As mortgage rates rise, so do foreclosure figures

The manager of Chancellor Mortgage Funding LLC in Fredericksburg said people with adjustable-rate mortgages, or ARMs, are getting anxious to lock in a fixed-interest rate.

"We're seeing people coming in now out of fear," he said. "They'd rather refinance now than take a chance that [interest rates] will reach 9 [percent] or 10 percent in a few years."

An increase of just a few percentage points can make a huge difference in mortgage payments. A monthly payment of $1,500 on a $500,000 ARM, for example, doubles to $3,000 when interest rates climb from 3 to 6 percent. "There are not a lot of people who can come up with $3,000 a month," Scruggs said.

Most Fredericksburg-area residents who have ARMs have been able to cope with the Federal Reserve's steady increases in interest rates because the region's vibrant economy and low unemployment rate help cushion the impact, he and other financial experts say.

But some residents are struggling to hold onto their houses. The number of foreclosures in the Fredericksburg region has climbed from 19 in the first quarter of 2005 to 80 during the same time period this year, according to RealtyTrac, a leading online marketplace for foreclosure properties.

In foreclosure, a homeowner who cannot make mortgage payments loses the house to the mortgage holder. The property may then be sold.

Stafford and Spotsylvania counties, which include Fredericksburg figures in RealtyTrac's report, had the most foreclosures locally. The number jumped from 10 in the first quarter of 2005 to 36 in the first quarter of 2006 in Spotsylvania, and from 3 to 29 during the same time frames in Stafford. Those also are among the fastest growing counties in Virginia and the country, which means that more people have been taking out mortgages on houses, second homes and investment properties, pointed out Mike Fratantoni, senior economist for the Mortgage Bankers Association, a trade group based in Washington.

The handful of foreclosures that Ron Davis, president and CEO of Virginia Heartland Bank, has seen, for example, involved people who had bought property with the intent to sell, but got stuck with unanticipated mortgage payments when the real estate boom started to stall. Fratantoni said a more realistic figure to look at isn't the number of foreclosures, but the rate.

"In the first quarter of 2006, the foreclosure rate in Virginia was 0.24, which is one-fourth the level of the national rate," he said. "Virginia is one of the stronger labor and housing markets in the entire country." Currently, the state with the highest number of foreclosures is Colorado, followed by Georgia and Texas, according to RealtyTrac. Nationally, the foreclosure rate is down because more people are getting mortgages, Fratantoni said.

"Between the fourth quarter of 2005 and the first quarter of 2006, there was an increase of $300 billion in mortgage debt outstanding nationally," he said. "It's a $9 trillion dollar market that's been growing at a double-digit rate."

That's small comfort, however, for the people who wind up coming to Deanna Hathaway for advice. She's an attorney for Boleman Law Firm in Richmond, which specializes in bankruptcies and foreclosures. Her clients include people living in the Fredericksburg area.

Their financial woes typically stem from such things as the changes to the minimum payments required on credit card bills and the impact of rising interest rates on ARMS, she said. They're able to cope until something unforeseen occurs, such as an illness, divorce or loss of a job.

"We see a lot of dual income couples with children. We see single people. It 's everybody. It's our neighbors, our friends, our relatives," she said. "One bump in the road, and it could be any of us going through this."

One of the first steps they tend to take is to pay off their debts by tapping into their house's equity or refinancing, Hathaway said. Mortgage lenders have come out with a number of new loans that can make this attractive, such as ARMs that start out at 3 percent and then fluctuate when the Fed changes the prime lending rate.

Locally, interest rates on a 5-year ARM are now as high as 6.625 percent, according to figures posted yesterday on fredericksburg.com. Interest rates on subprime and home equity loans can be even higher. "We see some loans that are really high, usually on equity lines," Hathaway said. "It's not unusual for us to say, 'That's too expensive.' That's difficult, telling people their loan is too expensive." In most cases, however, she said she's able to help people hang on to their homes by such things as making a Chapter 13 bankruptcy filing, which stops foreclosure proceedings.

"It stops the clock so they can pay back their debts and get caught up," Hathaway said.

The smartest move, however, is to talk to someone at the bank or mortgage company before things get that far, Scruggs said. They're interested in keeping loans from going into foreclosure, and may be able to work out a deal.

