12 US housing markets getting rocked by foreclosures

[Chris Clothier]

I ran across this article this morning on Business Insider.  It is painted with broad strokes, but it still has some data that could be troubling or encouraging depending on which side of the fence you sit.  I just wanted to see what investors in these states are seeing and if the increase in foreclosures is leading to an increase in opportunity?

http://www.businessinsider.com/states-with-highest...

According to RealtyTrac, bank foreclosures are up 66% year over year and the foreclosure rate nationwide is 1 out of every 407 homes.  There are 12 states that are foreclosing at a faster rate than the national average.  If I'm not mistaken, this is the same trend that precluded the last housing crisis as foreclosures were clustered in a few areas around the country.

Here are the states seeing increased foreclosures:

Delaware
North Carolina
Indiana
Ohio
Georgia
New Mexico
South Carolina
Illinois
Maryland
Nevada
Florida
New Jersey

Anyone feeling a big increase in foreclosures?  And is that good or bad for what we do? 

[Andrew Syrios]

I do sense that we are in a mini-bubble... nothing like the crisis of 07, but we've just had rates for so low for so long. Seems like there would be some malinvestment from all of that.

Some of those markets make perfect sense (Nevada and Florida), but others such as South Carolina and Indiana are really surprising. And I thought I would have seen California on there. But maybe appreciation has saved that market because they were drowning in foreclosures (along with Arizona) during the last crisis. 

[Kyle Penland]

The number of foreclosures in my home town has skyrocketed...Most of which the purchaser paid wayyy to much for the property, and walked away.  

[Charles Worth]

@Chris Clothier

For less investor friendly areas a portion of that inventory is still the crisis but the process just takes so long and the banks are reluctant to foreclosure on too many houses at one time. 

[Robert Adams]

I just read elsewhere that Las Vegas is up 13% on foreclosures from this time last year....however sales are also higher than last year...we are not seeing anytime type of slow down in the lower priced market. We have see the market remain a little stagnant in the 300k to 500k range though. I am hoping the lower price range being strong will drive up prices in the 300k to 500k in 2016.

[J Scott Hamilton]

Look at it from a bank's REO perspective. You have non-performing loans on the books. The housing market has recovered substantially since 2008, so much so that in some markets the prices are higher than in 2007. That also means you have a stronger market to sell short sales and foreclosures into.

It's absolutely the best time for the banks to clean up balance sheets before the next recession hits. To me that seems like the worst time for an investor to buy, as it sets them up for overpaying should the next recession be sooner rather than later.  I see it as an economic indicator to hoard cash and keep lines of credit open.

[Mark Ferguson]

I'M not in one of those states, but I know a few people in Jersey and quite a bit about reo. The average days to foreclose is some thing crazy like 900 days in jersey. So the foreclosures from the housing crisis are just now getting g through the system because many banks didn't even want to start foreclosures there because of all the hassles. 

The laws Jersey put in place to try to protect homeowners in foreclosure really hurt their recovery. I have heard there are many, many foreclosures coning through now from investors and reo brokers.  

[J Scott Hamilton]

Oooh, @Mark Ferguson, there may be a silver lining to the cloud.  Wait for the banks to glut the investor market with REOs. Then sit back and let the Dutch auction begin.

[Mark Ferguson]

Originally posted by @J Scott Hamilton:

Oooh, @Mark Ferguson, there may be a silver lining to the cloud.  Wait for the banks to glut the investor market with REOs. Then sit back and let the Dutch auction begin.

 It all depends on where your at. Colorado has almost no foreclosures. California and most of the west side of the country is the same way. I think there is enough demand out there to handle just about all the reos. 

[Albert Hasson]

The economic fundamentals nationally now vs. the 2008-2012 time frame are vastly different. Unemployment 5.1%, economy growing at a 2-3% pace, low inflation, etc. but the major difference between now and then is the absence of no-doc or "liar loans".  Strict underwriting in the single family market since 2008 or so has made the housing market much more stable.  

What makes the list suspect in my mind is that Nevada is on there but Arizona is not.  The market fundamentals are so similar between the two and Arizona is currently in the bottom 20th percentile for delinquent loans.  

I would never say never but it's highly doubtful we will ever see a housing crisis like the last one in our lifetimes.

[TJ P.]

I was a NV resident for many years. Young, naive and took out an ARM on a way too overpriced SFH in Reno. Foreclosed 6 years ago and am trying to short sell SFH on acreage out in the sticks that took a hit when the mines started downsizing in a cow town.

There is potential there and being that it looks like there are still issues, I would say that bargains abound.

