Roofable

Foreclosures, Defaults and the National Real Estate Market

The big news on the national real estate front for the past couple weeks has all been about the tightening of credit standards for potential home buyers, mortgage companies closing their doors, and a weakening real estate market throughout the country. We’re leaving the boom-times for real estate prices and settling into a correction period.

How We Got Here (part of it)
There was a very interesting article in the New York Times titled, Subprime Time, that gave some historical perspective on how the mortgage industry was turned into something tradeable on Wall Street. The end result was a mortgage market where borrowers were not placed under the same scrutiny as was seen in the past (prior to 1970).

Foreclosures and Defaults on the Rise

Today the Wall Street Journal has an article on how the large gains in the real estate space led to many more people buying real estate as an investment - particularly, properties that are unoccupied by the owners. We’re just entering into the beginnings of this mess, but it appears that many of the investors, especially in states like Florida, are just walking away from the loan. An excerpt:

Sazzad Khandakar, 43 years old, an information-technology manager and father of three in Monroe Township, N.J., is among the nation’s distressed home investors. In early 2005, he bought a $410,000 condominium and a $390,000 newly built single-family home, both in Orlando, Fla. “Everybody around me bought an investment home in Florida,” Mr. Khandakar said. “Florida was all over the news; my friends were doing it….I didn’t want to miss out.”

He planned to keep the condo as a second home and sell the detached house for a quick profit. For the condo, Mr. Khandakar made a 10% down payment, but he borrowed 100% of the cost of the house, assuming that its rapid price appreciation would soon provide him with equity. Instead, prices began falling, and he has been unable to sell the home or find a tenant. Now, Mr. Khandakar said, he is behind on both loans.

“My credit is shot for the next six or seven years,” he said, and he has run through $100,000 of retirement savings. “It will take me another five to 10 years to recover that,” he added.

This will be especially interesting to watch in Florida. We have a good economy that will continue to grow. However, we also have an inordinately large number of real estate investors and a huge amount of new homes and condos still coming onto the soft market. My guess is that it’ll be really easy to find a nice home to rent here in Orlando for a low price soon. We’ll also see a good number of foreclosures on the market for those with the money to buy at a great price.