Foreclosures Spike 32% in April – Highest on Record
Real Estate News & Commentary by Chris McLaughlin, May 13, 2009
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Foreclosures Spike
One in every 374 U.S. homes received foreclosure filings in April, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping. US foreclosures spiked 32% in April. 342,000 homes received notices of default, auction notices, or underwent bank repossessions, and 63,900 bank repossessions, the last stop in the foreclosure process, took place. “April was a shocker,” said Rick Sharga, RealtyTrac’s senior vice president for marketing. “I would have bet on a dip because March foreclosures were so high. “We had been predicting 3.4 million filings for the year, but we’ll blow those numbers out of the water.” Ten states accounted for 75% of all foreclosure activity, and they fell generally into two categories: one-time bubble markets and the rust belt. The bubble markets were in California, (96,560 filings), Florida, Nevada, and Arizona. The rust belt filings took place in Illinois, Ohio, and Michigan. Georgia, Texas, and Virginia made up the rest of the top 10 list.
But why so many foreclosures?
We’ve been talking about the wave of new foreclosures likely to come after uncertainty over Obama’s various mortgage “rescue” plans spurred a temporary moratorium on foreclosures by mortgage finance companies, including Fannie Mae and Freddie Mac. Well, it’s here with a vengeance and it’s expected to get worse as the foreclosures make their way through the system. Most of April’s filings were ones in the early stages of the process, like notices of default, according to James Saccacio, RealtyTrac’s CEO. The steady erosion of home prices, like those reported by the National Association of Realtors yesterday, just makes it worse as people find themselves with mortgages that cost more than the property is worth. “[The home price decline] will lead to more foreclosures,” said Mike Larson, a real estate analyst for Weiss Research. The Obama administration announced plans in March to provide $75 billion in incentive payments for the mortgage industry to modify loans to help up to 9 million borrowers avoid foreclosure, but with the recent heavy-handed government meddling in the banking industry, no one knows how much the lending industry will cooperate in modifying loans. If there’s a silver lining to this whole thing, it’s this: After banks take over foreclosed homes, they usually put them up for sale at deep discounts. According to the National Association of Realtors, sales of foreclosures and other distressed properties made up about half of the market in the first quarter.
Refinancing slows, purchases steady
The Market Composite Index, a measure of mortgage loan application volume released by the Mortgage Bankers Association (MBA), was 895.6, a decrease of 8.6 percent on a seasonally adjusted basis from 979.7 one week earlier. On an unadjusted basis, the Index decreased 8.1 percent compared with the previous week and increased 28.4 percent compared with the same week one year earlier. Refinancing demand has trended down from its mid-April peak, while purchase demand has increased slightly in recent weeks. The Refinance Index decreased 11.2 percent to 4588.6 from 5169.3 the previous week and the seasonally adjusted Purchase Index increased 0.5 percent to 265.7 from 264.3 one week earlier. The four week moving average for the seasonally adjusted Market Index is down 5.1 percent. The four week moving average is up 0.2 percent for the seasonally adjusted Purchase Index, while this average is down 6.5 percent for the Refinance Index. The refinance share of mortgage activity decreased to 71.9 percent of total applications from 74.4 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 2.3 percent from 2.1 percent of total applications from the previous week.
Retail sales fall
The Commerce Department said total retail sales fell 0.4% in April, compared with March’s revised decline of 1.3% (from 1.2%) — a second straight month of sales declines, as consumers continued to pull back on all types of unessential purchases. Economists had forecast April sales, excluding auto purchases, to rise 0.2% from the previous month, but instead they fell a surprising 0.5%. “This is a disappointing report,” Ian Shepherdson, chief U.S. economist with High Frequency Economics, said in a report. Michael Niemira, chief economist with the International Council of Shopping Centers (ICSC), said he was “puzzled” by the broad declines in core April retail sales given that many merchants, including Wal-Mart, had reported much better-than-expected same-store sales earlier in the month. “The categories that I had expected to be weak like cars and building materials were up and categories that I thought would increase such as general merchandise sales were down,” Niemira said. “So these results were really mixed against my own expectations.” That confusion seems to be a common theme amongst economists these days.
