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By Anonymous Mike, pseudonymously.



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Tuesday, July 22, 2008
 
Home is Where the Financial Hell Resides

Article on front page of the AZ Republic regarding the increasing number of foreclosures.

Key graph:

"It has become more of an equity problem than a subprime problem," said Tom Ruff, a real-estate analyst with Information Market.

Some thoughts...

Two years ago, a couple bought the house down my street for $575,000. The house is back on the market for $399,000. That means that given closing costs in the neighborhood of $30,000 or so that the couple in question is around $200,000 underwater.

I am a big fan of honoring one's financial responsibilities, but that couple isn't seeing positive equity in that house until well after the end of the second Obama Administration. They also put little money down. So why not hand the keys back to the bank and walk away? Why not give into foreclosure?

In fact there are several houses in my immediate neighborhood where the resident families are facing similar situations of negative equity. Why shouldn't there be a mass default on mortgages?

A bunch of economists from the Federal Reserve Bank of Boston say that based on past evidence, that they don't expect such a mass default. Looking at the history of similar drop in housing value in Massachusetts in the 1990s, they state that negative equity must be accompanied by cash-flow problems significant enough to impact the family's ability to pay the mortgage. Otherwise they contend that the family will stay put due to other factors such as desire to remain in the community and keep their kids in the same school.

A piece last year from the W.P. Carey School of Business at ASU wondered by the high rate of foreclosure wasn't accompanied by a similar rise in bankruptcies. One possible reason? Houses aren't owned by the same people who reside there...

W. P. Carey School Research Economist Dawn McLaren said that in the bubble areas, where housing appreciation -- and, now, depreciation and foreclosures -- was highest, 20 to 30 percent of homes were owned by investors.

And now, a lot of the homes that are being foreclosed on are owned by investors, said Haines.

So here's my question... with foreclosures hitting record levels in the Valley how many of the properties are owned by investors and how many are because of negative equity instead of cash flow issues?