Monday, January 30, 2006

Boston Globe: Housing Slowdown Is "Squeezing" Borrowers

Uh, oh - this story from the Boston Globe about skyrocketing foreclosures in the Massachusettes housing market doesn't sound good:

The number of foreclosure notices filed against Massachusetts homeowners last year reached their highest level since the housing bust of the early 1990s, as homeowners fell behind on their mortgages and lenders began the process of taking back the properties.

Paradoxically, the sudden halt to sharply rising home prices put a squeeze on many borrowers, analysts said. Homeowners who stretched their finances to the limit to buy a home found it more difficult to make their payments on variable-rate mortgages as interest rates rose, but they were less able to refinance their loans at more attractive rates -- or sell and pay off their debts -- because the value of their homes fell or remained flat.

''When prices are skyrocketing, you have the option" of selling the house for a gain or refinancing, said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University.

''In an economy where price appreciation is more modest or doesn't exist, what option do you have left?" he said. ''Sadly, one of those options is foreclosure."

Last year, there were almost 11,500 foreclosure filings in Massachusetts Land Court, where most notices are filed by banks and mortgage companies against the homeowners, according to ForeclosuresMass Corp., which compiles and tracks filings. That is a 32 percent increase from 2004, pushing the number of filings on record to its highest level since 1993, when a once-booming housing market was in a tailspin. The biggest increases were in Eastern Massachusetts.

During the housing boom of 1999 to 2004, the average price of Massachusetts houses and condominiums surged by at least 10 percent every year except one, putting the state's home-price appreciation among the nation's highest. But last year, price gains slowed to 5 percent, and single-family home prices were flat or even declined in some Boston and suburban neighborhoods.

''There's an epidemic of foreclosures," said Boston lawyer Gary Klein, who represents borrowers in lawsuits against lenders. ''We're getting a steady stream of referrals of people who are looking for any option to save their home."

Jeremy Shapiro, president of ForeclosuresMass, predicted filings would rise again this year, because many homeowners with adjustable-rate mortgages will see their monthly payments begin to rise along with interest rates.

''As we get into '06, '07, '08 and beyond, we're going to see more folks whose rates adjust," he said.


Divorce, separation, and job losses are the main reasons people lose their homes. While high-income individuals in divorce proceedings or spending beyond their means are vulnerable, working-class cities including Lynn and Worcester, where residents are more likely to live on a tight budget, were hardest hit last year. Also, people with poor credit ratings who qualify for mortgages from lenders charging high interest rates are also concentrated in these neighborhoods.

''People can't pay their mortgage," said Juan Ortega, a real estate agent in Lawrence in Essex County. ''They're up to the top. They bought very high, and now they can't make the mortgages."

Lawrence's housing market surged with the rest of the state. But lately, said Ortega, a Century 21 agent, he is spending his time helping clients facing foreclosures, which seem particularly acute in one predominantly Latino neighborhood north of downtown Lawrence.

A rash of foreclosures can drive down property values in a neighborhood, as lending institutions that do not want to hold onto the houses drop the prices to sell them quickly.


In the Boston area, house prices are so high, Klein said, that mortgages consume a growing share of monthly take-home pay. ''It used to be, if you lost a job you'd be at risk of losing the house," he said. ''Now, if you lose overtime, many families are so close to the brink, and that can create problems."

The Federal Reserve is meeting tomorrow to give Alan Greenspan a "Happy Retirement" party and raise rates to 4.5%.

People with adjustable rates are going to get killed if the Fed continues to raise rates.

Because the GDP for the fourth quarter came in at 1.1%, some analysts and traders believe the Fed's interest rate raising campaign will end after tomorow's meeting or perhaps one more rate raise to 4.75%

But also note that inside the GDP numbers, the "core" price index, which strips out volatile food and energy costs, was up to 2.2% in the fourth quarter. Greenspan believes 2.5% is the safety ceiling for the core price index, so if the index continues to rise in the first quarter of 2006, you can expect the Fed to continue to raise rates even if the economy continues to slowdown.

Which means higher interest rates for all of us.

Which means more foreclosures in the housing market for those with adjustable rate mortgages who can't make the 9% or 10% mortgage payments they're suddenly required to make.

Which means trouble in the housing market overall.

Which means big-time trouble for the economy as a whole, unless the Fed creates a new bubble to replace the bursting housing bubble.

Lots of "ifs" in this nightmare economic scenario, but there is enough data to show this economy is being held up by Scotch tape and Elmer's glue and it won't take much to bring it all down.

I know people who've bought homes they can't pay for, and a realtor friend of mine predicts that home prices will plummet, at least somewhat, as these poor folks lose their homes.

Home prices around here are obscene. A squat little 3-bedroom, 1 bathroom home across the street from my school (and who wants to live across from a high school?) goes for 800K to 1 million.
Geez, 3 bdrm, 1 bthrm - 800K to 1 million...something really does have to give.

I too have friends who have bought apartments they're having a hrd time paying for - and that's BEFORE their interest only mortgages switch to paying the principal along w/ the interest.

I just feel like something has to give in this economy. Everything feels propped up, first by the equity bubble in the 90's, now by the housing bubble. Eventually the Fed's gonna run out of bubbles to create and then what? Between the federal deficit, the trade deficit, and household debt, nearly everybody in the nation is up to their eyes in borrowed money.
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