Who is really in Foreclosure

The papers and news are full of stories of "2 million American Families losing their homes". If you listen to Congressional testimony on CSPAN it sounds like each and every home in foreclosure has the perfect American family about to have their dream ripped from them. Well....the truth is for from the perception....

1) Speculators: This group makes up the vast majority of early foreclosures and accounts for the 100,000's of vacant homes scattered across the country. They were purely playing a financial game, and when the tide turned...they bailed. Estimates are that fully 40% of the foreclosures currently reported are speculator activity. This group was comprised mostly of amateurs who lacked the knowledge and resource to properly function in the heavily leveraged Real Estate market. They artificially drove up demand, and the feverish bids drove prices to unsustainable levels. Think "Flippers". This group will be almost totally purged out of the market by early 2009 and will represent an ever declining share of foreclosures.

2) Investors / Private Builders: This group, who normally carves out a business in Real Estate using a more conservative approach to buying, selling and developing found themselves up against a huge wave of speculators who were bidding up the cost of the Real Estate that they needed to sustain their livelihood. Many started making bad decisions based on the "new" market realities. Initially they all profited handsomely, but when the market suddenly ground to a halt in 2007 they were left holding the bag on 100,000's of properties that they suddenly couldn't move. Many Investors / Private Builders use local banks to fund their projects. I know of two regional banks here in the Northwest that are on the verge of failure because of the non-performing loans to Builders and Developers. This group initially started to heavily discount their product to get any funds out that they could, driving down prices in their locals. Now that the markets have seized up, they are going into foreclosure by the droves. It is estimated that they account for 25% of the outstanding foreclosures. This segment will continue to falter and should be a larger segment of the foreclosure market for the foreseeable future.

3) Marginal Individual Homeowners: Enticed by ever easing lending standards and the perception that housing prices would go up in perpetuity. This group represents those that either should NEVER have become homeowners because they just did not have the financial means to do so (Liar Loans), or who bought much more house than they could actually afford (Pay-option ARMS). This group was sold on the American Dream and the chance to create 10's of thousands of dollars of wealth. This group also was blinded by greed and shares culpability. They only listened to what they wanted to hear, did not ask the tough questions of their Realtors and Mortgage Officers and turned a blind eye to the fact that every financial transaction contains risk. This group makes up approximately 30% of the current foreclosure market. This group will also be purged from the market by the beginning of 2010 and will see an ever decreasing share of the foreclosure number.

4) Traditional Homeowner: This group (Good credit, fully employed, has 20% or more equity) has benefited from the huge run up in prices and either cashed out through the sale of their home or tapped equity lines to get cash. Traditionally they rarely go into foreclosure (usually caused by job loss, divorce or death). Currently they make up only about 5% of the foreclosures. But, as prices rapidly deflate, the economy continues to cool and tighter lending standards make it more difficult for future Buyers to come into the market their numbers will soar. By 2010 this group should account for over 50% of active foreclosures.

5) National Homebuilders: Why am I talking about this group? They don't go into traditional foreclosure, right? Because they represent the single largest threat to home values over the next 2 years. Many are technically insolvent, only fighting of Bankruptcy through fiscal maneuvering. Once a major (my bet is Centex) goes BK, there will be a cascade effect. We are already seeing bulk land deals from the likes of Lennar, KB Homes and Centex where they are selling off lots in the $10,000 to $20,000 range. They continue to build homes at a rate faster than they are being absorbed. Once a large one goes into receivership, the value of their finished homes will plummet as they are sold off in a REAL auction, not these bogus auctions that we have been ready about, but a no-reserve highest bid wins...PERIOD type of auction. Once this starts, those traditional homeowners who thought they had 20-30-40% equity may find that they are under-water on their homes and that giving the keys back to the bank may be a better solution.

Bottom line, the current wave of foreclosures is not really affecting the solid homeowner, in fact most foreclosures are vacant homes held for investment or pure speculation. But, this first round of bad loans will have a prolonged effect on the market and put the rest of us at jeopardy....