Foreclosures are Not Going Away in Next Two Years
Foreclosures over the next two years will continue in Florida and around the country as more “interest only” and low payment loans come due for conversion.
At the end of the real estate bubble, people were buying Daytona Beach real estate with nothing more than stated income. The stated income in many cases covered only the interest only payment. Increases in income were expected to cover the increase in mortgage payments when the loan was converted and the borrowers started paying down the principal.
In addition to the payments increasing, some of the low payment loan did not cover the full interest payment and the unpaid interest has been added to the loan amount.
Interest Rates Rising
Another problem looming is the recent rise in mortgage rates are going to force payments even higher. The higher mortgage rates will make those payments unaffordable for many borrowers.
How many loans are out there? Here’s some numbers released by Fitch Ratings reported by Mortgage News Daily today:
- Loans to convert in 2010 – $47 billion
- Loans to convert in 2011 – $50 billion
$97 billion in loans, at let’s say an average of $200,000 per mortgage comes out to another 485,000 loans to convert. This is just one source leading to distressed properties. Continued unemployment and disappearing home equity are putting pressure on mortgage payments as well.
That’s a lot of money in loans that are likely to default when the higher payments become due. How many will be based on what happens with the economy in the next couple of years, but we are predicting a lot of the loans will become distressed and result in short sales and foreclosures.
Impact on Daytona Beach Homes and Condos
We know that Florida, Arizona and Nevada have a high percentage of these loans, many of which were bought on speculation. We expect we will continue to see many foreclosures and short sales. We remain concerned about the affect they will have on our market, but we also believe that the local market has already factored the reduced prices for short sales and foreclosure sales in market values.
Now, there are still tremendous deals to be had. The number of loans coming due for conversion means that the supply of distressed properties will be steady for the next two years plus. Not that there is a super high inventory of foreclosures. As of yesterday, 271 foreclosed properties were for sale through the Daytona Beach MLS. Most foreclosed property that is priced properly, and most are, are selling very fast, often with multiple bids.
Pricing is another story. Even though we still have historically high foreclosure rates, prices have stabilized in the past few months.
Another thing these numbers tell us is that for most people, the wisest course of action will be to buy and hold for at least five to seven years. All the distressed properties will have been worked out of the system by that time.
As we’ve stated in the past, we will be in a market dominated by foreclosures and short sales for several years to come. At least until 2012.
