HousingZone

Rising Foreclosure Rate Restrains Housing Starts

Jim Haughey, Chief Economist, Reed Construction Data -- 6/5/2009 8:32:00 AM

Recession has replaced 2004-2006's bad underwriting and fraud as the principal driver of home foreclosures. This means that the foreclosure count will continue to rise even though the absolute number of foreclosures -- due to rate resets from initial teaser mortgage rates, abandonment of speculative properties and quick defaults on mortgages that were never affordable -- continue to decline.

Foreclosures are a lagging indicator. Typically, the number of foreclosures keeps growing for at least a few months after employment begins to expand, which is 5-8 months ahead. As a result, home builders will be competing with an excess of existing homes for sale through late 2010 or beyond.

This will restrain starts for several years after home builders have cleared out their own surplus inventory. Both the delinquency rate (30-plus days late) and the number of residential mortgages in foreclosure jumped sharply in the first quarter, according to the Mortgage Bankers Association national delinquency survey. In the first quarter, 1.37 percent of residential mortgages entered the foreclosure process, up from 1.08 percent in the previous quarter. The delinquency rate rose to 6.06 percent for prime loans, and the share of prime mortgages in the foreclosure process jumped to 2.49 percent.

The prime delinquency rate is far below the rate for subprime (24.95 percent) and FHA loans (13.4 percent). But most mortgage loans are prime-rate, so the relatively low -- but historically high -- prime default rate now dominates the foreclosure count.

Nationally, about one in eight residential mortgages are 30 days or more past due or in the foreclosure process. This does not include mortgages already foreclosed, some of the distress sales (to avoid foreclosure) or homeowners' cutting other spending sharply to cover their mortgages.

The foreclosure problem is far worse in the Southeast and Southwest, where subprime loans were more common -- why the depth of the recession is greater. In the first quarter, 10.6 percent of all Florida mortgages were in the foreclosure proces. The rate was 7.8 percent in Nevada, 5.6 percent in Arizona and 5.2 percent in California.

The price decline is not over in these housing markets. Nonetheless, existing home sales will keep rising in these markets as first-time home buyers and speculators buy homes at a once-in-a-lifetime bargain price. Within the last two weeks, I got emails announcing 10 percent to 20 percent price cuts on more than 10 percent of home prices I am following in a Florida Gulf Coast community.

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