Foreclosures Keep Up Economic Pressure

The optimist’s view of the May foreclosure data from RealtyTrac is that the rate dropped 6% from April. The realist’s view is likely to focus on the 18% increase from May 2008. Neither view can ignore the fact that foreclosure filings hit more than 321,ooo homes last month.

The sunny side of the foreclosure numbers is that if the trend continues to get better, housing prices will start to recover and the real estate crisis will be over. The improving pace at which homes are being sold in some hard hit areas of the most troubled states like Nevada and California should cause prices to rise. That is not the case. Too many homes are still coming onto the market either through foreclosures or normal sales. The excessive inventory is still pushing prices down.

The case that foreclosures will stay above 300,000 a month well into next year is based on unemployment being likely to hit 10% later this year.  Some economists believe it could rise to 11% early in 2010. People without jobs are relatively likely to be pushed out of their houses or simply leave them because they cannot cover their mortgage payments. The correlation between employment and foreclosures is probably extremely high.

The housing market has resisted all attempts to build a price foundation under it for the time being. The government’s mortgage modification programs have helped a growing number of people lower monthly payments, but recent data show that those same people often quickly default on payments again.

There are virtually no statistics to show housing has gotten back onto any reasonable footing and that is likely to be true for several more quarters.

Douglas A. McIntyre