 The housing gurus trumpeted good news when foreclosures were frozen for over 50% of loans in default from Thanksgiving through January 9 . But that doesn’t mean that the sheriff won’t be knocking on those doors come January. It just means there will be an extra six-weeks’ worth of foreclosure notices going out at once. (The image that comes to mind is a boa constrictor swallowing a rabbit. I’ve refrained from including a picture here.)
True, the total number of foreclosures may be somewhat lower since the purpose of the freeze was to allow the lenders to catch up and get in place their home loan workout programs. The purpose of those programs is to renegotiate the existing loans to keep people in their homes. And, presumably, some of those workouts will indeed work. But some won’t. Meanwhile, part of the process of the workout is to reset the valuation of those homes – something appraisers will take into account on future sales evaluations.
Meanwhile, the pressure on those homeowners and investors who speculated with adjustable-rate loans will continue to build. The interest rates on adjustable rate mortgages (ARMs) reset after a year, or three, according the terms of the original loan. The bet by these homebuyers was that their equity would improve and they could sell or refinance and walk-away with money in hand. Or, that their income would improve and they could pay the higher rates. Those bets have been lost. What that means for the housing market is more foreclosures.
The graph shows that we’ve just begun down the path of option-ARM resets and that they will peak in 2011. But the Winter/Spring of 2009 is a sharp increase from 2008. Overall, subprime-ARM resets follow a path that could give us a break in 2010. But after a continuous inventory build-up from these foreclosures in 2009, it's not certain that the break will be enough to have an impact on home prices. More foreclosures means more competition for others trying to sell. And the banks which own these foreclosed homes intend to be at the low end of the market – every month they own the property costs them more money. So, if you want to sell, my advice is to cut your price and sell now. It’s only getting worse.
The number of foreclosure notices in Flagstaff is more now than it was last Spring. It takes a while for a home to come back on the market after the foreclosure sale – bank evaluations, bureaucracy and repairs all take some time. So, if we have a pile of foreclosures in January, they won’t start hitting the MLS in Flagstaff until Spring, just when some are holding out false hope that the prices will improve.
Some say, not in Flagstaff. It’s true that Flagstaff’s real estate market has so far been insulated from the big drops in prices, and may continue to be. Our market was not “overbuilt” as Phoenix and Las Vegas were. But where do many of the second home buyers that make up 25% of our buyers come from? Phoenix and Las Vegas. Without equity in their homes there, they will not be buying second homes here. The good news is that many of our buyers also come from Southern California and that market is picking up – but it still has a ways to go and I don’t know if the pick-up will survive the ARM resets to come.
If you are a homebuyer wanting to take advantage of this situation, here's where to start: Flagtaff Real Estate and Relocation. Or, give me a call: 928-714-0001. | 
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