We've Never Seen this Before?

"With real estate markets slowing and mortgage rates well above levels of recent years, times are getting tougher for homeowners - the number of homes entering into some stage of foreclosure is surging, according to a survey released Wednesday."

"In August, 115,292 properties entered into foreclosure, according to RealtyTrac, an online marketplace for foreclosure sales. That was 24 percent above the level in July and 53 percent higher than a year earlier."

"It was the second highest monthly foreclosure total of the year; in February, 117,151 properties entered foreclosure."

"California foreclosures are increasing at an even faster annual rate, up 160 percent since last year to 12,506. And the formerly red-hot Nevada market recorded a spike of 24 percent compared with July and a whopping 255 percent increase from August 2005."

"Some of the bellwether real estate market states are among the leading foreclosure markets. Florida, had more than 16,533 properties in foreclosure in August. That led all states and was 50 percent higher than in July and 62 percent higher than in August 2005."

"Rick Sharga, RealtyTrac's vice president of marketing, says the rising foreclosure numbers are in part the result of rising monthly payments on adjustable-rate mortgages, which have a low introductory interest rate that heads higher after an initial period."

'"Usually, foreclosures are a lagging [market] indicator," he says. "But we've never had a situation like this with adjustable-rate mortgages amounting to $400 billion to $500 billion coming up for adjustment over the rest of the year."'

"For a homeowner with a 5/1 ARM (an adjustable rate loan with an initial fixed rate for five years that then adjusts annually) that's now resetting, the adjustment could add at least two percentage points to the interest rate. That could send the payment on a $200,000 loan up from about $950 a month closer to $1,200."

"These exotic mortgages, which have been issued by lenders at much higher numbers the past few years, default at a higher rate than do fixed-rate mortgages. And sub-prime loans, which are much more common than in the past, have a higher default rate as well."

"But, Sharga says, "The real wild card is the nature of the loans themselves. Historically, ARMs were underwritten pretty conservatively. There has been a loosening of standards with lower credit worthiness and smaller down payments."'

(Reuters) - "The U.S. housing market is slowing roughly as the Federal Reserve has expected, San Francisco Federal Reserve President Janet Yellen said on Tuesday."

"Speaking to reporters after a speech to a local business group, Yellen said the main thing that could trigger unexpectedly harsh weakness in housing would be heavy job losses, which she said she did not foresee on a national basis."

"Even so, anecdotal reports suggest that builders are "fearful" about the outlook and that canceled orders for new homes have gone way up, she added."

"Chief Executive Robert Toll said the U.S. housing market got ahead of itself due to greed on the part of buyers and sellers, and that it now likely faces the highest level of speculative inventory ever."

Toll said the current downturn is unique in his experience because it wasn't driven by a "macro-event" although interest rates have risen steadily.

'"Every day there's an article about how lousy housing is now and how dumb you have to be to buy a house now," the CEO said Tuesday at the Credit Suisse Homebuilders Symposium."

'"I don't know what it will take to turn this market -- it could take two years, or it could take someone getting quoted in the New York Times saying the market has hit bottom."'

"The chief executive of home builder Hovnanian Enterprises Inc. (HOV) at an industry conference Monday said housing markets are changing "quite dramatically" and that new-home prices have effectively reversed through the use of concessions and incentives."

"Speculators and investors were a greater part of the market than anyone realized, and are now contributing to the inventory overhang of homes as they stop buying and relist homes, said Ara Hovnanian at the Credit Suisse Homebuilding Symposium in New York."

"'Buyer psychology has shifted . . . buyers are more content to wait on the sidelines than they were," the CEO said. "Cancellation rates have been creeping up."'

"Don Tomnitz, chief executive of D.R. Horton Inc. (DHI) , Tuesday said the company is preparing itself for a tougher housing market in 2007 compared to 2006, with prices finally stabilizing in 2008."

'"We have never seen housing prices and demand slow as quickly as they have during this downcycle," said the CEO of the nation's largest home builder when measured by 2005 deliveries."

'"Demand has evaporated to the extent of about 20% to 30% for the industry, and in a tighter timeframe than we've seen before."'

"The use of incentives by builders to move homes in a slower sales environment will continue for the next three to four quarters, Tomnitz estimated at the Credit Suisse Homebuilders Symposium."

Is this what Yellen was expecting? Does she think the building, real estate, mortgage industries that will be impacted by this tanking of the market are only going to have small regional impact? When those regions are hit all across the nation, won't that translate into a national impact?

"Testifying before the Senate Economic Policy and Housing and Transportation Subcommittees, NAHB Chief Economist David Seiders said the record housing starts and sales of the past two years were well above levels supportable by demographics and other fundamental demand factors, and were fueled to a great extent by investors and speculators seeking to make a quick profit and through the surge of unconventional ARMs, according to Seiders."

'“In retrospect, it was the finance- and price-driven acceleration of buying for homeownership and for investment that drove housing market activity into unsustainable territory during the boom,” he said."

"After posting double-digit gains during the past two years, national home price appreciation is expected to remain relatively flat for the foreseeable future. “Indeed, some decline is a distinct possibility, and the rate of price appreciation should remain below trend for some time,” said Seiders."

"There are several downside risks to the housing and (less alarming) economic outlook he presented. These include the possibility of spikes in interest rates or energy prices, a large resale of homes back onto the markets by investors/speculators and uncertainties regarding the size of the inventory overhang in the market for new homes."

"There also are considerable uncertainties about the impacts on consumer spending from a fading housing wealth effect as well as from the impacts of “payment shock” on home owners facing upward adjustments to monthly payments on “exotic” types of adjustable-rate mortgages (ARMs)."

"NAHB’s forecast has a cumulative shortfall of housing starts of roughly 400,000 units from the middle of this year through the end of 2008, in line with the estimated excess supply generated during the recent boom period."

“Ivy Zelman, a housing analyst at Credit Suisse Group, estimates that prices of newly built homes in San Diego, Sacramento, Calif., Phoenix, northern Virginia and southwest Florida already are down as much as 10% to 15% from a year ago. That estimate includes ‘concessions’ from builders, which are disguised price cuts. But Ms. Zelman still sees more price declines ahead.”

“‘We believe that the housing market is still in the early innings of a hard landing that will likely take several years to develop,’ she says.”