Where does *your* market hurt?
Granular data has the annoying habit of disrupting the mythic narratives that we construct for ourselves,. Although to read the newspaper you’d think the real estate downturn was omnipresent, in fact the pain is unevenly distributed.
It only hurts when I sell, doctor
This is demonstrated by a really nice piece of quantitative analysis by my long-time professional colleague Peter Fugiel, formerly chief housing analyst for Nuveen. Writing in MuniNet Guide, he starts by laying out the overall pain, which is bad enough:
Nationwide, there is one home/unit that is currently in foreclosure process for every 175 local market residents. Put another way, it is estimated that approximately 2.2% of all homes in the U.S are in the foreclosure process. This is a foreclosure level that is four to five times the level experienced before home prices began to fall.
Yet some places hurt a whole lot more than others:
Right now, we would especially benefit if we understood the current foreclosure facts on the ground. Real estate is a local industry; and local markets are each different. When it comes to the current foreclosure crisis, it’s important that we all begin to make distinctions based on the foreclosure trends that have begun to emerge.
This research has identified four general types of real estate markets. This classification is based on the current foreclosure patterns that exist among the various major
Data mapped from Fugiel analysis.
Red’s bad, isn’t it?
Four Types of Real Estate Markets in the
The following local market figures indicate local foreclosure rates as a percent of the estimated
A careful analyst, Peter cites his sources and his compilation algorithm:
Note: Statistics for this paper were derived from the invaluable Realty Trac.com website, and from the US Census Bureau’s Quick Facts for local counties & cities. Realty Trac.com uses a wide definition of properties “in the foreclosure process.” It is a necessarily inexact term, one that includes all loans in serious arrears and all properties that have been foreclosed.
It is difficult to compare categories of arrearages, due to the differences that exist under state laws.
Although it has yet to come up in this blog, foreclosure varies widely around the country; in some states, known as ‘judicial foreclosure’ states, required legal notices and other pro-borrower, anti-lender provisions make foreclosure onerous, expensive, and slow.
Surprised by the market?
For example, the large majority of properties in the
For those areas (listed in Tables 1 & 2), which are above the national average, the percentages exceed 100%. For those markets, with foreclosures that are below the
For convenience, I converted Peter’s four types into colors, using my traffic-lights-plus-one system.
Red. Markets with two times or more the national foreclosure average: These markets are where the big losses may occur, especially among vacant and investor units. None of these markets are a surprise:
Type 1
Most Severely Impacted Sunbelt/Weak Urban Markets (way above the national average)
Las Vegas/Clark County: 389% of national average
Phoenix/Maricopa County: 269%
Miami/Dade County: 188%
The Reds divide into two groups: weak demand (the Midwest), and excess supply (Vegas,
Yellow. Markets with above-average foreclosure patterns: These are mostly big city markets,
The Yellow areas are interesting because their fundamentals are generally sound: economy good, long-term demography favorable.
Type 2
Large Urban Markets with Sub-Prime/Spec Condo Problems (above the national average)
Chicago/Cook County: 156%
Charlotte/Mecklenburg County: 110%
Probably the observant herd of developers all built simultaneously. While a recession will shrink demand, the owners who can hold out (or the lender who foreclose on them) should have intrinsic value they can recover.
Who’ll eventually get whatever value comes out?
Green. Stable markets: The majority of US housing markets are essentially stable. Even though local foreclosure rates are two to four times higher than historical levels, most stable markets [Like
Type 3
A Representative Sample of “Stable” Markets (below the national average)
Louisville/
Minneapolis/Hennepin County: 72%
Portland/Multnomah County: 68%
Austin/Williamson County: 65%
Nashville/
In green markets, people won’t be buying, but people won’t be selling much either.
Blue. Under-produced markets: The political hysteria about the real estate collapse of 2008 is just that: hysteria. Overbuilt markets are nothing new in recent housing history. It is important to notice that the very best
Notice something in common among the blue markets? With the modest exception of
Type 4
Under-Produced Markets (well below the national average)
Seattle/King County: 44%
Still one of the best places to own them
In these markets, recent buyers may not get the appreciation they expected, but they’re unlikely to lose much. These markets also have a huge shortage of affordable and workforce housing.
What do we do with the resulting differentiation?
ET buy home?
Many of the homes impacted by lender/value problems continued to be occupied. The majority of the properties in the pre-foreclosure process stay out of the ’short sale/for sale’ category.
Preserving the value of real estate assets is dependent upon knowing any one local market well enough to tell the difference between a unit’s current market value and its long-term value. There is a considerable difference, for example, between an empty investor condo in south
Empty homes are inviting targets for clandestine occupancy.
Currently, there are far too many seriously impaired loans and local markets for the nation to wait on the current arrearage problems. Congress will have to face some new continuing occupancy options, as it juggles the rights of current occupants with the potential cost to the Treasury. These options will include deeper (more expensive) lender loan write downs, shallower (less expensive) re-lending into the federal FHA loan program, ‘rent-to-own’ programs, ‘rent-to-buy’ programs, and ’shared equity’ programs.
To get out of this situation faster, we’ll need to invent (or import) new financial tools.
New tool time?
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