit to Dallas but only $521 to rent the same truck to move from Dallas to Detroit. The real economic problem, for the most people, isn't the price-spike states. It's the deflation states.

Questions about personal finance and investments may be e-mailed to scott@scottburns.com. Questions of general interest may be answered in future columns. More columns by Scott Burns can be found here and here.

http://articles.moneycentral.msn.com/Banking/HomeFinancing/ForeclosureCrisisIsOverblown.aspx

[Lauri]

looking at the graph i snipped out .. it looks to me that most of the Top Areas in foreclosure... are blue areas. heavily blue areas.

[DixieBelle]

A few things about this "crisis" irk me:

1. As the article states - it's not a true crisis. Many people are NOT losing their homes. In fact, some studies are showing that homes in the millions are selling at an all time high.
2. I really don't like the idea of bailing people out of their stupid mistakes. I cannot believe our govt would even suggest such a thing. Not to mention that I will ultimately end up paying for it via higher taxes, higher interest rates, etc..
3. The people who treated their home like a piggy bank and raided it when the price was inflated just need to suck it up! It's not my fault you're bad with money that was never really there to begin with! You rolled the dice - time to pay up.
4. I do think there were some bad lenders who only wanted to profit and then dump the loans. But a market correction will fix this. Not govt intervention! Oversight and regulation are fine and should be enforced though. But stop blaming the banks in every case!

Grrrr!!!

/rant off

[Lauri]

Dixie, all your opinions are mine as well... I think most of America looks around and says, "what recession?? we're doing pretty good over here!"

this is where McCain can seize the actual news and smack Hilary and Obama over the head with it every single day - he needs to be out there saying we are NOT in a recession and explain what a recession actually is (two negative quarters - which havent happened yet) and explain the media hype driving the campaigns on the left.

he needs to keep talking about how well we are doing in Iraq and make Hilary and Obama defend themselves over wanting to cut and run.

McCain CAN use the Reagan positive attitude to swing people to him if he chooses to... I'm going to be really frustrated if he doesnt.

[DixieBelle]

^Rove said the same thing last night on Fox. Totally agree!!!

And I just think it's so cool to flip the channels and see Teh Rove on Fox. Must really give the libtards heartburn. I bet a lot of them have deleted the Fox channel from their guides. BWAHAHAHAHA!

[Chris_]

A few things about this "crisis" irk me:

1. As the article states - it's not a true crisis. Many people are NOT losing their homes. In fact, some studies are showing that homes in the millions are selling at an all time high.
2. I really don't like the idea of bailing people out of their stupid mistakes. I cannot believe our govt would even suggest such a thing. Not to mention that I will ultimately end up paying for it via higher taxes, higher interest rates, etc..
3. The people who treated their home like a piggy bank and raided it when the price was inflated just need to suck it up! It's not my fault you're bad with money that was never really there to begin with! You rolled the dice - time to pay up.
4. I do think there were some bad lenders who only wanted to profit and then dump the loans. But a market correction will fix this. Not govt intervention! Oversight and regulation are fine and should be enforced though. But stop blaming the banks in every case!

Grrrr!!!

/rant off

You hit it on the head.  I want to expand a bit on #3.  As many know, if you sell out for less than you owe ("upside down") and are released from the loan, the IRS treats the difference as income.  That is because IT IS INCOME.  Take for example, someone whose house goes from a value of $200,000 to $400,000 (not unusual in L.A.) -- that person refinances the whole thing and then has $200,000 in his/her hand.  Not too much later, for whatever reason, they walk away from the loan and sell the house for $350,000. That $50K difference is in his/her hand.  If you forgive the income tax, then you are allowing a 50K boon.  That really isn't fair to those of us who pay income tax on all our income.

[DixieBelle]

^yes, it really is screwy.

Our county is being raked over the coals for recent tax assessments. The local media is all over them with accusations of huge increases to cover the many defaults. And guess what article was in the local paper? One about a huge budget shortfall in the school system because of declining property tax. Hmmmm....

We all get screwed.

[Ptarmigan]

The foreclosure crisis mostly hits exurban areas, areas that are really way out of the suburban areas. Also, in newly developed areas as well. I still see houses and buildings being built as of today. As for some lenders, they were giving out loans and mortgages like if money grew on trees. The government should not bail anyone out. If they do, this could encourage people to take out even bigger mortgages. As for a recession, we will not find out until the quarter is over. Here is an interesting article that links the subprime mortgage crisis with 9/11.

http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2007/stories/DN-burns_03bus.ART.State.Edition1.38aa65b.html