Real Estate Bubble Watch: Rising Foreclosures

Today’s Washington Post, “A Bane Amid the Housing Boom: Rising Foreclosures,” describes the rising number of mortgage foreclosures nationally. Sayeth the Post: “Foreclosure rates rose in 47 states in March, according to, an online foreclosure listing service. The rates in Florida, Texas and Colorado are more than twice the national average. Even in New York City and Boston, where real estate markets are white-hot, foreclosures are rising in working-class neighborhoods.

“Virginia, Maryland and the District have relatively low foreclosure rates — analysts say troubled owners in those booming markets can still sell their homes before facing foreclosure. Should the nation’s housing bubbles deflate, as many economists and federal officials expect, the foreclosures could prefigure a national crisis. Americans now shoulder record levels of housing debt — more than 8 percent of homeowners spend at least half their income on their mortgage.”

Regulators blame mortgage brokers and bankers who, while promoting the dream of home ownership, have crafted ever-riskier ways for Americans with poor credit to buy homes. Interest-only and adjustable-rate mortgages account for 63 percent of new mortgages. Now policymakers are wondering if the crusade to boost home ownership is backfiring. As debt levels rise, home ownership is destroying wealth for millions of working class Americans rather than creating it.

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  1. Sorrel Avatar

    It’s a sobering thing to comtemplate: If values begin to decline (remember, assessments will lag behind market changes), local governments that have cut tax rates will have a helluva mess on their hands. There will be tremendous resistance to increasing rates, but there will be very little choice. AS crazy as people’s attitudes are now to falling tax rates, I can’t imagine what they’ll say when rates have to be increased to compensate for falling assessments. This all indicates to me that we would do well to try to get away from this tremendous dependence on ad valorem property taxes in favor of income tax increases. Haven’t seen a lot of politicians willing to go to the mats on that issue (or even speak its name, for that matter). But it’s out there lurking in the darkness. Watch out.

  2. Jeremy Hinton Avatar
    Jeremy Hinton

    While this article focuses on forclosures among lower income families, i forsee major problems among the young, overextended middle/upper middle folks of my (20-30s) generation. I know many of my contemporaries who are spending (what i would consider) far too much buying suburban McMansion’s. Then comes the nice car, to make the 1 hour commute more enjoyable (or to outdo the neighboors new SUV).

    Only having my own finances to compare things to, it amazes (and concerns) me to see families with what what i believe to be less income than my own, buying houses for amounts that i wouldn’t even consider. And the article is right, mortage companies are certainly assisting the phenomenon. When looking for our first house a few years back, we were “pre-approved” for twice the amount i considered it prudent to spend. It seems like people are neglecting to actually look at their finances, and are instead taking at faith the belief that the compaies offering them credit must have a better understanding of their finances than they themselves do. Also, soaring home prices + low rates = lots of home equity loans and HELOCs, often used to consolidate the massive amounts of credit card and personal debt we americans have accumulated. The picture is really starting to look quite worrisome.

  3. E M Risse Avatar
    E M Risse

    The last two major housing price “adjustements” in the northern part of Virginia (the 70s related to the REIT bust and the 90s related to the S&L bust) both started with the high end units and worked down.

    Has anyone seen signs yet of weakness at the top? There is none in Warrenton-Fauquier that we have seen. Mr. Hintons note sound a theme we hear all the time. It is in tune with billions in advertising by those who make trillions from the churn.

    (Note: the REIT and S & L bust hit primarily raw land, commercial property and rental dwelling units but they had an owner occupited residential impact too.)

    It is ironic that those at the bottom who represent the “success” of the expansion of the national home ownership goal are the ones getting hurt. Perhaps those who made millions a year in bonuses by over stimulating the mortgage market at Fanny and Freddie could set up a relief fund.

    Even when someone is able to sell out and avoid foreclosure (as Jim notes is the case for Wash-Balto NUR and other boom housing/More Better Jobs regions) they still lose equity, et al.

    There is a need for Fundamental Change to fix the Shelter Crisis. We will deal with the property tax on owner occupied residentail property in an up coming column.


