Home foreclosure rates are increasing nationwide

Rising interest rates and adjustable loans are contributing to home foreclosure

All good things eventually have to come to an end. So it seems to be with the booming real estate market. The market took off a few years back as investors began to shy away from tech stocks and started to put their money into something more tangible - real estate. This led to the biggest housing boom this country has ever seen. In some parts of the country, prices tripled in just five years’ time. Last year, prices in the Phoenix area rose nearly 40%. It was a good time for sellers and a good time for the real estate industry.

But things have been slowing down for the last year or so. The Fed has raised interest rates sixteen times in the last two years and those interest rate increases have had their effect on mortgage rates. New home loans cost more than they did two or three years ago. Even worse is the fact that adjustable rate loans issued two or three years ago are now adjusting, and the new rates are rising by a couple of points. This is putting a huge amount of pressure on buyers who were struggling to buy their homes in the first place. The result is a dramatic rise in foreclosure rates across the country. In Michigan, the rate is up a whopping 91% over last year. In the rest of the country, the rate is up some 60% over last year. As rates continue to rise, more and more homeowners are going to find themselves unable to pay for their houses and more and more of them will find themselves turning their property back over to their lender. This could lead to a steep decline in property values, particularly on both coasts, where prices have risen the most.

There are a few contributing factors to the rise in foreclosures:

• With prices reaching previously unknown levels, buyers resorted to unusual and somewhat risky home loans, such as Option ARM, interest-only, and piggyback loans. These loans tend to allow buyers to buy with less cash and make lower payments. The problem is that the lower payments are often temporary, and in the case of the Option ARM, the payments are artificially low and contribute nothing to the principal on the loan. Eventually, the buyer is expected to pay towards the principal, and the increase in payments to do that can be staggering. Increases of 50% are not impossible, and for many buyers who were already stretching to buy in the first place, the higher payments are simply unaffordable.
• Buyers who put little or nothing down on their property were counting on rising prices to provide them with equity. Stable or falling prices have left them owing as much, or more, than they borrowed in the first place. Offers of home equity loans for up to 125% of the value of the property haven’t helped.

The market will eventually stabilize; it always does. In the meantime, a lot of buyers are going to get hurt and a number of cities will see significant drops in property values and some stagnation in the market. And next time, buyers will be a bit more cautious when they buy a home.