While foreclosures were down 7 percent from May to June, they were up 87 percent in June of this year compared to June 2006, according to RealtyTrac, an online service that tracks foreclosure activity and acts as a marketplace for foreclosed properties.
RealtyTrac's data shows one foreclosure filing for every 704 American households in June, a statistic that includes default notices, auction sales notices, and bank repossessions.
Yet the worst is still to come, says Christopher Cagan, director of research and analytics for First American CoreLogic, who recently published a report on mortgage payment resets.
The mortgages most likely to foreclose, those done with no verification of either borrower income or ability to pay the loan back and with the lowest initial teaser rates, were taken out at the height of the housing market boom in 2005 and were equally prevalent in 2006 as the market cooled. The bulk of them were ARMs with the first two years at interest rates below 4 percent—with most below 2 percent—but will reset with vastly higher rates, says Cagan.
Just one of Cagan's conclusions is that 13 percent of all ARMs taken out between 2004 and 2006 (about 1.1 million loans with a value of $326 billion) will result in foreclosure as people become unable to afford the higher rates, bringing about $112 billion of lost equity to lenders and investors.
“It's real,” says Cagan, speaking of the foreclosure threat. “It's definitely rising, and there are local differences, but I expect it [nationally] to be going up for two more years.”
Not everyone agrees that a further flood of inventory is imminent. Mark Vitner, Wachovia director and senior economist, thinks most of the homes on their way to foreclosure over the next few years are already for sale on the existing-home market, and that they are a large part of the reason inventory levels are so high—2.5 million vacant for-sale homes according to some analysts. Their presence should help improve affordability, Vitner says.
“Where the impact will be is on price,” says Vitner, who acknowledges that many homes will get to foreclosure—just not enough to measurably impact inventory, in his opinion. “As homes move closer to foreclosure or into foreclosure, we will finally get the price adjustment that we need.”
If more homes do hit the market, prices will only fall further. One thing is certain: We have not yet seen the end of rising foreclosures or price declines.