Forclosure Goes Upscale

14 Oct

Remember back when the Foreclosure crisis started all th Republicans running around claiming it was the fault of all those poor and black folks in taking out loans they couldn’t afford?

ForclosureWell – Now foreclosure in the top market tier is nearly 1/3 of all foreclosures in the market.

About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.

The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. “The slope of that curve in recent months is much sharper than it was recently,” said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.

The Zillow research compared homes against the median values for their local market and broke each market into three tiers by value. Zillow then looked at the share of monthly foreclosures in each tier over the past decade.
[Moving Up chart]

Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year.

The issue here is that these homeowners typically are massively under water on their homes. A house which could have sold for $1.4 million in 2005 is now only worth (in some markets) $750,000. This issue if exacerbated by financing vehicles in the high-end market allowing the buyer to make only (sometimes partial) interest payments for 5 Years, at which point the purchaser has to pay off the “balloon”. In a hot real estate market with prices climbing 7% a year, this was a good deal – because the home could be “flipped” for more than the balloon payment…

With the market crash, it’s death.

The second issue is the economy – supply and demand. The number of high-end homes far exceeds the demand – or the number of folks with the income to afford them. There are just so many folks who can afford a $5,000, $10,000, or $15,000 a month mortgage anymore – and that number isn’t expanding because the number of folks “movin’ on up” isn’t expanding… it’s shrinking.

Indeed, the only way to make sense of some of this may well be “multimillion dollar tear downs” where there is enough land to build several units – or a reverse McMansion creating a duplex or triplex …

The lower end of the market seems to have bottomed, and is on it’s way to recovery. However the huge, ugly elephant in the room is that 30% of all mortgages in the country are under water.


Posted by on October 14, 2009 in You Know It's Bad When...


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2 responses to “Forclosure Goes Upscale

  1. brotherbrown

    October 15, 2009 at 12:04 AM

    That’s really all you have in California. There was a time when if you were talking about 3,000 square feet, you were talking over half a mil and I’m talking about in my neck of the woods, 50 miles outside of downtown LA in the supposedly affordable areas. Countrywide was the king of the interest-only loan and other shady dealings, which is why they were the first to go belly up and why their CEO was indicted for fraud.


    • btx3

      October 15, 2009 at 11:19 AM

      Did a foreclosure search on my zip. Came up with 42 properties, with the lowest being (foreclosure price) $400k, and the highest being reduced to $4.5 million from an original listing of $6.5 million. While the guys whose businesses have gone down the tubes generally are the $3 million and ups – lot of the $1-2 million buyers were folks playing real estate roulette trying to flip their way up who got caught. Those folks are at the mercy of their ARMs or Balloons. Real estate here isn’t as expensive as in San Fran or LA, but it’s still $314 a sq foot on average – meaning you are looking at $630k for a 2000 sq foot house, before whatever the land is worth. The bargains here are the older houses, because the new ones are coming in at an average of 6000 sq ft. I did see one 6,000 sq foot house for $500k in foreclosure – but I’m betting that one was a builder who went belly up half way through getting it built. What they generally do is get the house closed up and leave the interior roughed in, meaning the buyer has to contend with the really expensive stuff like the kitchen and baths, which if done to the level to make the house competitive with it’s comparables in that size range is another $500 – 700k.

      A lot of the folks in this area didn’t get trapped by predatory lending – they got trapped by their own predatory greed.



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