Tuesday, April 13, 2010

Foreclosures Of Million Dollar Homes Are Spiking

Foreclosures of homes costing over $5,000,000 have recently begun to spike, hinting that the effects of the economic turmoil is trickling up. This is casting doubt on the prospects of a housing recovery while mortgage rates have been climbing. See the following post from Expected Returns.

As this current economic downturn picks up steam, large swaths of the population will be affected, including the very wealthy. With that being said, it appears the long-awaited capitulation from high-end homeowners is finally here. From the WSJ, Foreclosures Hit Rich and Famous:

The rich and famous now have something in common with hundreds of thousands of middle and lower-class Americans: The bank is about to take their homes.

Houses with loans of $5 million or more will likely see a sharp rise in foreclosures this year, according to a RealtyTrac study for The Wall Street Journal.

In February alone, 352 homes nationwide in this category were scheduled for foreclosure auction, the final step before a bank acquisition. That is the largest monthly number of these so-called notices of sale since the financial crisis began. By comparison, in all of 2009, there were 1,312 such notices.

Economists say the super-wealthy are among the last to lose their homes in a mortgage crisis because they usually have high savings, better access to credit and other means for staving off foreclosure. But many of them work in financial services and other industries hit especially hard by the crisis, and have seen their wealth shrink in the market crash.
The economic crisis is unfolding as expected, with subprime foreclosures leading to prime foreclosures. It's highly questionable whether we are on a sustainable path to economic recovery when the financial elite are falling on hard times. While homeowners in the $5 million dollar range are a small portion of the population, their financial distress is very telling of the troubling trend in long-term unemployment.

Home prices will likely fall once again as average Americans remain unemployed and as households in America decline. The decline in households in America underlies the trend of former homeowners doubling up with families and friends. The weak rental market confirms the severity of this trend, as we are not seeing the kind of boost in rental demand that would normally follow a decline in home ownership.

The housing crisis will come to the fore once again as mortgage rates begin to rise. Coming off the Fed's withdrawal from the MBS market, mortgage rates have, not surprisingly, risen to 8-month highs. While mortgage rates are still historically low at 5.23%, they must remain at this level in order for housing to stabilize. If and when mortgage rates rise meaningfully, housing will come under intense pressure, and everyone will realize that this crisis is not over by a long shot.

This article has been republished from Moses Kim's blog, Expected Returns.
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