U.S. Foreclosure Filings Rise 12 Percent in FebruaryOne quibble: I think you really need two conditions to have a substantial rise in the number of foreclosures. Declining house prices certainly make foreclosure a more likely outcome (compared to the home-owner simply selling the house, which is what they would do when the real estate market is strong), but some sort of event that leads to the financial difficulty in the first place is also required, like job loss (which is traditionally the most common reason for a mortgage-holder to fall behind on payments) or a rise in adjustable rate mortgage payments.
March 26 (Bloomberg) -- U.S. foreclosure filings last month jumped 12 percent compared with a year ago as owners struggled with declining home values and higher adjustable mortgage rates.
More than 130,000 homes entered foreclosure last month, according to a report from RealtyTrac, an online listing of foreclosed properties. That's the second-highest since RealtyTrac began collecting data in January 2005.
The worst housing slump in more than a decade is pushing down home prices and hampering the ability of owners to refinance mortgages. Borrowers with poor or incomplete credit are also vulnerable to mortgages that are resetting at higher rates than introductory or so-called teaser rates.
"The rise in foreclosures over the past year probably only marks the beginning of the problem," Jan Hatzius, a Goldman, Sachs & Co. economist, wrote in a March 23 report. "The main reason to expect further deterioration is that house prices are likely to fall significantly in 2007, with further declines possible in subsequent years."
Foreclosures in 2007 may rise by one-third compared with last year should rates continue at the level seen in January and February, RealtyTrac Chief Executive Officer James Saccacio said in a statement today.
In our current situation, I think that higher mortgage payments will likely be a catalyst for many foreclosures over the next couple of years. It's only because we can forsee both conditions happening simultaneously - rising mortgage payments for millions of people, combined with stagnant or declining home prices - that people like me are worried about the foreclosure rate rising considerably over the next 1-3 years.
And then there's the nightmare scenario. If we also add an economic recession into the mix - something that is a distinct possibility sometime in the next year or two - then the resulting job losses could really throw the foreclosure rate through the roof. Combine that with my sense that the financial health of banks could be seriously threatened if they have to absorb rising mortgage losses at the same time that they deal with an economic recession, and I feel pretty sure that a recession in the next year would be really, really bad news. The perfect storm.
In other housing market news, the Census Bureau reported this morning that new home sales have dropped by almost 20% over the past year. See Calculated Risk for complete coverage and charts of that very bearish report.