A Guest Feature
The housing and real estate markets continue to dominate the news headlines, impacting politics, affecting Wall Street, and threatening the national economy. What we have experienced is an anticipated cyclical downturn in housing prices, suddenly becoming an unexpected test of the securitization industry’s ’worst-case’ scenario.
The real culprit was that there were far too many poorly underwritten loans, many times made in declining urban areas. Add to that the severe overbuilding that occurred in a handful of locations in the Sun Belt. As a result, many mortgage lenders have been pulled under by the securitization crisis. Lenders are having a difficult time disposing of all of their delinquent assets. The less-impaired loans are sitting on the books, waiting for a federal solution.
The real estate markets are beginning to recover in most U.S. population centers. However, the inability of the mortgage-backed securities market to properly work out and dispose of its delinquent inventory is still impacting many local real estate markets. It is important to understand that making local markets more stable will continue to be the key to bank asset preservation.
Preserving the value of real estate assets is dependent upon knowing any one local market well enough to tell the difference between a unit’s current market value and its long-term value. There is a considerable difference, for example, between an empty investor condo unit in south Florida, an occupied home in a Chicago suburb.
The possibility of recovering a property’s mortgaged value is a matter of continuing to maintain the asset in order to recoup the value of its long-term cash flow. What is clear at this point is that the federal solution has to keep as many credit-worthy homeowners, or at least incentivized renters, in these distressed units, as is practical.
Currently, there are far too many seriously impaired loans and local markets for the nation to wait on the current arrearage problems. Congress will have to face some new continuing occupancy options, as it juggles the rights of current occupants with the potential cost to the Treasury. These options will include deeper (more expensive) lender loan write downs, shallower (less expensive) re-lending into the federal FHA loan program, ’rent-to-own’ programs, ’rent-to-buy’ programs, and ’shared equity’ programs.
What perhaps matters most to the various local real estate markets is that many of the homes impacted by lender/value problems continued to be occupied. That means that the majority of the properties that are in the pre-foreclosure process stay out of the ’short sale/for sale’ category.
Right now, we would especially benefit if we understood the current foreclosure facts on the ground. Real estate is a local industry; and local markets are each different. When it comes to the current foreclosure crisis, is important that we all begin to make distinctions based on the foreclosure trends that have begun to emerge.
Recognizing the Market Distinctions That Exist in 2008
This research has identified four general types of real estate markets. This classification is based on the current foreclosure patterns that exist among the various major U.S. housing markets. These categories include:
- Markets with two times or more the national foreclosure average: These markets are where the big losses may occur, especially among vacant and investor units. None of these markets are a surprise: Las Vegas, Phoenix, the Miami suburbs, the Los Angeles suburbs, Detroit and Cleveland.
- Markets with above-average foreclosure patterns: These are mostly big city markets, Chicago, Houston, Long Island, the city of Los Angeles itself. These are the markets where predatory lending, many times at the service of the securitization industry, went unregulated. Some of these urban markets also suffer from the over-production of now empty condo units that at times, are embarrassingly overpriced.
- Stable markets: The majority of U.S. housing markets are essentially stable. Even though local foreclosure rates are two to four times higher than historical levels, most stable markets can count on long-term demographic demand to restore market equilibrium. The under-30 “echo” generation is on its way.
- Under-produced markets: The political hysteria about the real estate collapse of 2008 is just that: hysteria. Overbuilt markets are nothing new in recent housing history. It is important to notice that the very best U.S. housing markets continue to have a severe shortage of housing. From Boston to San Francisco, and from Seattle to Albuquerque, affordable housing is in short supply in most popular U.S. markets.
October 2008: U.S. Average Foreclosure Rate
Nationwide, there is one home/unit that is currently in foreclosure process for every 175 local market residents. Put another way, it is estimated that approximately 2.2% of all homes in the U.S are in the foreclosure process. This is a foreclosure level that is four to five times the level experienced before home prices began to fall.
Four Types of Real Estate Markets in the U.S.
Note: The following local market figures indicate local foreclosure rates as a percent of the estimated U.S. national average. For those areas (listed in Tables 1 & 2), which are above the national average, the percentages exceed 100%. For those markets, with foreclosures that are below the U.S. average, (those listed in Tables 3 & 4) the local percentage rate is under 100%.
Type 1: Most Severely Impacted Sunbelt/Weak Urban Markets (way above the national average)
- Las Vegas/Clark County: 389% of national average
- Broward County (north Miami suburbs): 327%
- Wayne County (Detroit): 310%
- San Bernardino County (far Los Angeles suburbs): 318%
- Phoenix/Maricopa Co.: 269%
- Cuyahoga County (Cleveland): 220%
- Miami/Dade County: 188%
- Milwaukee County: 184%
Type 2: Large Urban Markets with Sub-Prime/Spec Condo Problems (above the national average)
- Chicago/Cook County: 156%
- Suffolk County (New York suburbs): 121%
- Harris County (Houston): 111%
- Los Angeles County: 110%
- DuPage County (Chicago suburbs): 110%
- Charlotte/Mecklenburg County: 110%
Type 3: A Representative Sample of “Stable” Markets (below the national average)
- Louisville/Jefferson Couty: 99%
- Minneapolis/Hennepin County: 72%
- Philadelphia: 71%
- Portland/Multnomah County: 68%
- Austin/Williamson County: 65%
- Washington, DC: 63%
- Nashville/Davidson County: 63%
- Brooklyn: 61%
Type 4: Under-Produced Markets (well below the national average)
- Dallas County: 45%
- Richmond: 44%
- Seattle/King County: 44%
- Montgomery County (MD): 39%
- Boston: 26%
- Manhattan: 15%
Note: Statistics for this paper were derived from the invaluable Realty Trac.com website, and from the US Census Bureau’s Quick Facts for local counties & cities. Realty Trac.com uses a wide definition of properties “in the foreclosure process.” It is a necessarily inexact term, one that includes all loans in serious arrears and all properties that have been foreclosed.
It is difficult to compare categories of arrearages, due to the differences that exist under state laws. For example, the large majority of properties in the Chicago foreclosure statistics are classified as ’pre-foreclosure.” Under Illinois law, foreclosure is a long process, and it can be months – even a year – before an arrearage results in an actual foreclosure. In other states, such as Arizona and Texas, foreclosure is an automatic court procedure.
About the Author: Peter Fugiel
Pete Fugiel holds a Ph.D. in government (public financial administration,) from Northern Illinois University. He was a long-time housing analyst with Nuveen Investments in Chicago. Currently Pete is a Chicago realtor with Keller Williams Lincoln Square, and a housing consultant on Chicago’s north side. Visit his housing research website and his local market website for more information about Pete, the properties he is currently offering, and his research on local real estate trends.
Other 2008 Housing & Real Estate Articles by Peter Fugiel on MuniNetGuide.com