Note: For readers not familiar with the concept of our “Melmania” section,
this is where your editor can take any subject and develop arguments regarding
some ultimate conclusions. Since some of those conclusions might sound
extremely radical, the name of “Melmania” seems appropriate.
Few topics have generated the intense interest over the past
five years as has real estate, particularly rising residential values. Millions
upon millions of words have been written under three general headings:
The enormous growth in prices for homes in various parts of the United
States and Canada (and other parts of the world as well)
The staggering additional increments of money taken from those rising values
which have had such a positive impact on consumer-driven economies.
Now, more recently, the likelihood of an important reversal in residential
real estate prices which would negate many of the benefits which have accrued in
the past few years.
Many economists, most particularly those employed by or associated with the real
estate profession, have been offering reassurances that, if there is a reversal
at all, it will be short lived and followed by a resumption of rising home
values, albeit perhaps at a more modest rate than was seen from 2001 through
mid-2006. In effect, a “Soft Landing.”
Other analysts, your editor included, suspect otherwise. We suspect that the
reversal will not be quick, but longer-lasting, and the damage done to
residential real estate prices will be much more severe than many suspect.
One of our friends and long-term readers was kind enough to forward an article
from the Sacramento Bee which provides substantial information in support of our
position. The article informs us that Sacramento has suffered, “...the most
dramatic rise in home foreclosures since the 1990s during the fourth quarter of
2006...” And the rate is rising rapidly as we are also informed that, “...865
capital-area homeowners surrendered their houses to the bank in October,
November and December - nearly double the region’s 450 third-quarter
foreclosures.” As a comparison, the 865 fourth quarter foreclosures compared to
only 63 the same time last year.
There was another piece of information in the article that has particularly
ominous implications and read, “...More ominous, the number of people who
receive such (foreclosure) notices and then lose their homes to banks reached
32% in the fourth quarter. That’s up from 8% the same time in 2005.”
As I wrote my friend, “Back when I was in that business (mortgage lending), when
we sent out our first notice of foreclosure, most homeowners would find a way to
scrape up their deficiency and keep their homes. However, today that is
obviously not the case. A multitude of homeowners are buried in debt so deeply
that without huge and rapid increases in home values - which, in my opinion, are
NOT going to happen for some long time - they are doomed to lose their homes,
which will collectively further exacerbate the situation. I truly believe, as
the famous song would put it, "We've only just begun..."
That’s still the way we see it. Millions of homeowners purchased property
knowing in advance that they could not meet the monthly mortgage payments, but
believed they could hang on long enough for rapidly rising prices to rescue
their situation and enable them to actually make a huge net profit. That isn’t
happening, and the reality that they may actually have to pay for their homes is
just beginning to dawn on them.
One can only speculate on how many will eventually default. Our best guess is
that the number to be huge.