Anyone need info on No. NV hit me up.

[Anthony Gayden]

Originally posted by @Albert Hasson:

The economic fundamentals nationally now vs. the 2008-2012 time frame are vastly different. Unemployment 5.1%, economy growing at a 2-3% pace, low inflation, etc. but the major difference between now and then is the absence of no-doc or "liar loans".  Strict underwriting in the single family market since 2008 or so has made the housing market much more stable.  

What makes the list suspect in my mind is that Nevada is on there but Arizona is not.  The market fundamentals are so similar between the two and Arizona is currently in the bottom 20th percentile for delinquent loans.  

I would never say never but it's highly doubtful we will ever see a housing crisis like the last one in our lifetimes.

 I would say that the recovery in Phoenix is far stronger than the recovery in Las Vegas. Phoenix has a much larger and more diverse economy.

[Jo-Ann Lapin]

Thanks so much for this.

[Matt R.]

@Chris Clothier @Mark Ferguson I have little doubt these prolonged low interest rates have created bubbles in some lower tier RE markets.

[Chris Tiff]

So how is it that many of these states, particularly the southern ones, are seeing solid appreciation despite a potentially large supply of cheap inventory in the pipeline? Are the banks holding these REO's deliberately keeping supply artificially low in the hopes that their toxic holdings end up booking some profit? And what would that mean for natural appreciation in the next few years? Is the best approach to finding deals going to be dealing directly with the banks for the forseeable future?

[Chris Tiff]

Also I think it's a bit misleading to keep referring to natural price peaks as 'bubbles'. A market bubble has certain characteristics- lack of sustainability, flow of cheap money and a certain mass recklessness (what Alan Greenspan termed "irrational exuberance") that won't always apply to more general peaks and troughs. It's all about fundamentals and substance; something which was conspicuous by it's absence, both in the dot-com boom and the RE run up of the mid 2000's. 

Admittedly, the full effect of the last true bubble, and subsequent crash, has yet to make it's way completely through the system, but many of the most dangerous holes have been identified and plugged. The economic characteristics are simply not the same as pre 2008. The danger of labelling each price peak as a potential bubble is that people will associate it immediately with fear of a 2008 replay, rather than the opportunity it truly is.

[Mary B.]

I do see an increase in my neighboring states of DE & NJ. However, I'm a bit surprised that Illinois made the list. 

Does this means its time for landlords in those markets to sell? Does it mean landlords shouldn't be looking for rentals in those markets? Could be...or not. If you're an out of state investor with rentals in those markets then contact your good source on the ground. Maybe pay a visit there. News articles, depending on the pub, can be embellishments, complete fabrications or warnings. I'd go with an experienced fellow BPer on the ground before taking any drastic measures. My coin.

Kudos,

Mary

[Kathy Stewart]

Every market is an opportunity f/saavy investors. Owing property that may decline in value is an opportunity to buy another at a value to offset/average overall net impact. Owning no property due to waiting f/an entry point makes now the time in declining markets.

[Michael S. Helton]

I can not speak for all of Nevada, but in Northern Nevada, there has been some very strong economic news (Such as the Tesla Gigafactory, Amazon, Switch) which has been pushing up home sales and prices.  Inventory is low and a lot of people are looking to buy.  

If I was a bank, it would seem like a perfect time to clean out the distressed properties still on the books.

[Darron Stewart]

@Chris Clothier

The signs of foreclosures are reappearing in the states I frequent, also many properties were bought by institutional investors, so I expect a huge buyers market on the horizon, if you do it wisely.  Be careful as you ride the wave down...   Make sure you buy with a big enough discount and look outside the traditional market!

[Brian Burke]

I can't speak specifically to the markets on this list, @Chris Clothier, but I can say that here in California the vast majority of foreclosures are still in the 2004-2007 vintage loans.  This tells me that we are still sweeping up the mess from the crash that happened in 2007.  

I think this is happening for two reasons. 1. Relapse defaults after loan modifications that kicked the can down the road. We are now "down the road" and its judgment day for these folks.  2. Lenders that just ignored the problem waiting for higher home values so they could recapture as much as possible upon foreclosure.  Values are higher now...time to clean up the books.

By way of a first-hand example of reason #2:  I just bought a house on the courthouse steps that had a $600K loan from 2006. The unpaid balance was over $1 million...meaning that there were $400K in back payments and costs (never made a payment after origination??).  I paid around $350K on the courthouse steps. The house is worth around $525K. Had the lender foreclosed in 2009, the house probably would have sold at auction for around $200K.  Instead, the lender waited and got 175% of what they likely would have received back then.  I think we'll see more of this now that the upward trajectory of prices has slowed and there will be little benefit to lenders by waiting much longer.

