Sunday, October 10, 2010

56% of all 2010 Q-2 housing transactions in Nevada are foreclosure sales

These are just stunning numbers from RealtyTrac, via Bloomberg, that demonstrate the enormity of the foreclosure crisis. According to RealtyTrac, more than half of all second quarter home sales in Nevada were foreclosure sales. Here are the exact numbers of the top foreclosure sales states for 2010 Q-2:

Nevada - 56%
Arizona - 47%
California - 42%

Nationwide, foreclosure sales accounted for almost 1 in 4 transactions (24%). Then there's this:

"U.S. home seizures climbed to records in three of the last five months, RealtyTrac said Sept. 16. Banks seized 95,364 homes in August and issued foreclosure filings to 338,836 owners, or one of every 381 U.S. households, according to the company."

The announcements over the last weeks and days that four major US banks, including the nation's largest mortgage lender, Wells Fargo, have suspended foreclosures due to accusations of fraud, perjury, and document falsification are being cited by some as evidence that the already over-supplied housing market will at least enjoy a short reprieve from having new homes, due to new foreclosure, flood the market, and so these events should actually work to support prices. But this will only be temporary, assuming it happens at all, as any positive effect the suspension might bring could very well be cancelled out by the new fears that the suspension itself causes--the fears that prospective foreclosure buyers are going to meet, now that buyers realize that they cannot trust the bank's word that the foreclosure itself was not fraudulent. (Would you want to go anywhere near that title?) This is a legitimate fear: considering that it appears quite clear that these banks lied in court, the next logical assumption would be to expect that the banks would lie to buyers!

If 24% of the nation's housing sale activity in Q-2 was due to foreclosures, what will a drop in foreclosure sales do to total home sales?

Answer: it will result in a drop in total sales
. And what will result from a decrease in total sales? That would be, an increase in supply, and thus a downward pressure on prices. Continuing downward pressure on prices reduces the equity in homes, and increases the likelihood that underwater home-loan-owners (which includes 1 in 5) will walk away from the shackles of their debt and surrender the house to the bank in foreclosure. If foreclosures increase, then the supply increases, further pressuring prices downward and further increasing the number of underwater houses, into a spiral. This is what happens was market participants lose confidence in each other: remember, it was a lack of confidence (due to knowledge of the evidence!) that caused the credit markets to freeze in September 2008. Confidence is essential, and how can you possibly confidently trust a bank that lies in court?

The even more grave issue is that of those thousands of Q-2 foreclosures sales and thousands more completed prior, at least some will likely be determined as flawed and possibly as outright fraud. This will further erode confidence in the housing market, and press prices lower yet, as reluctance to buy and fear solidify.

In a few short year years, the American housing market has transitioned from a system based on unsustainable sure-fire-ever-increasing home prices and television shows on "house flipping," to a system based 24% on foreclosure sales.

How is it that this crisis is getting any better?

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