Foreclosures
on the rise in slow market
Declining
values, easy credit, rising interest rates contribute
by Kathleen Stinson
NORTH
VALLEY – The widely publicized slowdown in the residential
real estate market is contributing to a rising number
of foreclosures, experts say.
Homeowners
who need to sell fast no longer have the safety net of
rapidly appreciating home values and an abundance of willing
buyers to save them from foreclosures.
Foreclosures
that have gone to auction and the property transferred
to the winning bidder, or reverted to the lender, increased
in Maricopa County 260 percent over the last year, according
to research by Foreclosures.com, a California firm specializing
in reporting foreclosure notices nationwide. In the first
quarter of 2006, 196 Stage 3 notices (of auction) were
filed, versus 706 in Q1 2007.
Single‑family
resales in the Greater Phoenix area dropped 40 percent
in 2006, compared to 2005, reveals data provided by the
Realty Studies Department of Arizona State University.
The median sale price of a Valley home dropped from $265,000
in June of 2006 to $250,000 in December ’06, according
to Arizona Regional Multiple Listing Services, Inc.
“The
market is in the process of normalizing. A homeowner behind
in payments doesn’t have the same opportunity to sell,
so naturally the number of foreclosures would increase,”
said John Foltz, president of Realty Executives, Phoenix.
“There
are some foreclosures in the North Valley and we are probably
going to see more, mostly in the lower end of the market
and interest‑only loans,” stated Robert Brooks,
agent with The Equitable Real Estate Co., Scottsdale.
Although
title companies are reluctant to share their statistics,
Brooks says just because people are not talking about
foreclosures doesn’t mean it is not occurring. He related
that homeowners will tell an agent they need to sell fast
but won’t say they are facing foreclosure, information
which would drive down their asking price.
Compared
to the number of houses in the Valley, even with the increase
in foreclosures, “relatively, this is a small percentage
of the total housing,” said Jay Butler, director of realty
studies at Arizona State University Polytechnic Campus.
Factors
contributing to the increase in foreclosures are rising
interest rates which affect adjustable rate loans and
loan fraud, according to Fletcher Wilcox, vice president
of Grand
Canyon Title Agency, Phoenix metro.
Wilcox
said most foreclosures are taking place in the subprime
(poor credit) market and with zero or little down loans.
He
noted real estate fraud is occurring Valley‑wide,
and the North Valley is no exception.
For
example, a typical fraud scenario is a $800,000 house
appraised for $1 million. Part of the deal is the buyer
forms a construction limited liability company (LLC) to
repair the house for $200,000. The buyer obtains 100‑percent
financing on a $1 million loan. But the buyer disappears
after spending only $25,000 on repairs and takes the remaining
$175,000 in cash. The home is now worth only $800,000
and it goes into foreclosure.
Wilcox
said lenders are more inclined to go after people who
commit this type of fraud than in the past because fraud
is on the rise and they are sustaining losses due to declining
property values.
Rising
interest rates can hit some homeowners hard. A buyer who
bought a house with an adjustable rate loan, faced with
an increase in interest from 5 percent to 7 percent, for
example, now must make a significantly higher monthly
payment–one they may not be able to afford.
Many
homeowners find they cannot refinance their loans to cover
mounting debt because they have used up their equity or
do not have any equity in their property. This also contributes
to foreclosures.
In
2005, the real estate market created an extreme subjective
psychology that no matter what house a person bought,
it would be worth more the next month, Foltz related.
In that market people felt comfortable with high‑ratio
financing and did not perceive the loans as risky.
The
reality is the real estate market is always cyclical,
he points out.
“From
a distance, this part of the cycle has a higher rate of
foreclosures than the frenzy of 2005,” Foltz said. “In
2005, a homeowner behind on his payments could sell easily
and be liberated from the loan.”
Homeowners
who took out zero‑down loans are in the most precarious
position in today’s declining market, if they need to
sell fast.
As
an example, a buyer who bought a house for $500,000 and
took out a 100‑percent loan in 2005 may find that
today the house could only be sold for $460,000–not enough
to cover the loan. Whereas, someone who paid $100,000
down on the same house could sell and afford to pay off
the loan, avoiding a foreclosure or short sale back to
the lender.
A
short sale is when the homeowner negotiates with their
lender to, in effect, sell the house to the lender for
less than the amount of the loan, avoiding a foreclosure
action. In a market where home values are declining, sometimes
the lender is willing to agree to a short sale in lieu
of foreclosure because the house may be worth even less
by auction time and to save costs associated with foreclosure.