Someone who can't pay their mortgage for three months, for example, might get a grace period and have the payments added to the loan principle. "Anyone considering refinancing should come in with a long-range financial plan rather than in a panic," he warned. "They shouldn't refinance just because they want to buy a pickup. That catches up with you."

Housing Starts Rise, But Permits Decline In May

Housing starts rose five percent in May to a seasonally adjusted annual rate of 1,957,000, according to The U.S. Census Bureau and the Department of Housing and Urban Development.

Three of four regions reported increases in housing starts for the month. Construction of new homes and apartments rose 1.7 percent in the Northeast, 8.5 percent in the South and 15.8 percent in the West. Housing starts were down 15.8 percent in the Midwest, following a sizeable increase in April.

"The rebound in total housing starts for May primarily reflected typical volatility in the multifamily market, and the modest increase in single-family starts largely reflected a build-out of units that had been sold and permitted earlier," said NAHB Chief Economist David Seiders. "Strong numbers in the South and West regions may also have been supported by some rebuilding in the wake of last year's record-breaking hurricane season."

Fewer building permits were issued in May, for a seasonally adjusted annual rate of 1,932,000--a 2.1 percent drop from April. Single-family permit issuance was down 2.1 percent on a national basis to a pace of 1.466 million units. The pace of multifamily permit issuance also dipped 2.1 percent to a pace of 466,000 units for the month.

Housing completions in May also took a dive, falling 8 percent to a seasonally adjusted annual rate of 1,878,000.

US housing starts rise faster than expected

The pace of US housing construction was faster than expected last month after three months of declines as ground-breaking on both single-family and multifamily units jumped — but permits for future projects fell.

The US commerce department said May housing starts rose 5% to 1,957-million units a year compared with an upwardly revised 1,863-million unit rate in April.

Economists had expected housing starts to stabilise at a 1,85-million unit pace last month, edging above April’s initially reported 1,849-million unit rate.

Construction starts for single-family homes rose 2,1% to a 1,586-million unit pace, while ground-breaking on multifamily buildings with five or more units rose 25,4%. Starts on structures with two or more units rose 19,7%.

“The housing market is responding to general weakness in sales. The single-family side is weaker than a year ago.

“Overall starts went up because of the five-plus family category,” said David Berson, chief economist for Fannie Mae in Washington.

However, permits for future ground-breaking, an indicator of builder confidence, fell 2,1% to a 1,932-million unit pace, the lowest since November 2003 and the first time since January that total housing permits fell below starts.

Economists expected housing permits to fall to an annual pace of 1,95-million units last month after an unrevised 1,973 million rate in April. May permits for single-family homes fell 2,1% to a 1,466-million unit pace, the lowest in nearly three years. Permits for buildings with two or more units also fell 2,1% last month, while permits for buildings with five or more units fell 5,2%.

US treasuries dipped slightly after the higher-than-expected May starts. The dollar showed little reaction to the data. US stock index futures inched up after the report, with S&P 500 futures up 1,3 points.

David Wyss, chief economist at Standard & Poor’s Ratings in New York, said the data showed the housing market was holding up better than expected. “Some of what happened in March and April was due to weather,” he said. “This suggests less of a slowing economy and the Fed’s concern about inflation is still there. This is one more reason to jack up interest rates.

“This is going to be a negative for the market.”

On Monday, the National Association of Home Builders said US home builder sentiment had sunk to its lowest level in more than 11 years this month as rising interest rates made houses less affordable and curbed speculative buying.

Home 'for sale' signs soar

The standoff between thousands of Sacramento-area homeowners and buyers sharpened in May, as 1,800 new listings added to a mounting inventory of homes for sale in El Dorado, Placer, Sacramento and Yolo counties, real estate researcher TrendGraphix reported Wednesday.

The newest influx of "for sale" signs contributed to a near-record pileup of 13,146 homes on the market at month's end. Yet May also appeared to strengthen prices in a market that has slumped since a searing five-year housing boom cooled late last summer. Overall, sales of existing homes and median prices both moved up in May.

Real estate analysts call the surge of new inventory the normal springtime rush by sellers eager to put their homes on the market for the traditional summer buying season.

