Pipeline

The foreclosure process is going to help purge our system of excess debt. It will be very expensive for banks, and traumatic for home-debtors. But it will return housing costs to those which can be sustained.

Home buyers between 2001 and 2007 started extending themselves more and more so that they could purchase a home. Real estate appreciates endlessly, of course, and so you make money by owning real estate. The more expensive a house you buy, the more money you make. Over extending yourself to afford a home is in fact a sound financial decision. The more people that over extend themselves, the more housing prices increase, the more attractive over-extension becomes. It was a positive feedback cycle: all that needed to happen was for lenders to keep pumping debt into the system. Thus the exotic loans: 10% down, 0% down, subprime, liar loans, interest-only loans, negatively-amortizing loans.

Unfortunately for the people that bought between 2001 and 2007, housing couldn't appreciate forever. Now the buyers that could barely afford a house in 2007 cannot sell their house in 2009 because they owe more than the house is worth. They are trapped. It sucks.

Chapel Hill saw a lot of 10% down mortgages. I haven't found any 0% down. I have seen a lot of ARM mortgages, but not any interest-only or negatively-amortizing loans. Most people took out conventional mortgages. Lots of them took out 80/10/10 mortgages (80% first mortgage, 10% second mortgage, 10% down). Chapel Hill won't be seeing tons of foreclosures due to the grossly exotic loans. What about foreclosures from conventional mortgages where the buyer simply overextended themself?

So far, foreclosures have been very light in Chapel Hill. I keep looking at the Google foreclosure map, and there are ever only about 17 properties in the foreclosure process (delinquent, foreclosed, reo) -- some foreclosures come and go, but several have been showing up consistently for a very long time. The one on North Hill Road, for instance, was foreclosed upon back in August 2008.

So are we ever going to see a foreclosure wave hit Chapel Hill? If we don't, prices will deflate more slowly.

CalculatedRisk has a post showing a graph with the "seriously delinquent" rate for all conventional mortgages it backs. It's a hockey stick graph: flat until mid 2007 when it shoots straight up. It's still going up.

Foreclosures are coming.