Foreclosures in Real Estate Market

According to the definitive barometer for real estate prices, the three year drop in housing prices slowed dramatically in the first two months of the second quarter. The evidence came in the form of The Case-Shiller Home Price Index, which tracks home prices across 20 major cities nationwide, when it reported that the decline in May, at 0.2%, was the lowest number in twenty four months with a handful of cities, including Denver, Washington, D.C., Chicago, Boston, Cleveland and Dallas, actually recording small gains.


Other data has been encouraging as well. According to the National Association of Realtors, there were about 3.8 million unsold homes on the market at the end of June. That's a big drop from the from 4.5 million a year ago. The decline in prices has also brought housing affordability back to the point where people are actually looking at homes again, even if they’re not buying them yet. On average, homes are down by about one third, while homes in the “sand states” like Nevada, Arizona, and Florida are down by more than half from their peaks. The unemployment rate also stabilized, albeit for the month of June, falling to 9.4% from 9.5%. Combine some of that news with mortgage rates near historic lows and suddenly there are some voices saying that the worst is over.

That optimism is being tempered by the fact that approaching a bottom in real estate prices doesn’t necessarily mean that prices are heading up anytime soon. The first point brought up by market watchers is that the second quarter is usually the strongest season of the year for housing. The last piece of data detailing the strength of the second quarter will be delivered when The Case-Shiller Home Price Index for June comes out on August 25th.

The current low interest rates and the $8,000 first time buyer tax credit are temporary stimuli which won’t be around forever. The Federal Reserve has been doing everything they can to keep interest rates low but with Fed Funds at .25%, there is really only one way for interest rates to go. Any sign of a turnaround in the economy will likely start an upward move in rates which will hurt the housing market.       

As encouraging as the reduction of inventory may appear, the fact of the matter is that a large number of homes have been put up for rent instead of for sale. Many of these remain empty and will likely turn into inventory again at some point. Another significant addition to inventories is likely to be supplied by both the backlog in foreclosures as well as the estimated 2 million expected to occur by the end of the year. The foreclosure estimates for 2010 are also expected to be in the multi-millions in part due to resets in teaser rate mortgages originated in 2005.

Unemployment, despite the brief respite in June, is still expected to reach 10% by year end. Combine that with historically high household debt levels and the argument for anything close to robust consumer spending, which currently accounts for 70% of GDP, goes flat. Also, on a historical basis, the biggest bubbles tend to deflate in a big way and then take years before showing any kind of recovery. In Japan, where another real estate bubble of epic proportions took place in the eighties, prices have yet to recover some twenty years later. 

Stabilizing real estate markets will make the argument for home loan modification even stronger as homeowners settle in for a long haul. Without sales or refi’s as an option, homeowners can still get their mortgages back in line with their current financial situation with a loan modification and set up a sustainable level of payments while waiting for the market to get back on its feet. The benefits can be even greater if a reduction on the principle owed on the mortgage can be reduced to bring the balance closer to the value of the home. There have been several positive outcomes for homeowners seeking loan modifications to get the terms they need to make their mortgage payments affordable again.


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