Wednesday, May 31, 2006

A Wonder We Haven't Had More Foreclosures

The Dallas News has this on area foreclosures. "George Roddy is no stranger to real estate cycles. The president of Addison-based Foreclosure Listing Service Inc. has been collecting data on the industry for 36 years.

"As local foreclosure rates approach the heights of the savings-and-loan scandals of the 1980s, Mr. Roddy's depth of experience enables him to draw parallels – and distinctions, between yesterday and today."

"When did the last major foreclosure cycle get under way? Back in the early 1980s, we were seeing double-digit interest rates that at one point hit 16 percent. Consequently, it was just too expensive to build for a period of time. This created pent-up demand for more development. It soon became a matter of who could make the money available the quickest. So there ended up being many, many more deals done than there should have been. This led to the beginning of a real estate recession, close to depression, in the D-FW area."

"A 'recession' or 'depression' presumably led to some properties going back to the lenders? Yes, foreclosures really began to hit in 1985. But unlike today, the first impact was on the commercial side, which had been hurt by massive overbuilding. The same thing that happened in the early 1980s is happening today, but on the residential side. The common denominator is money, and lots of it."

"But didn't foreclosures peak in 1988 and 1989? Yes, but you have to remember foreclosures are a lagging indicator. By the late 1980s people were having trouble selling their homes for what they paid for them. Consequently, foreclosures peaked in 1989, when they were running at a record 2,000 postings a month in Dallas County alone."

"How does that compare with what we're seeing today? The big parallel between then and now is unemployment. In 2000 and 2001, we saw the big dot-com bust here, and unemployment started going up fast. In 2000, the Texas unemployment rate was 4.4 percent. It would peak at 6.7 percent in 2003. And just like in the 1980s, you started seeing foreclosures rise at about the same time unemployment started ticking up."

"OK, but unemployment has fallen back to about 5 percent. Based on what happened back in the 1980s, shouldn't we be starting to see foreclosures tapering off? We thought we had seen foreclosures peak in September 2005 but as things turn out, it looks like we might still be early in the cycle. For one thing, in 1989 we had a whole heck of a lot less inventory of homes on the market than we do today."

"If you go back to the years of 1985 through 1989, we saw total building permits of 12,000 for the area. But between 2001 and 2005, we've seen a total of 51,900 permits. Permits are running 328 percent higher."

"So it's an oversupply issue? No, it's more than that. The change in the bankruptcy law has impacted more people than we'd anticipated, making it even harder for people to keep their homes. Another problem is we are seeing interest rates going up. That's going to impact a lot of people who took out these crazy loans."

"But aren't people making a lot more money today than they were back in 1989? Well, yes. In 1989, the median income in Texas was $34,700. In 2005, it was $54,000. That's a 55 percent rise in median income over 16 years, which equates to a 3.4 percent increase every year. But that's only half the equation. In 1989, the average value of a home in Texas was $86,100. Today, that number is $183,000. That works out to 112 percent, or 7 percent a year."

"What that means is the cost of the home has increased at double what incomes have. And that means there must be new ways to buy homes. That must bring us back to what you call the 'crazy loans.'"

"People can qualify to buy the same house while making less because of creativity in lending, which has to exist in order for John Q. Public to be able to buy that house. These will also impact the ability of someone to stay in a house."

"Have you seen the impact of this creative lending play out in any way? In 2005, we saw 934 home equity loans posted for foreclosure, and that number continues to rise. In the first five months of 2005, there were 356 home equity postings. Over the same period in 2006, there were 429; that's an increase of 20 percent."

"So with overall foreclosures, we're only about 75 percent of the way to 1989 levels. Obviously something is better this time around? Back then we saw meaningful degradations of value, in some cases 25 to 30 percent declines. But we haven't seen that today. If you look at months' supply figures from 1989, inventories were running at 13 months, while today we're just at about seven months, so we're not at that point yet."

"When you do start seeing values affected, it just adds fuel to the fire. But if you look at this from the positive side, this could just be an adjustment."

"What's the biggest unknown as you look to the future? When you add in all of the other cost-of-living increases we've seen in the last two years, it's a wonder we haven't had more foreclosures."

"The scary part is, what happens if we don't start to see some modification in borrowing habits? We're not yet seeing a slowdown in the foreclosure figures; in fact, we're seeing higher numbers. Where's this going to take us? We could be in for a long haul."


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