mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Sunday, September 25, 2005

Why housing forclosures are low in high-priced areas...

The Sunday Baltimore Sun is carrying this syndicated column (bugmenot) that can't seem to understand why housing forclosure rates are higher in places where home prices haven't appreciated much, and lowest in places where home prices are out of this world. After all, if people have to pay a bunch of money for their homes, then aren't they more likely to fall behind on payments?

Maybe. But it seems pretty obvious that if home prices are going up, and demand for homes is up, forclosures will be rare. Why? Because forclosure is a last resort. It's what you end up doing if you have no other choice. And when housing prices are up, you have other choices - namely, you can sell your house (possibly at a profit) and pay off the loan, thus avoiding forclosure.

And in a boom market, this has created a whole industry of speculators who look for, or advertise for, people whose houses are about to be forclosed on, and buy it cheap enough that they can flip it for a profit. High prices create new intermediaries.

There are probably other reasons. I'm going to guess that few people have their homes forclosed on in the first year or two after being purchased. If housing prices have gone up 25% each year in the last 3 years (as they have in Baltimore) and you bought your house 3 years ago, not only can you probably sell it for a profit, but your home payments are not affected by the increase, since you bought your house before the increase.

Furthermore, high prices also squeeze out marginal buyers. Chances are the people buying houses - who can afford to buy houses - are among the best qualified, because people selling their house can afford to be choosy, and people buying houses have to compete with other buyers. The well-qualified buyer, who has a pre-approved conventional mortgage, is more likely to have their offer accepted.

I'm not sure why the author is so puzzled. It seems to me like the thing that is going to cause increased forclosures is if the real estate market crashes - if the bubble that everyone keeps talking about pops. You will then have a bunch of people carrying mortgages on houses that aren't worth nearly as much as they paid for them. If they find themselves unable to make the paymetns for whatever reason (poor budgeting, illness, loss of job, downturn in the economy, ect) they will be unable to sell the house for what they paid for it. Forclosure may then be their only option.

Maybe I'm missing something, but I don't get why this guy has a newspaper column and I don't. Then again, what do I know about real estate? I'm still renting.


At 2:25 PM, Anonymous Anonymous said...

My wife and I are currently in the process to buy a 1-bedroom condo in Falls Church, VA just inside the Beltway and we're seeing this.

Pump and dump.


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