Foreclosures Increasing

Residential property foreclosures in southeastern Wisconsin increased more than 21 percent (from 1,283 to 1,557) in the first quarter of this year, compared to the first quarter of 2005, according to ForeclosuresWI, a company specializing in foreclosure data collection.

Statewide the number of foreclosures jumped 26 percent (from 3,213 to 4,048). Racine County had the highest percentage increase of foreclosures, rising 46 percent from 138 to 202. Sheboygan County had the second biggest increase, rising 37 percent from 60 to 82.

"Those numbers seem awfully high," said Judy Hearst, vice president and regional manager of Coldwell Banker Residential Brokerage. "I don’t know what exactly to tell you, this is really interesting. They definitely are significant numbers."

Foreclosures are typically caused by people financially over-extending themselves, financing at rates of 95 and 100 percent, second mortgages and equity loans, Hearst said.

"For the past few years the economy has been so in favor of refinancing it made it very easy for people to get refinancing, get appraisals, and the higher finances on properties reflect the challenges people have when they do overextend themselves," she said.

The cost of lending is less when interest rates are lower, and the last few years offered plenty of inexpensive opportunities to refinance.

"From the real estate side we are seeing more situations where we’re helping negotiate short sales (to) help sell properties, to help them not go into foreclosure," Hearst said.

The increase in residential property foreclosures could indicate that the housing bubble is bursting, as some have predicted. In addition, the Beige Book, which publishes anecdotal information on current economic conditions in each Federal Reserve Bank district eight times annually, reported that "most districts report cooling and moderation in their residential real estate markets. In general, year-on-year price appreciation seems to be lower than in quarters past."

However, despite these signs of cooling in the marketplace, this is not indicative that we are experiencing a housing bubble burst, Hearst said.

"We’ve gone into a normalized market whereas the past few years have been a hot sellers’ market," Hearst said. "We’re seeing properties with longer days on the market. One of the beauties we have in our southeastern Wisconsin area is we’ve never really seen the dramatic highs in appreciation or the very dramatic lows."

Don Madisen, an advisor for Coldwell Banker Home Loans, attributes the high foreclosure numbers to sub-par lending.

"The low documentation of income and assets and people with low incomes, marginal credit who put no money down, they’ve got little reason to stick around to try and make it work when they’ve brought little to the table," Madisen said.

A lot of the requirements that had been used for verifying that a borrower has a few months of house payments in savings after closing have gone by the wayside, Madisen said.

"Investors out there have gotten more aggressive in terms of what they’re willing to accept on credit scores and asset and income documentation," Madisen said. "It’s coming back to bite us is really what it’s about."

Michael Sadoff, Investment Advisor with Sadoff Investment Management LLC said the foreclosure numbers aren’t surprising.

"Though the numbers are relatively small, if things get bad enough it would not surprise me to see those percentages go up even higher," he said.

There may be cause for concern that a housing bubble burst is on its way after all, Sadoff said.

Housing affordability dropping, increased interest rates and higher price tags on homes are also indicators of a housing bubble about to burst.

"You have people who can’t afford payments anymore," Sadoff said. "Most people took out adjustable rate loans. As short-term rates are rising, I think people are going to be pinched in all different directions on their homes."

Sadoff said the foreclosure numbers may be cause for concern for our economy.

"As money rises for mortgages, less money spent elsewhere on discretionary things and that’s going to affect the economy," Sadoff said. "If it starts to fail, you could have some panic."

Because the foreclosure numbers are relatively small, it’s tricky to say what they mean, Sadoff said.

"This 20 percent jump doesn’t concern me as much, but nationwide you’re going to see larger numbers and trends," Sadoff said.

Watch the unemployment and foreclosure numbers with one eye and the publicly traded housing market stocks with another, Sadoff said. If the former numbers go up and the stocks keep plummeting downward, the bubble may soon burst.

David Clark, an associate professor of economics at Marquette University, said the foreclosure numbers are surprising to him.

"Mortgage rates are markedly higher than they were last year, but the economy is somewhat better than it was last year, although it was in solid shape last year," he said.

Clark compiles a quarterly analysis for the Wisconsin Homeowners Association of home sales in Southeastern Wisconsin.

"Of the data that I have, nothing is suggesting that home sales are markedly different this year than they were last year," he said.

Residential Property Foreclosures