A 'Dialogue' on the Housing Market

Appearing on a recent episode of “Dialogue with Jim Doti”, RealtyTrac CEO James Saccacio cited a number of factors for the more than 60 percent year-to-year increase in foreclosure activity in September 2006. Chief among those — local economic conditions, poor planning for the future by home buyers, and rising interest rates.

Now the stage is set. The nation’s foreclosure total already broke the 1 million glass ceiling in October, and just how high foreclosure levels will go in 2007 is open to debate depending on how steep one believes the downturn will be.

“When I got into this business, back in 2000, defaults were about 1 percent of all first mortgages. Today we’re at 1.5 percent. While it’s not a large number, it’s still a significant move. Do I think the economy is going to crumble? No! Will (the foreclosure rate) go to 2 percent? We’ll have to wait and see,” Saccacio told Doti, an economist and president of Chapman University.

For Esmael Adibi, executive director of the A. Gary Anderson Center for Economic Research at Chapman University, the key concern is all those people who signed up for those “exotic” adjustable-rate mortgages in 2005 and thereafter. In California, for example, 27 percent of all mortgages were so-called “option ARMs,” where the buyer pays 1 percent interest and the underpaid amount gets added to the loan’s principal.

“Our concern is with interest rates not going down, with wages growing very slowly, employment growing slowly, we’re going to see increases in Notices of Default and ultimately foreclosures. The magnitude is very hard to project,” Adibi said.

The problem with so many people signing up for these adjustable loans, according to Saccacio, is that they don’t have enough money set aside for a rainy day if the loan’s interest rate moves higher. And with increased inventory levels and longer marketing times around the country, the prospect of distressed homeowners being able to bail themselves out is statistically against them.

“If you all of a sudden have inventory to sell and the length of time to sell goes up, people with problems are not going to have the ability to move the asset quickly,” Saccacio said. “Sometimes people operate out of fear.”

Expectation is a key factor in the movement of the real estate market up or down. When people expect the market to keep appreciating, prices have gone up 15-20 percent. But now, the level of pessimism will determine how rapidly and how steep the reductions in prices are going to be.

Still, owners of million-dollar properties, generally speaking, will normally have more cushion to work with in cutting prices and staying out of foreclosure than owners of the median-priced homes around the country, Saccacio concluded.

We'd like to hear what you are seeing in your city, county, state or region of the country. Are people being pessimistic about their local real estate market? Or are they just sitting on the fence waiting to see how low the prices will go?

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