Tax credit can be used for down payment
Ok, now for some better news. Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, says that the Federal Housing Administration is going to let its lenders accept the $8,000 tax credit as a down payment. Before this, most buyers wouldn’t receive the funds until after they filed their tax return, and that deterred some people from using the credit. “We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment,” Donovan said. He added the obligatory plug we’ve come to expect from the government: “I do think we have some early signs that the market overall is stabilizing. Since January we’ve seen both home sales moving up and down around a relatively stable number and we are seeing the first signs that the rapid decline in home prices is starting to abate.” Do tell.
Inflation risk
John Taylor, a prominent authority on monetary policy, former undersecretary of the Treasury for international affairs, and author of the widely cited Taylor Rule of central banking, said the Fed’s monetary stance had “caused, prolonged and worsened” the country’s financial crisis. “My calculation implies that we may not have as much time before the Fed has to remove excess reserves and raise the rate,” he said in remarks prepared for a financial markets conference hosted by the Federal Reserve Bank of Atlanta. “We don’t know what will happen in the future, but there is a risk here and it is a systemic risk.” The Fed has pumped hundreds of billions of dollars into the economy, and may find it very hard to remove this expansion by shrinking its balance sheet in the future. “While Federal Reserve officials say that they will be able to sell newly acquired assets at a sufficient rate to prevent these reserves from igniting inflation, they or their successors may face political difficulties in doing so. That raises doubts and therefore risks. The risk is systemic because of the economy-wide harm such an outcome would cause,” Taylor said.
Now on to our real estate investor education tips section …
Auctions 101
Many short sale investors are naturally curious about auctions. While there are occasionally good deals to be had, it’s important to understand the mechanics behind auctions designed to encourage buyers to over-bid. Learn how to navigate the auction world with this quick tutorial and avoid falling prey to common pricing wars.
Never Forget Rule Number One…
Understand that auctions are a method for determining the highest price. By definition, this does not mean you are likely to get the best buy on any given property since only the highest bidder wins. Unlike short sales, auctions are only awarded to the person willing to pay the most – not necessarily the best qualified or able to determine quality.
Types of Auctions…
Auctions come in all shapes and sizes but the most common types include:
· Sealed bid auction. The better the value the less likely you are to win the sealed bid auction. The person with the highest net typically wins. Bids are typically sealed then opened at a pre-determined time. The auction thrives on bidders ability to drive the price up over time however, due to the sealed bid provision there is less likelihood of ego over-drive resulting in bidding wars.
· English auction. This is the standard open air auction where an auctioneer begins with a low minimum bid then gradually accepts increased bids. High bidder wins. Be cautious of excess fees including surcharges and bidders fees – often in excess of 10 percent plus taxes! Since these tend to be public affairs, the ego-centric bidder is often prone to drive the price up well past the true value. Don’t expect many bargains in this venue.
· Dutch auction. Rarely encountered, a Dutch auction begins high and drops the price. The first bidder to accept a given price wins the bid. Typically considered a gimmick, serious short sale investors are wise to stay away and focus on real value instead.
Winners Curse…
Remember, the one over-riding characteristic of an auction is that the high bidder wins. Always be sure to mentally tally the total cost of the property at auction including bid, buyer’s premiums (10 to 12 percent), taxes, transfer fees, repairs and other expenses. It’s also imperative to learn how to recognize shill bidders…while it’s considered highly unethical, it’s also fairly common practice in many areas. Winning isn’t always everything especially when dealing with real estate auctions. More than one winning bid has walked away with buyer’s remorse due to the winners curse.
Don’t play if you aren’t willing to pay top price. That is the essence of real estate auctions. Search out short sales and REOs instead.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com/welcome.html
P.S.
Don’t miss our webinar tonight at 8:30 PM ET, 5:30 PM PST:
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Copyright Loss Mitigation Institute 2009.
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid flipping of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner and Supervising Broker of one of Florida’s
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positioning him to help thousands of investors
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* Highly sought-after speaker, consultant, and
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