Thursday, October 23, 2008

Foreclosure Filings Surge 71% in Third Quarter

According to RealtyTrac, a total of 765,558 properties received a default notice, were warned of pending auction or were foreclosed on in the quarter, up 71% from the third quarter of last year.  Filings rose 3% from the second quarter and actually fell 12% in September from August as state laws to keep people in homes slowed the pace of defaults.
Six states accounted for more than 60% of defaults, led by California.  California had six of the 10 metropolitan areas with the highest foreclosure rates in the quarter.  According to the September 2008 homes sales report released by Dataquick yesterday, 51.1% of all sales in California were foreclosure resales, indicating they have been foreclosed on at some point in the prior 12 months.  The number of homes and condos sold statewide was up 6.1% in September from August and an astonishing 64.8% from September of last year.  The median price paid for a home last month was $283,000 down 6% from $301,000 the month before and 34.2% from $430,000 in September a year ago.  According to the Dataquick report, around half of the drop in the median is due to depreciation, with the other half due to shifts in the types of homes selling, and how those homes are financed.  The typical mortgage payment that home buyers committed themselves to paying last month was $1,337, down from $1.428 in August and $2,046 in September a year ago.
The silver lining in all of this disheartening news for homeowners is the return of affordability.  Lawmakers around the country are taking drastic measures to "keep people in their homes" by launching programs such as the $300 billion FHA-backed Operation Hope for Homewoners.  The FDIC's Sheila Bair has been the most vocal about helping beleaguered homeowners.  Today's Wall Street Journal reports that Ms. Bair is suggesting that the government allocate $40 billion to purchasing mortgages, renegotiating terms with the lenders and sharing in potential future losses.  Frankly, with the government throwing billions around like chicken feed, might as well try to help those borrowers who really were victims of predatory lending, as well as those who were just flat-out foolish enough to borrow more than they could afford and assume that 20% appreciation per year was a given.  $40 billion is nothing compared to the $1.7 trillion in loans to dealers, banks, money market funds, AIG, and foreign central banks currently sitting on the Fed's balance sheet.  If the government is going to bailout everybody, make sure to pass the hat around. 
I think the California housing market hints at the eventual resolution to the nation's housing crisis.  In many parts of the country, particularly in places where housing values skyrocketed to levels not supported by median incomes, cheap and ridiculous financing options drove up the prices of homes.  Now that values are crashing, we see affordability returning to the California housing market.  Although this obviously hurts many people who bought into the market in the past few years, it makes houses more affordable for the average family.  The strong level of sales activity that we are seeing in California indicates that a bottom in prices is being set in some of the hardest hit areas.  In the same way that I don't believe that a true bottom in prices on CDOs will be reached when the government buys them, I also don't believe that a bottom in housing prices can be reached by artificial measures designed to prop up prices.  When houses are affordable again, people will buy them.  The government only needs to make sure that financing is available to those with appropriate credit.          

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