April 16, 2008 (Housing Market Monitor)

Housing Market Monitor

Foreclosures Hit New Record

April 16, 2008

By Dean Baker

"Former bubble markets now have the highest foreclosure rates."

The number of foreclosures was 234,685 in March according to RealtyTrac, a 2.8 million annual rate. This is 5 percent above the February level, more than reversing a small decline from January to February. The March number is 57 percent above the level for March of 2007.

There are three characteristics about the latest foreclosure data that are worth noting. First, the increase relative to 2007 is probably understated by a straight comparison, since it is becoming increasingly rare for banks to file foreclosures on second mortgages in many areas. This is for the obvious reason that with house prices having plunged in many formerly hot markets, the odds of collecting anything on a second mortgage is almost zero. (Nothing on the second mortgage can be paid, unless the first mortgage is paid in full.)

The second striking item in this report is the sharp increase in the number of properties that are directly returned to mortgage holders instead of going through an auction. The number of homes that were directly returned to banks in March was more than double the year ago level. This is likely occurring in cases where house prices have fallen well below the value of the outstanding mortgage debt. In these cases, there is little point in going through the motions of conducting an auction, since the price will not be enough to cover the mortgage.

The third item of interest is the geographic concentration of foreclosures in the formerly hot markets. Last year, Michigan and Ohio ranked at the top in foreclosure rates. They have now been surpassed by Nevada, California, Florida, Arizona, and Colorado, all states that had seen large run-ups in house prices. The geographic switch is primarily due to the collapse in the bubble in these markets. However, a glut of abandoned properties in depressed Midwest areas may be a factor holding down foreclosure rates.

Banks with large inventories of foreclosed homes have little incentive to rush through with foreclosures. According to some accounts, they are just letting properties sit, in some cases having been abandoned by the homeowner, rather than filing the papers that would allow them to legally reclaim the property.

The homebuilders’ confidence index remained at 20 in April, near its all-time low of 18,  which was hit in December. There is little evidence of any upswing on the horizon. One item that is working in the wrong direction for builders is a rise in the price of construction materials. Over the last three months, the material and components for construction component of the Bureau of Labor Statistics intermediate goods index has risen at a 7.9 percent annual rate. This reflects the rising world price (measured in dollars) of many of these products. 

Consistent with the homebuilders’ index, housing starts fell to a 17-year low in March, dropping 11.9 percent from an upwardly revised February number. The 947,000 annual rate is the lowest since March of 1991 and is down 54.2 percent from the 2005 rate. The annual rate of 680,000 starts of single-family homes is a decline of 60.4 percent from the 2005 rate. By region, the Midwest appears to be hardest hit in the latest data, with starts down by 21.4 percent from February and 46.5 percent year over year. While this could be due to the effects of the recession compounding the impact of the collapsing housing bubble, it is also possible that the decline is attributable to unusually bad weather in March. Next month’s data should provide a clearer picture.

All the data continue to point to further weakening in the housing market. The sharp decline in construction is a positive development, since it will reduce the oversupply of housing, but falling prices coupled with a weakening economy will further reduce demand. Tighter loan conditions, particularly in the markets with rapidly declining prices, will also curtail demand, especially since many homeowners will have little equity to put toward the down payment on a new home. The one positive development is that long-term interest rates for prime conformable mortgages have stayed low, even as inflationary pressures have grown.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net). CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.

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