[Jo-Ann Lapin]

Thanks Brian  agreed.

[Jay Hinrichs]

@Brian Burke  lenders can lag the market somewhat but they are not clueless.

they see markets rise they adjust. 

I think you hit the nail on the head   loan mods defaulting.   Also not as much peer pressure to save poor homeowner who can't pay

[J Scott Hamilton]

@Albert Hasson I was not implying that the next recession would be from a housing crisis, but rather stating that it will be from a US treasury debt crisis. When the world central banks (including the Federal Reserve) can no longer keep the dollar propped up through treasury bill auctions, we'll likely see a spike in interest rates tied to those securities. Borrowing rates tied directly to that index. There will probably be a lag in COFI rising until rate arbitrage goes into effect. Higher interest rates on mortgages will most likely depress housing prices. I believe the banks know this only too well and are solidifying their balance sheets before the other shoe drops. 

@Brian Burke You elaborated my implication beautifully.

Generally speaking, market timing can be smoothed over by investors finding great local deals during ups and downs in the market, but people making large investments in 2006 - 2007 got killed, which is precisely why we have so many foreclosures to clean up still. 

If a house's appraisal is down and you invested on cash flow, no big deal unless the mortgages start having a dangerous LTV ratio. But if consumers strapped during a recession caused by dollar devaluation have less free cash flow overall to spend, I see that affecting buy and hold investors (flat or lower rents, higher costs) and consumers (lower offering prices on purchases, or failed loan qualifications) alike.

Given the government debt to GDP ratios, which are far higher now than they were in 2008, I see this kind of recession as inevitable; it is just a matter of when.

[Heather DeGeorge]

We are in IL and we were (for other reasons) planning to sell, but the foreclosure market increasing also creates a new wave of renters.  People who lost their home and have nowhere to go (we see this somewhat with divorced tenants, too, when foreclosures or economic decline hit.  It loosely appears that these financial strains are affecting divorce rates and we see the tenant applications for these types of renters come together in waves).  Admittedly, those apps and credit profiles need to be reviewed with a seasoned eye because not every person with a foreclosure on their record equates to a bad tenant.  But if you don't know what you're looking at, you won't know the difference.

And I have to agree--it's a known fact that there have been banks holding onto empty properties waiting for the values to increase.  Aside from that, they also knew that emptying their inventory into a bad market was only going to make it worse.  When you consider that the banks have REOs but also want to make new loans, unloading their REOs at huge losses and flooding the inventory with low cost housing doesn't help them on the origination/new loan side, either.

[Doug N.]

I was reading the other day about how PE firms are foreclosing very aggressively bc it's a better play to repo and re-sell than to conduct a workout. It was interesting. 

Housing advocates and lawyers for borrowers contend that the private equity firms and hedge funds are too quick to push homes into foreclosure and are even less helpful than the banks had been in negotiating loan modifications with borrowers. Federal and state lawmakers are taking up the issue, questioning why federal agencies are selling loans at a discount of as much as 30 percent to such firms.

One company has emerged as a lightning rod, criticized by housing advocates and lawyers for borrowers, but admired by investors: Lone Star Funds, a $60 billion private equity firm founded in 1995 by John Grayken. In just a few years, Lone Star’s mortgage servicing firm, Caliber Home Loans, has grown from a bit player to a major force in the market for distressed mortgages.

An examination by The New York Times of housing data and court filings, as well as interviews with borrowers, lawyers and housing advocates, revealed a pattern of complaints that Lone Star was quick to begin foreclosure proceedings, whether the firm had bought a delinquent mortgage at a federal auction or directly from a bank.

Take Charles and Pamela Hubbard of Sacramento. They briefly lost their home when Lone Star’s Caliber subsidiary dealt harshly with their request for a loan modification. The couple said they had submitted the application to reduce their monthly mortgage payments four days before a planned foreclosure sale, but the Lone Star subsidiary said the Hubbards had been late in completing the application and pushed ahead with the sale. 

As Banks Retreat, Private Equity Rushes to Buy Troubled Home Mortgages (nytimes, Sept 28, 2015)

http://www.nytimes.com/2015/09/29/business/dealbook/as-banks-retreat-private-equity-rushes-to-buy-troubled-home-mortgages.html

Foreclosure Abuses, Revisited (nytimes, Oct 6, 2015)

http://www.nytimes.com/2015/10/06/opinion/foreclosure-abuses-revisited.html?_r=0