  4. Ray Hyde Avatar
    Ray Hyde

    Come on guys, calm down. No investment is a sure thing, even though homes have been American’s greatest source of wealth for generations.

    Like jeremy , I have friends who approached me nad asked if I thought 40% of income was too high to pay for a home. I told them I thought they were stark out of their mind: that was in 1975.

    If they ignored me they did well.

    A few years ago I was involved in an equity raising campaign for a new business. It put me in touch with many affluent people – who had no money. They were struggling to make their $4000/month mortgage payment.

    At the same time I met others who made millions through lucky or astute stock market investments. For myself, I have chosen to avoid the churn as far as housing is concerned, but I have made substantial money on the churn in the stock market.

    What EMR dismisses as, The Churn, is simply many people doing business as they see fit. If mortgage lenders make bad loans they get hurt more that the homeowners who default, just not on as personal a level.

    The last thing a bank wants is a foreclosure: it’s a guranteed money loser.

    But someone is going to buy that forclosure for a song, and they will, likely, make money.

    0nce I pulled my small boat into a marina in Norfolk and the dockmaster at the gass dock assigned me a slip. When I go t there i found I was tied up between what looked like the Queen Mary and the Queen Elizabeth. It took all the dock line I had just to reach the corners of the slip.

    When the Dockmaster came around to help me tie up I said, look Ifeel a little silly here. “I see what you mean”, he said, “I’ll be right back.”

    I thought he was going to find me a smalller slip, but after a while he came back with a sign.

    The sign said, “This one’s paid for.” Then I didn’t feel so badly.

    Just because someone has a variable rate mortgage, does not mean they are under water. Just because someone borrowed against their home for other needs does not mean they are an idiot.

    It might mean they have to downsize. If they made really bad decisions, like financing credit card debt with home equity, they might be under water. For a while.

    If they do go under, then who will pay? We all will, because we can’t afford to let people go homeless. The current run up in home prices is a sign that we can’t afford to let people go homeless. We can’t afford to deny home construction, however NIMBY we may be. We have created a an artificial sellers market through growth restrictions that are bound to fail on account of demographic pressure.

    There is still a tremendous shortage of homes: whether it will be made up by, more homes, larger mortgages, or more crowded abodes is still up in the air. If it is to be made up by more crowded abodes, then we will have to change some NIMBY regulations.

    As far as tax rates are concerned, Sorrel is missing the point. If my valuation falls I’m planning on setting up a union of citizens to sue for back taxes charged against a value that no longer exists. Fortunately, I don’t have any idea that will actually happen.

    Higher rates against falling values will be the least of governments’s problems. EMR points out that losing equity is equivalent to losing money. On that basis, my equity in 1985 was based on one home per two acres. Now it is based on one home per fifty acres. Am I going to blame the market for that, or the government?

    Fortunately for the government, EMR is wrong. Losing equity is not the same as losing money. If I buy stock at 20 and it goes to 40 and back to 30, I have lost equity but not money, yet. The guy who bought at 40 lost money and equity, maybe.

    Timing is everything.

    One problem with EMR’s concept of balanced communities, is that it fails the temporal test. What is balanced today, isn’t tomorrow: therefore we are always out of balance.

    That’s what causes The Churn.

    EMR can save his effort on the real estate tax problem. In reality, there is no tax on residential property: it is a tax on income based on the supposed value of the property.

    But since government largely controls the value of property, through it’s development potential, the whole thing is a sham.

    Suppose Microsoft tried to charge you a license fee on your software, based on what they thought you could sell it for with your labor and data included. You would have a fit, especially if Microsoft set the valuations. Yet that is exactly what we put up with on real estate tax.

  5. Ray Hyde Avatar
    Ray Hyde

    Ooh, another way the Gummint might attempt to control the value of property. This one is particularly tricky: housing was the one bright spot in the economy during the recent slow-down. If the Fed really tightens the money supply in the face of rising housing demand, house prices could go higher at the same time the economy tanks – Yikes.

  6. Anonymous Avatar

    Forbes has good info on the housing bubble this issue.

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