2007 April 29 | Wheatworks Blog: Financial Matters

Archive for 29th April 2007

Foreclosures Increasing

4/29/2007, 9:42 pm

Foreclosure filings rose 47 percent from a year ago last month. There’s now one foreclosure for every 775 households. In Clark County, Nevada, one out of every 30 homes began the foreclosure process last year!

What’s that about? Generally, three things: people buying much more home than they can afford, “flippers” with bad timing, and homeowners facing crises.

Let’s look at them in reverse order. Homeowners with mortgages they can afford usually do well, make their payments and, eventually, own their home. Crises happen, though. People lose jobs, spouses die, costly medical procedures are required. Financial crises can knock a stable homeowner for a financial loop. While this is not the primary reason so many homes are entering foreclosure proceedings, it is a factor for some.

The second group is comprised of “flippers” with bad timing. Flipping real estate has always been risky. But when the market hits its peak, the risk increases quickly. If you buy at the top hoping to resell higher, you lose. Many have been caught at the top in many regions of the US. Whether or not you consider flipping a form of investing or a type of gambling, there is always risk involved when you pay a lot of money expecting a bigger return.

The third significant group facing foreclosure are those caught buying more home than they can afford. You can read their stories nearly everywhere. These are people who buy homes costing more than 3x their annual income. Or they are couples who have mortgages that require both partners to remain employed. Or they are first time home buyers who have no concept of what “starter home” means.

Given that these three groups facing foreclosure have always existed in some form, why the sudden increase in foreclosures? Because money has been so cheap lately, lending standards have plummeted (remember qualifying ratios?), and home prices rose too quickly compared to incomes.

If you’re in the market for a home here are a few tips to consider:

Because prices in some regions are still high relative to value, it may be best to continue renting until home prices bottom a bit.
Never buy more home than you can afford.
Avoid funny money loans if you can. A fixed rate mortgage is “ol’ reliable”, especially now while mortgage interest rates are low. Unlike ARMs, IO, NegAms, a fixed rate mortgage gives you an assurance of stability. You’ll know what your monthly payment will be and it won’t change; it’s fixed.
Consider all the costs involved. Of course, there’s the principal, interest, taxes and insurance. But don’t forget the costs associated with maintenance and repairs.
Pay your mortgage and utilities first.

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