Foreclosure: the Wave of the Future in Real Estate?

Most real estate markets experienced unprecedented gains during the first few years of the 2000's. If the numbers are speaking the truth, those incredible success stories could end up becoming horror stories for some. It seems as though, payback time is coming! One doesn't need to look far back (late 90's to 2000), to the stock market. During that time, when you could have bought ANY .com stock, regardless of company profit (or more like, losses), and you're stock would have performed well no matter what. I can't help, but to draw some comparison to these two situations. The real estate market (in most big markets), ran up in value faster than a speeding bullet. Similar to what the stock market did in the late 90's. We all know what happened to the markets, following that insane valuation. It corrected big time, especially the tech sector (.com stocks) which ultimately ended up dragging down practially everything, including the blue chips.

Forclosures in the housing market are up a whopping 43%, which translates into over a million units to date. When you consider the fact, that it's probably going to take another year before things settle down, foreclosures could at least temporarily seem like the wave of the future. Sure, in the end the housing market will recover and end up once again on top. But for now, it's seems like a market that is about to pay a big price for it's past gains. The sad part is, we did it to ourselves. In the interest of propelling our economy, the mortgage industry came up with even more creative ways to finance real estate. Notably, the interest only loan. This allowed a home buyer to bite off a much bigger mortgage than he or she could have otherwise afforded. So now you had people buying much larger properties, yet having what at the time seemed to be a very reasonable payment. The problem was, like the stock market in the late 90's, people got caught in the pure euphoria mode, thinking it's going to keep running up and never stop. Unfortunately, reality says, that can't happen! And for obvious reasons, there is no way it can. I mean, if it were possible, somewhere along the line our wages would have to follow suit. Otherwise in no time flat, 99% of the population would be priced out of the market.

So now, that bigger house with the reasonable payment isn't going up in value like crazy anymore. And to make matters worse, that interest only mortgage (which by the way never drops the principal balance one dime), is based on an adjustable interest rate. How many people do you know with an ARM (adjustable rate mortgage), that have had their interest rate go down? Probably not to many. So, not only is that house not gaining value as fast, the mortgage payment is adjusting upward. Plus, a large portion of the homes sold during the last couple years of the real esate boom, were purchased as an investment, and financed with either an ARM or Interest Only Loan. There for a while, everybody, and there brother jumped in the market. You had stone cold amatuers buying and selling houses for a quick profit. With so many of these homes being bought for the sole purpose of flipping them, the housing inventory has skyrocketed. As a matter of fact, they got 2 or 3 television shows on cable right now, reality ones I guess, depicting real estate investors going out and buying old, beat up houses, fixing them up, and selling them in what appears to be about a 2 week process. Hell, they make it look like anybody could do it. And the funny part is, they never seem to have any major problems making a big profit. I wonder how many people watched those shows, ran out and bought a junker house, only to find out it's not quite that simple! This overheated market has not only created to much supply (without the demand to carry it), but it's assisted in leveling off, and in some cases decreasing current market values.

So, until this once abundant housing market can take some time to come back to earth, it may seem (at least for a little while) like forclosures have become the wave of, at least , the temporary future!