Increasing Foreclosures Mean Low House Prices for Many More Years

Foreclosure activity hit a record in the first quarter of 2010, according to realtytrac.com, up 7% from the previous quarter and up 16 % from the first quarter of 2009. 7 million of all mortgages, i.e. 14%, are in some stage of default of which about 1 million are already in the foreclosure pipeline while a pool of 6 million defaulted/delinquent mortgages awaits entry into the pipeline. Words: 366

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited excerpts from Charles Hugh Smith’s (www.oftwominds.com/blog.html) original article* for the sake of clarity and brevity to ensure a fast and easy read. Smith goes on to say:

Defaulted Mortgages Expected to Increase
While the numbers are imprecise, media reports suggest about one-quarter of all mortgage holders are “underwater,” meaning that their homes are worth less than their mortgages balances, and such negative equity (owing more than the house is worth, hence negative equity) drives foreclosures. As such, if 25% of mortgage holders are underwater, and 14% are delinquent/in default, then we can expect the number of defaulted mortgages to rise as negative-equity homeowners throw in the towel and stop paying their mortgages.

Rising Foreclosures = Falling Home Valuations = Increasing Defaults = Rising Foreclosures
Rising foreclosures pressure home valuations as hundreds of thousands of homes come to market. This decline in valuations increases the negative equity of mortgage holders who are already underwater, and pushes more owners into the negative equity pool where most will eventually capitulate and default on their mortgages. This increases the pool of mortgages in the foreclosure pipeline, insuring more homes will be dumped onto the market in the future, and so on.

Anyone who sees a rising pool of millions of delinquent mortgages as the foundation of a recovery in housing valuations isn’t considering the feedback loop which is now firmly in place. The foreclosure pipeline will be full for years to come precluding any “recovery” in housing valuations as supply will swamp demand.

*http://seekingalpha.com/article/199424-foreclosure-pipeline-is-full-to-bursting?source=email

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given.