For the past several weeks there has been a lot of exposure about the "next wave" of foreclosures that will be a result of Alt-A and Option ARM loans resetting. I was glad to see that 60 Minutes did a feature about this as the volume of loans that will reset and are at risk of foreclosure over the next four years will trump the sub prime tsunami that made land-fall in 2007 and 2008. This is a problem that is not going to go away and as such, needs to be accounted for when debating how soon the real estate market and broader economy is going to hit a bottom.
But just recently I stumbled upon an even more alarming set of data; the data about the number of homes that have negative equity, in other words, the home is worth less than what is owed on it. And while there is certainly some overlap between mortgages resetting as in the 60 Minutes piece, and those mortgages that are "under water", the aggregate of the two is alarming none the less, especially when you consider the direction and speed of the economy over the past quarter.
Les Christie of CNNMoney.com, who I have been really impressed with, talks about this phenomenon in an article he wrote on October 31, of 2008. His article details that approximately 7.5 million homeowners are underwater with another 2.1 million on the brink of being so.
The usual victims of this phenomenon are CA, AZ, NV, FL, MI, and OH, no big surprises there. What was surprising is that according to the data provided by First American Core Logic, 23.2% of homeowners in Georgia, 18.3% in Colorado, 17.2% in New Hampshire, and 16.5% in Texas were also considered to be underwater and have negative equity. In other words, the places where a lot of people have moved to within the past two years.
The best quote from the article is when Mark Fleming, the chief economist for First American Corelogic said, "Being underwater doesn't necessarily mean that you can't pay your bills, but it's a necessary condition of default." In other words, those homeowners who are underwater are "pre-disposed" to default because they are unable to refinance or sell their home should they need to without bringing outside capital to the table.
Compounding this phenomenon is the fact that based on the current supply of housing which stands at a historic 11.2 month's supply in November (source: NAR), home value declines will continue well into 2009 and 2010.
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Notwithstanding all that, NAR also reported a seasonally adjusted 4.9 million homes selling in 2008. That's not "being put up for sale," that's being sold, as in successfully closing escrow and title to the property changing hands.
If one can't get a piece of that market, then one doesn't understand marketing and customer service. I see a worsening economy -- quoting President-elect Obama: "It will get worse before it gets better." -- but that doesn't mean that there aren't buyers buying from sellers selling with banks financing.
Best wishes for health, happiness, peace, and prosperity in 2009.