Housing market and rising foreclosure rates
Get ready to catch the wave, and buy a house!
The Mortgage Bankers Association have released their weekly report.
To help you understand the Association, and to see a good summary of the report, have a look at this page first:
Now on with the story, and your great opportunity.
"The seasonally adjusted Purchase Index is at its lowest level since December 2000. The unadjusted Purchase Index decreased 13.7 percent compared with the previous week and was 21.6 percent lower than the same week one year ago."
This means that mortgage applications to buy a house are at their lowest level since December 2000, the end of the dot com bomb. There are lots of refinancing applications, but financing by home buyers is abysmal.
This sets the stage for a perfect storm. Since early 2009, the banks have been avoiding foreclosing on their customers who are severely delinquent. The banks figured if they don't foreclose, they don't have to write those loans to market. The banks have been doing this in the vain hope that real estate prices would bottom out and prices would start to recover, or the Government would bail out the huge losses they are still incurring.
But these new figures show a continuing huge and growing weakness in the property sales market. There is currently over 11 months of housing inventory, enough property to supply the needs of all the buyers who want to buy houses for the next 11 months. If the banks foreclose on more mortgages, then the inventory would push towards the 30 month mark, and property auctions would drop the price of a house to 50% of its current depressed level. But nobody is buying!
Take a house California, that rose to $520,000 at the height of the property boom, whose owners continuously refinanced as interest rates fell. There is now a mortgage for about $460,000 on this hypothetical house. But the house is now worth $205,000, and the mortgage is going unpaid. Meanwhile, the bank continues to report the mortgage as current, adding the income to it's profit, along with the late fee charges, which makes the loan look like an asset, rather than a disaster waiting to happen.
This house is going to drop to $140,000 in the coming wash-out, and the bank will record a $320,000 loss on the property, which does not include the price of remarketing the property, or the further write-down they will take on past unpaid mortgage payments and late fees.
This creates an interesting dilemma for those people who are still paying the mortgage on a very inflated property value. It may be a good strategy to simply walk away fromtheir old house, and buy a new one. If they have steady employment, they will be able to get a mortgage, and paying 14% interest on a $140,000 loan is a lot cheaper than 6% on a $460,000 loan, and the real benefit is that they will only have to pay off a $140,000 capital value to completely own the property. Every dollar they pay off saves them that 14% interest rate, which makes it really worthwhile to pay off the house faster.
I think we have just about hit the tipping point at which the banks are going to have to declare their insolvency, and take their medicine. The property crash may be severely aggravated by people walking away from inflated mortgages, because there are going to be so many people with horrible credit scores, the whole credit score issue will be meaningless in assessing loan risk. Mortgages will be given on the basis of people having the income to support them, at low property values which protect the financial institutions for the future.
Every cloud has a silver lining. If you are thinking of buying a house, prices may be ready to plummet again, creating a wonderful opportunity to buy either a new residence or a rental property.
Get ready to ride this wave of opportunity. The wave will break in the next few months, and the time to buy is when property prices actually start to recover. In the meanwhile, find yourself a banker and explain your strategy. You can't surf the waves without the right equipment and people.
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