"More houses go on the market in the summer months -- this is the cycle of real estate," said Sara Veliz, a senior accountant at Lyon Real Estate. She said the number of homes coming onto the market jumped 16 percent this year from April to May. Last year it was 19 percent for the same period.

Resales of single-family detached homes rose in five of six counties between April and May, reaching a total of 2,551 escrow closings across the region, according to La Jolla-based property researcher DataQuick Information Systems. Only Sutter County reported fewer sales from the previous month. Total six-county residential home sales, which also included condos and new houses, reached 3,655 during the month.

Median sales prices for the month climbed in El Dorado, Placer, Sacramento, Yuba and Sutter counties while remaining flat in Yolo County, DataQuick reported. Prices fell in Nevada County.

Generally, across the region, May's home sale numbers showed a resumption of rising values seen earlier in the year. But everywhere, median prices remain below their peaks in late summer and fall 2005. The median is the point at which half of the homes sell for more and half for less.

The most-watched indicator among local real estate agents is the supply of existing homes on the market.

"That's the big thing affecting our market more than anything -- inventory, (along with) interest rates," said Richard Swayne, vice president of Sacramento-based Dunnigan Realtors.

Or put another way: "What we have is a lack of inventory priced right," added Michael Lyon, head of Lyon Real Estate. "We have absolutely a ton of overpriced homes."

As the "for sale" signs pile up, buyers like John Daniels of Sacramento and Alison Munro of Vacaville are holding back, waiting for lower prices. They're key players in what experts now call a "buyer's market."

"We're probably going to wait longer than three months just to see," said Daniels, a supervisor for Select Carrier Group, a Sacramento shipper. Daniels is looking at homes in Sacramento's Natomas area.

Munro, a Fairfield teacher considering a move back to her Sacramento hometown, said, "We are looking actively, but I'm kind of watching the prices come down. … We're just waiting it out a little bit longer."

El Dorado Hills-based real estate agent Mark Macarow said buyers are not as much in a rush. Often that means sellers must adjust expectations.

"You reach a certain price and, all of a sudden, the phones start ringing," said Macarow, an agent with RE/MAX Gold.

Altogether, there were 4,621 more homes for sale at the end of May than there were on New Year's Day, according to figures from TrendGraphix. The record number of "for sale" signs in the region was 13,507 in April 1992. That happened amid local military base closings, a statewide recession and unemployment numbers almost double the region's most recent jobless rate of 4.6 percent in April.

Then, approximately 2.5 percent of the region's residential units were for sale. Since, builders have added approximately 210,000 new single-family homes, condos and apartments to the four-county region's housing supply, according to the Construction Industry Research Board. The number of homes for sale today would have to swell to almost 19,000 to equal the impact of the 13,507 for sale in 1992.

As the supply grows and homes sit longer on the market, new-home builders have begun curbing construction starts. The Folsom-based Gregory Group, which tracks the new-housing market, estimates that 20 percent of new homes are finished but have no buyers moving in.

3 of the top 9 reasons that the real estate bubble is bursting

If you own real estate or are thinking of buying real estate then you better pay attention, because this could be the most important message you receive this year regarding real estate and your financial future.

The last five years have seen explosive growth in the real estate market and as a result many people believe that real estate is the safest investment you can make. Well, that is no longer true. Rapidly increasing real estate prices have caused the real estate market to be at price levels never before seen in history when adjusted for inflation! The growing number of people concerned about the real estate bubble means there are less available real estate buyers. Fewer buyers mean that prices are coming down.

On May 4, 2006, Federal Reserve Board Governor Susan Blies stated that "Housing has really sort of peaked". This follows on the heels of the new Fed Chairman Ben Bernanke saying that he was concerned that the "softening" of the real estate market would hurt the economy. And former Fed Chairman Alan Greenspan previously described the real estate market as frothy. All of these top financial experts agree that there is already a viable downturn in the market, so clearly there is a need to know the reasons behind this change.

3 of the top 9 reasons that the real estate bubble will burst include:
1. Interest rates are rising - foreclosures are up 72%!
2. First time homebuyers are priced out of the market - the real estate market is a pyramid and the base is crumbling
3. The psychology of the market has changed so that now people are afraid of the bubble bursting - the mania over real estate is over!

