Article

The Foreclosure Crisis Revisited
by Henry S. Harrison


It has been over 5 years since the housing bubble burst dragging down the whole economy with it. Those of you who are long time readers of Real Estate Valuation Magazine (we have been continuously published for over 20 years) will remember that we saw the bubble burst coming and predicted it would take 10 years for a full recovery. Sadly, it looks like that prediction is coming true. Since that time the Government has taken over Fannie Mae and Freddie Mac and the housing crisis is far from over.

Five years later here is where we are and nationally (the are local exceptions): housing prices are no where near where they were five years ago. The good news is that appraisers were again busy, and the volume of resales is recovering so that many of the Realtors and appraisers are doing O.K. The bad news is that this does not do much to help the overall the economy. What helps the general economy is the construction of new houses. Also it has been reported in many areas the volume.

In spite of the large inventory of foreclosed houses for sale the annual rate of new housing units has risen to about 600,000 units which is about half of the rate of new house construction prior to the bubble bursting. Many of these reported new construction units include units in multifamily buildings.

Many of these new units reflect a growing trend to move into the cities. Toll Brothers has been a large developer of suburban mega-homes. According to an article in Fortune magazine they are now putting up luxury condo in places like Manhattan and the hippest neighborhoods in Brooklyn.

In March 2013, Realty Trac — an online marketplace for foreclosed property — published a foreclosure inventory analysis showing nearly 1.5 million U.S. properties still actively in the foreclosure process or bank-owned (REO). This is up from the same period a year ago. These figures peaked in 2010 at over two million.

Many foreclosures are “Zombie Foreclosures” – houses that are vacant because the homeowner moved. Florida leads the pack with 90,566 zombie foreclosures, Illinois with 31,668 zombies, California 28,821 houses.

On a personal note, we decided to upgrade our house in Florida. Four years ago we purchased a 3 bedroom house with a swimming pool. It was in the Indian River Colony Club – an over 55 development started in 1995, when our house was built. It has 780 free-standing single family houses with a beautiful quite golf course (quite difficult by Florida standards), three Har True tennis courts, and a well run country club bar and dining room. It is unique in that the association completely maintains the outside of the house and all of the appliances for a mandatory fee. There is also a monthly minimum dining charge at the club. The monthly association fee is about $1,000. It is located on the East coast of Florida in Viera, about 5 miles from the ocean. Access to the beaches is easy, as the county provides ample parking and changing facilities. If you drive straight East from Orlando our house is one hour away.

Here is what now (August 2013) is happening: Four years ago after the bubble burst we paid $125,000 for a house that cost $275,000 when is was built in 1995. At the end of August, we purchased the 4 bedroom house without a pool on the same street for $110,000. It is in excellent condition. Since purchasing our first house in the development four years ago, 75 to 85 houses have consistently been for sale in the development. In the past two months there were enough sales to drop the inventory to less than 50. However, so far the prices have not gone up.

In my opinion, the primary thing standing in the of the long awaited economic recovery is the millions of houses that either are being foreclosed or now owned by some financial institution that are boarded up and vacant.

This backlog of pending foreclosures, which will result in the sale of over a million houses at prices well below what builders will be able to obtain for new single family houses they construct. The projected number of new houses to be built in the next twelve months is about 400,000. The annual number built in between ten prior to the housing bubble bursting in 2007-8 was 1.74 million houses per year. When you see the announcements that new housing starts are up by ten percent, it means an increase of 40,000 new units - to 440,000 – which is far below the million-plus new units needed to kickstart the economy.

Looking back over the past four years, there have been a series of programs announced by the current administration, and not one of them has amounted to a hill of beans.

Looking back, we see ample evidence that prior to the burst of the housing market bubble in 2007, lending institutions were lending money to homebuyers who did not have the income needed to make their mortgage payments. According to Joe Nocera, in his New York time article, “The Foreclosure Fiasco,” over a billion dollars were spent by the lending institutions required to review their foreclosures made in 2009 and 2010.

There was such poor reaction as a result of this review that the Feds gave up and made a blanket settlement with the lenders who did little to solve the problem. The Housing Market (with some exceptions) is still a mess dragging down the whole economy.