July 27, 2009
By Ken Fears, Manager, Regional Economics
Even in the best of times a small number of homeowners fall behind on their mortgage payments, in some cases resulting in foreclosure. Since the beginning of 2007, however, the foreclosure rate has risen in every state in the country. Some states have fared better than others. The initial wave of foreclosures resulted from a confluence of financially vulnerable borrowers using risky loans to finance home purchases in areas where prices had escalated rapidly over a long period of time resulting in an environment of weak affordability. This pattern was most common in the markets of California, Arizona, Nevada, and Florida, but it occurred to an extent in any market where there was a long period of price increases that eroded affordability (this pattern could be restricted to certain neighborhoods).
Foreclosures have been a problem in parts of Michigan, Ohio, and Illinois for even longer, though. The global economic recession that started in 1999 caused a structural change in the economy of this region, shifting thousands of manufacturing jobs from this area abroad. This permanent loss of jobs resulted in high unemployment and elevated foreclosure rates as well as slack housing demand even as the national economy expanded. High foreclosure rates have characterized this area since, but were exacerbated by increased access to risky loans in 2005 and 2006 followed by mass layoffs more recently.
As of the first quarter of 2009, these two areas - states which experienced the sharpest increase in home prices and areas of the Rust Belt - share the highest concentrations of foreclosures with rates in excess of 5.0 percent and as high as 10.0 percent. Foreclosures have swelled inventories and depressed demand in California, Florida, Arizona and Nevada. A recessionary economy only made matters worse. Stabilizing these foreclosures through loan workouts and higher demand is critical to stabilizing prices in these areas.
Foreclosures have also risen in other areas of the Midwest, Mid Atlantic, Northwest, Southeast, and Northeast, but not to the same extent as in the Sun Belt and Rust Belt markets. Rates in these areas currently hover in the 1.0 percent to 2.0 percent range with some states in the 4.0 percent range. Localized pockets of high foreclosures exist in each of these regions, though. While the national foreclosure rate moderated between the fourth quarter of 2008 and the first quarter of 2009, this decline may prove temporary as the Administration’s moratorium on foreclosure processing by the GSEs (Fannie Mae and Freddie Mac) expired in March of 2009. The cessation of the moratorium could lead to a bulge in foreclosures over the summer.
Not surprisingly, prices have fallen sharply in areas where there are large concentrations of foreclosures; notably in California, Arizona, Florida, but also in parts of Michigan and Ohio where price declines are in excess of 40 percent from their peak levels during the housing boom to the first quarter of 2009.
Prices have been most resilient in those markets that were last to join the housing boom like those in Texas (Dallas, Austin, Houston, etc.), Utah (Salt Lake), New Mexico (Albuquerque and Farmington) and Oklahoma (Oklahoma City and Tulsa). Similarly, smaller Northeast markets such as Reading, Pittsburgh, New Haven, and Upstate and Western New York (Buffalo, Syracuse, Albany, and Binghamton) and many markets in the Midwest and upper South like Chattanooga, Waterloo/Cedar Falls, and Green Bay have seen more modest declines in the range of 10 to 20 percent. These markets did not experience the sharp, headline-making price increases that led to subsequent lending and foreclosure problems. Consequently, while they have been impacted by the shortage of financing and general buyer apprehension, prices have not fallen as much in these areas for typical properties.
The performance of high priced markets on the East coast like New York City, Providence, Boston, and Washington, DC is somewhere in the middle. They have experienced considerable declines since their respective price peaks, in the range of 20 percent to 40 percent through the first quarter of 2009, but these market corrections have not been as sharp relative to markets with high concentrations of foreclosures. The price declines in these markets tend to reflect sharp declines in peripheral areas, while more central and established neighborhoods have only witnessed modest declines, if any.
These changes in prices took time to develop. Many markets skidded to a halt until earlier this year. Recently there has been a substantial change in the pattern of home sales, which resulted directly from the changing pricing environment. The second part of this commentary will address these shifting sales trends.
Copyright National Association of REALTORS®, Reprinted with permission
Posts
No comments:
Post a Comment