The first reason that the real estate bubble is bursting is rising interest rates. Under Alan Greenspan, interest rates were at historic lows from June 2003 to June 2004. These low interest rates allowed people to buy homes that were more expensive then what they could normally afford but at the same monthly cost, essentially creating "free money". However, the time of low interest rates has ended as interest rates have been rising and will continue to rise further. Interest rates must rise to combat inflation, partly due to high gasoline and food costs. Higher interest rates make owning a home more expensive, thus driving existing home values down.

Higher interest rates are also affecting people who bought adjustable mortgages (ARMs). Adjustable mortgages have very low interest rates and low monthly payments for the first two to three years but afterwards the low interest rate disappears and the monthly mortgage payment jumps dramatically. As a result of adjustable mortgage rate resets, home foreclosures for the 1st quarter of 2006 are up 72% over the 1st quarter of 2005.

The foreclosure situation will only worsen as interest rates continue to rise and more adjustable mortgage payments are adjusted to a higher interest rate and higher mortgage payment. Moody's stated that 25% of all outstanding mortgages are coming up for interest rate resets during 2006 and 2007. That is $2 trillion of U.S. mortgage debt! When the payments increase, it will be quite a hit to the pocketbook. A study done by one of the country's largest title insurers concluded that 1.4 million households will face a payment jump of 50% or more once the introductory payment period is over.

The second reason that the real estate bubble is bursting is that new homebuyers are no longer able to buy homes due to high prices and higher interest rates. The real estate market is basically a pyramid scheme and as long as the number of buyers is growing everything is fine. As homes are bought by first time home buyers at the bottom of the pyramid, the new money for that $100,000.00 home goes all the way up the pyramid to the seller and buyer of a $1,000,000.00 home as people sell one home and buy a more expensive home. This double-edged sword of high real estate prices and higher interest rates has priced many new buyers out of the market, and now we are starting to feel the effects on the overall real estate market. Sales are slowing and inventories of homes available for sale are rising quickly. The latest report on the housing market showed new home sales fell 10.5% for February 2006. This is the largest one-month drop in nine years.

The third reason that the real estate bubble is bursting is that the psychology of the real estate market has changed. For the last five years the real estate market has risen dramatically and if you bought real estate you more than likely made money. This positive return for so many investors fueled the market higher as more people saw this and decided to also invest in real estate before they 'missed out'.

The psychology of any bubble market, whether we are talking about the stock market or the real estate market is known as 'herd mentality', where everyone follows the herd. This herd mentality is at the heart of any bubble and it has happened numerous times in the past including during the US stock market bubble of the late 1990's, the Japanese real estate bubble of the 1980's, and even as far back as the US railroad bubble of the 1870's. The herd mentality had completely taken over the real estate market until recently.

The bubble continues to rise as long as there is a "greater fool" to buy at a higher price. As there are less and less "greater fools" available or willing to buy homes, the mania disappears. When the hysteria passes, the excessive inventory that was built during the boom time causes prices to plummet. This is true for all three of the historical bubbles mentioned above and many other historical examples. Also of importance to note is that when all three of these historical bubbles burst the US was thrown into recession.

With the changing in mindset related to the real estate market, investors and speculators are getting scared that they will be left holding real estate that will lose money. As a result, not only are they buying less real estate, but they are simultaneously selling their investment properties as well. This is producing huge numbers of homes available for sale on the market at the same time that record new home construction floods the market. These two increasing supply forces, the increasing supply of existing homes for sale coupled with the increasing supply of new homes for sale will further exacerbate the problem and drive all real estate values down.

A recent survey showed that 7 out of 10 people think the real estate bubble will burst before April 2007. This change in the market psychology from 'must own real estate at any cost' to a healthy concern that real estate is overpriced is causing the end of the real estate market boom.

The aftershock of the bubble bursting will be enormous and it will affect the global economy tremendously. Billionaire investor George Soros has said that in 2007 the US will be in recession and I agree with him. I think we will be in a recession because as the real estate bubble bursts, jobs will be lost, Americans will no longer be able to cash out money from their homes, and the entire economy will slow down dramatically thus leading to recession.

In conclusion, the three reasons the real estate bubble is bursting are higher interest rates; first-time buyers being priced out of the market; and the psychology about the real estate market is changing.