4 Million Foreclosures in 2010? It's A Real Possibility

Updated January 8, 2010 to correct an editing error.
I spent much of the last hour listening to Trulia founder and CEO Pete Flint and RealtyTrac Senior Vice President Rick Sharga discussing their (shall we say somewhat depressing) views of the real estate market.

Their vision of foreclosures in 2010? As many as four million homes will receive a foreclosure notice next year, which would make it the peak of this foreclosure cycle.

According to Flint, we're in a "false state if stability" as far as the housing market goes. Tax credits have driven sales, but banks are holding back inventory, he noted.

"When the tax credit runs out, inventory will go up and interest rates will go up. Prices will go down again. We have a long way to go until we have a healthy real estate market," Flint said, adding that he sees house prices dropping another 5 to 10 percent, and mortgage interest rates moving into the 6 percent range.

Tax credits haven't broadened the number of sales. "They have just pushed sales forward," he added.

Sharga said that unemployment, negative equity, and credit availability are the driving factors behind foreclosures.

And, don't discount the $2.5 trillion in Alt-A and negative amortization loans that is expected to reset starting July 2010 through August 2011. While low interest rates might help that a little, most of those homeowners "probably didn't qualify for those loans even at the teaser rates," he added.

"Negative equity on its own is not necessarily enough to drive foreclosure activity, but with a second trigger, such as a loss of income, divorce, medical bills, or a loan resetting at an unaffordable level, that negative equity greases the skids for more foreclosures," Sharga said, adding that "2010 will be a challenging year."

Sharga said RealtyTrac believes that 2011 will be marginally better than 2010, but we won't see normal levels of activity until the end of 2012, and "we will still go through shadow inventory into 2013."

Sharga and Flint both agree that foreclosures are being driven by unemployment. If you want to know where the next spike of foreclosures will be, they say, look at where unemployment is spiking.

In the Chicago metropolitan area, December foreclosures are up 118 percent over December 2009. Why? Sharga said it's because the Chicago metro area includes Joliet, Illinois, where unemployment recently spiked higher.

Other areas to watch for increased foreclosure activity? Fayetville, AK, Portland, OR, Provo, UT, Charleston, SC.
The bottom line: Jobs and real estate are still tied together.

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask. She blogs about money and real estate at ThinkGlink.com.

Read More:

• Jobs and Real Estate Still Tied Together
• Recession Over? Not With 21 Percent Unemployment