The Great Financial Crisis that started in 2007 is far from over, and it is about to heat up again with what could be a new mortgage meltdown. Foreclosure statistics indicate that the real estate market is still extremely volatile and vulnerable to sudden disruptions.
The number of foreclosures in the United States increased by 20% in March 2015, data collected by RealtyTrac.com indicates. This was the first month with an increase in the number of foreclosures since September 2010, according to RealtyTrac.
To make matters worse, the number of homes that actually reached foreclosure auction (the end of the process) in March was 11% higher than in February. That indicates that large numbers of Americans still do not have enough money to keep their homes.
What is even more worrisome is that the number of bank repossessions, or REOS, increased by 49% between February and March 2015, RealtyTrac reported. The bank repossession rate hit a 17-month high and rose to a rate that was 25% higher than for March 2014. These statistics indicate that the foreclosure crisis has returned with a vengeance, folks.
“The 17-month high in bank repossessions in March corresponds to a 17-month high in scheduled foreclosures auctions in October,” RealtyTrac vice president Daren Blomquist said in a press release. The number of repossessions in first quarter 2015 was seven percent higher than in fourth quarter 2014.
There was a little good news in the report; the rate of new foreclosures in first quarter 2015 was down 11% from fourth quarter 2014 and eight percent from first quarter 2014. That means fewer homes are entering foreclosure but more of the ones in it are being taken.
Where the Foreclosures Are
That good news is offset by dramatic increases in the rate of new foreclosures in a number of states. Those increases were reported in a number of states that have been touted as being in recovery. RealtyTrac reported the following foreclosure increases:
- The number of new foreclosures in Massachusetts in first quarter 2015 was 58% higher than in first quarter 2014.
- The rate of foreclosure starts in Virginia and Michigan increased by 11% in the past year.
- Lenders initiated eight percent more foreclosure starts in Illinois in the first three months of 2015 than they did a year earlier.
The Slow-moving Financial Crisis
These numbers reveal a disturbing reality that our leaders are ignoring: the financial crisis did not end in 2009. Instead, we are in the midst of a slow-moving financial crisis that appears to be heating up again.
“The March increase is continued cleanup of distress still lingering from the previous housing crisis; not the beginning of a new crisis by any means,” Blomquist admitted.
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The crisis is continuing because we no longer have a free market in residential real estate in the United States. Bad policy and government interference have so distorted the marketplace that it no longer functions. One example of this is the exorbitant price of real estate that is created by government underwriting of mortgages and the mortgage income tax deduction.
The Broken Real Estate Market
Another was the refusal of our leaders to let the real estate market collapse. Free markets need to collapse occasionally to bring prices back down to earth. Such collapses can be good; the collapse in oil prices stimulated economic growth by giving people more money to spend.
The stock market recovered because it collapsed in 2008. The real estate market has not really recovered, because it never really collapsed.
One big effect of this is that unrealistic prices for which there is no real market demand are sustained. This means perfectly good housing sits empty and deteriorates while average people go homeless because they cannot afford the price.
Another is that the only way people can afford housing is to take out a big mortgage. If real estate values fall, large numbers of properties will be underwater, a situation in which the amount of the mortgage exceeds the price the home can be sold for.
This catastrophe could have been averted by setting up mechanisms to quickly liquidate foreclosed homes and get them back into the market. That would have lowered prices, which would have helped average people. Even though people would lose their homes, they could probably find a comparable property at a lower price in a realistic real estate market.
It would have also enabled investors to buy many of the properties and turn them into rentals. That opportunity could have allowed a lot of average people to generate a lot of wealth for their families. Instead, the properties sit empty, which hurts communities and helps no one.
Another positive result from a collapse in real estate values would be that average people would pay less for housing. They would have more money to spend, which would stimulate other sectors of the economy.
Unfortunately, this has not happened; RealtyTrac reported that it now takes around 620 days—nearly two years—to complete a foreclosure in the United States. The situation is worse in some states; it takes 1,475 days to complete a foreclosure in New York State and 1,115 days to complete one in New Jersey.
It’s About to Get Worse
What is truly frightening is that the situation is about to get a lot worse. Many more of the ticking time bombs left over from the 2005 real estate boom are about to go off.
The bombs are called HELOCs, or home equity lines of credit, and were offered to many homeowners 10 years ago. A HELOC is essentially a second mortgage that lets a homeowner borrow against the value of the home. Many of the ones offered during the boom allowed people to pay just the interest and not the principal on the loan for the first 10 years of a 30-year mortgage.
That bill is about to come due, and it could be the disruption that causes a new mortgage meltdown. RealtyTrac estimated that around 3.3 million American homes carry HELOCs, and 56% of those homes (around 1.8 million) are considered seriously underwater. A property that is seriously underwater is mortgaged for 125% of its current market value or more.
Under the terms of many HELOCs, many homeowners could see their mortgage payments increase. In some cases, they could double, which could force many of those properties into foreclosure.
This catastrophe occurred because many families used HELOCs to pay for things like food and gasoline during the financial crisis. It could quickly end the real estate recovery in some areas of the country like California, where there are 646,000 homes with HELOCs, most which (424,000) are on underwater residences, RealtyTrac found.
Many homeowners will simply walk away from the houses when they get the higher HELOC bills, Los Angeles realtor Mark Hughes predicted in an MSN Money interview.
The effect will be hard to gauge because some areas of the economy, like the stock market, are healthy while others, like employment, are anemic. One definite effect of this will be increased stock values as money flows out of real estate and into stocks. Another will be demands for radical solutions like government plans to keep people in their homes.
A wild card here is the Federal Reserve, which has been propping up real estate and mortgages with low interest rates. If the Fed raises interest rates this summer, that could be the event that crashes the real estate market.
My guess is that real estate will remain in crisis for the next few years while the rest of the economy experiences sluggish growth. We could also see some dramatic drops in property value in certain areas of the country as Americans realize that there has been no real estate recovery.