Foreclosures

There is a chance that we may see an increase in employment when the data comes out for December. However, it is not going to result in all the unemployed people going back to work all at once. Still, if you like to look at trends it is very hard to dispute a positive one in the ratio of firings to hiring and if it continues we will start to see a slow reduction in unemployment.

One of the problems in trying to determine how the economy is doing is the fact that each of us is really our own individual economy. You have a job or a business and regular income or you don't. You can afford your mortgage payments or you can't. The sum of all the various individuals is simply an accumulation of all these individual situations and while it is necessary to look at it that way it can be very deceptive.

For example, we saw a trend where some homeowners who saw the value of their homes go underwater simply walked away from them. Now, remember that during the boom, there were two categories of home buyers that were created that are not normally representative of most American homeowners. These are the flippers and the unqualified.

It became popular for some people who believed that housing would simply continue to appreciate in value to buy houses on spec with the intent of getting rid of them at a profit. It got so bad in some states (coincidentally the ones that had the biggest problems later) that people would line up and compete to put deposits down on condos and homes under development hoping to transfer those rights before ever actually occupying those homes. Now when the real estate bubble burst, these people had no real financial or personal investment in these homes and found it very easy to walk away. There was no real emotional attachment and as real estate plunged they walked and they walked early. However, most homeowners do not fall into this category and have strong emotional attachments to their homes. They go into foreclosure because they really can't make the payments, not because they see it as financially desirable.

The other group were the unqualified, meaning people who got zero interest or negative equity mortgages when they really didn't have enough financial assets to justify the prices they were paying. Of course they were also hoping for price appreciation and further for personal advancement in their jobs before the payments increased. When this didn't happen, they were forced out, since really they had no way to refinance or to make the payments in most cases.

So this created a significant short term trend. However, I would argue that while there may still be some people who fall into these categories waiting for the shoe to drop, so to speak, by this time most have been driven out. This leaves homeowners who really want to keep their homes. The fact that some of them have missed a payment because they wanted to have a good holiday season or because other bills came due, does not mean they have decided to walk away. Yes some will end up being forced into foreclosure, unfortunately, but not because they decided to walk away from an underwater mortgage situation, but because their individual situation just didn't give them any other option.

My point is that with the two groups who walked away easily greatly diminished, the trends calculated based on their behavior is simply misleading. Most homeowners will do everything they can to avoid foreclosure. Some of them will go into foreclosure, but most will find a way to avoid it. It isn't just economics to them.