Foreclosure numbers in the US released on August 14th by Realty Trac showed a jump of 8% in July 2008 over the previous month and up 55% over the same period a year ago. The organization also estimates that there will be over 3 million foreclosures by the end of this year. Nowhere is it more troublesome than in Florida. I was visiting the state in May, and was astounded by the number of homes for sale. Everywhere I went, from Miami on the east coast to Sarasota on the west coast, it appeared that 3 in every 10 homes was up for sale or rent. Upon further research, I discovered that while a healthy real estate market has 3-6 months of available inventory on the market, Miami-Fort Lauderdale had 34 months of inventory on the market! The huge imbalance between supply and demand can only mean one thing - prices spiraling downward, exacerbating an already dire situation. Realty Trac says that currently the Cape Coral-Fort Myers is feeling the most pain in the country, achieving the dubious distinction of being the Foreclosure Capital of America, with 1 in every 64 homes under threat of foreclosure, a rate that is 7 times the national average.
When trying to understand how the situation got so bad, I stumbled upon three examples that underlined how out of control the situation had become. Most examples revolve around a few common themes: putting little or no money down, buying a home more expensive than they could afford based on traditional lending guidelines, taking on non-traditional mortgages with little understanding of their impact, and lastly, a belief that housing prices would keep going up.
You can read an interesting article on these examples of foreclosures at the link below:
http://articles.moneycentral.msn.com/Banking/HomeFinancing/HomeownersWhoJustWalkAway.aspx
Anyway you crunched the numbers, the scenarios are not going to turn out well for the individuals in these examples. While hindsight is 20/20 for those involved, I was still astounded that a number of people involved in these transactions did not raise a red flag long before the deals were sealed. In my opinion, a responsible realtor should advise the buyer what purchase price is within their range. I know my realtor has often spoken to me about what price would be considered reasonable for my budget. The second person was the financier who had to have calculated the numbers and realized that it was a very risky proposition for their organization (and in some cases, how do financial organizations justify giving loans with absolutely no proof of income?). And lastly, the buyers themselves should temper their expectations of what they can reasonably afford. The straw that broke the camel's back is then using the equity in their homes as a virtual ATM, driving people further into debt.
Even in more conservative Canada where the foreclosure situation has yet to show a marked increase, examples are starting to emerge of people buying expensive homes with little money leftover to afford any unexpected expenses such as a leaky roof, or broken down furnace. The Canadian Government has already indicated that they do not want financial organizations to offer 40-year mortgages, and no money down (100% mortgages) deals are almost impossible to arrange with traditional financiers.
Sorry to be so judgmental, but it irks me that in pursuit of the American Dream and also keeping up with the Jones, that everyone was looking out for themselves, hoping to make a buck, and praying that the house of cards didn't collapse, and hoping rising housing price continued unabated forever.
The main reasons given by Realty Trac for the current housing crisis are that many communities were overbuilt and based on over-inflated property values. The only silver lining to this very dark cloud, is that all parties concerned will learn that living within one's means is the surest way to financial freedom. A copy of the Millionaire Next Door by Thomas Stanley should be issued to every North American whose currently buried under a mountain of debt. Oh, and for those prospective home buyers who were not swept up in this mania, prospects look good toward the end of this year or in 2009 to snag a great deal on a home.
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