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April 2007

Foreclosures are up; Home prices are up! Huh?

Posted at 6:15 PM, Apr. 19, 2007

Foreclosures are up; Home prices are up! Huh?

Foreclosures are up, according to DataQuick.  DataQuick has provided real estate information since 1978.

Home prices for Los Angeles County are up according to the Los Angeles times.

Basic economics suggests that as demand decreases prices will fall.  Is this time different?  

The past run up in price was credit driven.  After 9/11 as credit became much easier to obtain more household were able to buy homes.  As demand rose, prices roses.  As prices doubled many were not able to afford homes even with the most aggressive types of mortgages and home sales stalled.  Additionally, rates on adjustable rate mortgages (ARM), rates on many interest only mortgages and rates on most second mortgages,  rose.  Now a 30 year fixed conventional mortgage can be less expensive than an adjustable rate mortgage (ARM).  Thus, using an ARM as a way to get into a home has lost some its allure.

With many ARM products resetting to a rate higher than the borrower's initial rate and with appreciation not in the double digits, some are finding that they can not longer afford their payments. These homeowners also do not have enough equity to refinance into a loan that could work for them.  As a result, foreclosures are going up. Principally, these are buyers who have bought in the last 18 months.

This is not the 90's.  In the early 1990's a recession caused large losses of employment and many people lost their jobs.  As a result of their job loss they could no longer make payments on their homes and their were massive foreclosures.  The foreclosure rates of the early 90's were more than 5 times today's level.  

Can prices hold up under these pressures?  Absolutely, without large losses of employment most people will continue to make their payments and stay in their homes.  Builders will continue to reduce their inventories, flippers and other speculators have already largely left the market, and new hires moving into the region continue to buy homes.  

Will appreciation slow?  It has.  Appreciation in most areas is now in the low single digits.  It is difficult to see further declines in appreciation without large job losses.

Could large job losses occur?  Sure,  Some speculate that the losses in the mortgage sector and other real estate related sectors will spread to the greater economy.  There are no present signs of that.  While some mortgage companies are closing others are expanding.  Employment as a whole is quite stable.

So this time could be different from the early 90's because the cause of price appreciation slowing is different.  

Does this mean it is a good time for you to buy or sell?  To talk  about currently market conditions and how those conditions effect you, contact me at your convenience.

Terri Champlin