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Rise in foreclosures "a shock." Really?!?!

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March 12, 2009 – Comments (7)

You've got to love this headline:

Rise in foreclosures 'a shock'

Really?!?!  How can you be shocked that the number of home foreclosures is rising?  Despite legislative efforts to slow them, the number of home foreclosures rose 10% month-over-month and 30% year-over-year in February.  It would be a heck of a lot worse if they government wasn't doing its darndest to keep people in homes that they can't afford.

While the headline from this article is a joke, the following quote is spot on:

The reason so many people lose their homes once they are in default is partially attributed to the severe home price drops recorded in many of the worst-hit areas. When borrowers are severely underwater, owing more than their homes are worth, it removes an incentive to keep up with mortgage payments. Some simply walk away.

One big reason that foreclosures are up is because many people have to move to get a new job and their homes are underwater.  Would you pay money out of your own pocket so to sell your house to someone else?  I certainly wouldn't unless I was barely under water and I really needed to preserve my credit rating for some reason.

The government is going to be unable to prevent home prices from falling to an affordable level.  They had gotten way out of whack with all traditional measures of affordability.  They may be able to slow the decline in prices down by passing policies that are unfair to responsible citizens, but make no mistake about it prices are going to eventually fall regardless of the action that Uncle Sam takes.  The economy will not stabilize until home prices do.

By the way, I hope that the government claws back every penny of the bonuses that that scumbag Thain and his friends over at Merrill paid themselves early.  This sort of stuff is infuriating: Merrill postponed posting losses until after cutting $3.62 billion in bonuses, NY Attorney General says.  I'm not for capping executive pay, but I am for bringing the hammer down on these guys.

Deej

7 Comments – Post Your Own

#1) On March 12, 2009 at 7:01 AM, TDRH (99.64) wrote:

Where are the perp walks?   Bernie is not going to be enough to slake the public thirst for blood. 

Home prices need to fall to levels of qualified demand where the rent vs buy decision makes economic sense.  Some areas are already at equilibrium, others may take longer to slide, but you are right, interference only slows the tide.  With unemployment and foreclosures on the rise though it is going to be interesting to see if we overshoot the bottom, and if so by how much.   Case Shiller report will be watched closely.

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#2) On March 12, 2009 at 7:10 AM, TMFDeej (99.41) wrote:

Here's a great quote from the HCM Market Letter by Michael E. Lewitt that sums up this situation beautifully:

Moreover, as more and more debt was created through financial engineering and policy prescription, the prices of these were bid up higher and higher. This led these products to become grossly inflated in value compared to any inherent economic worth they might possess. Once the bubble burst, their value dropped precipitously. Unfortunately, the face amount of the debt used to purchase these assets did not adjust downward at the same time. Assets that were purchased at inflated prices are now worth a fraction of what they were purchased for, leaving behind a serious dilemma for the owners of these assets and their creditors.

Following conventional economic thinking, the government believes that the solution lies in policies designed to reflate the value of these assets. The problem with this approach is that it is based on the incurrence of trillions of dollars of additional debt to create the demand needed to purchase these assets. Debt begetting more debt is a poor prescription for sustainable long-term economic growth. At best the government may be able to provide a short-term boost to the economy, but what the economy really needs is a solid, organic foundation for growth. Debt-financed government demand can't be sustained indefinitely, which is why this policy is doomed to fail in the long run. The U.S. balance sheet is not a bottomless pit, although it is increasingly coming to resemble a Black Hole. At some point, the economy will have to generate sufficient tax revenue to pay for this government spending or the country will lose its AAA rating and ultimately become a troubled credit. Economic demand will ultimately have to become savings-driven or it will again collapse.

Deej

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#3) On March 12, 2009 at 9:39 AM, outoffocus (23.02) wrote:

Check out this little gem from a recent article (free subscription required):

"The National Association of Realtor’s Housing Affordability Index shows that a median-income family can afford a home priced at $283,400 in January with a 20 percent downpayment, assuming 25 percent of gross income is devoted to mortgage principal and interest. A year ago, that same family could only afford a $263,300. “I see a housing rally ahead because consumers simply can’t afford to sit on the sidelines any longer,” adds McGee."

That is the biggest piece of crock I've heard so far.  And where, exactly, did this extra income come from to bring the affordability index up this year? Heck even CEOs are taking a pay cut.  Tell them to cut the BS please...

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#4) On March 12, 2009 at 9:47 AM, EverydayInvestor (< 20) wrote:

um, not extra income, lower mortgage rates.

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#5) On March 12, 2009 at 10:04 AM, outoffocus (23.02) wrote:

$283000? Based on what median income? They need to provide more data before I'll be convinced.  After the huge destruction of wealth that transpired over the past year, who has $70000 to drop on a downpayment for a house? Even if they do have $70000, how many people out there will be willing to drop that amount of money on a downpayment given the current economic situation?

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#6) On March 12, 2009 at 10:24 AM, Schmacko (55.51) wrote:

The 20% down payment is probably where the argument falls apart.  The median-income family that is a first time home buyer probably doesn't have $70,000 sitting in the bank waiting to go to a house.  The median-income family that already owns a house probably isn't looking to buy a new house... because they already own one, and there is no guarantee that they have at least $70,000 of equity built up in their current house available to make a down payment on a new property.  

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#7) On March 12, 2009 at 11:42 PM, SharpSEO (69.85) wrote:

Consumer spending is another "SHOCK" currently hitting analysts in the face. How did they not see this coming? I don't think they're mind-bogglingly dumb individuals. They're either lazy or biased (under pressure from money managers to push equities.)

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