Sounds good to me. That takes them out of the housing market for a good five years, decreasing demand. Plus, their house goes on the market, increasing supply. Housing prices fall, and I get a lot more house when I buy this year or next.

Selfish assessment? Well, these folks weren't thinking of anyone else when they bought their house, or when they walked away from it. I don't feel bad.

Got bad news: This is NOT the beginning of the end of this mess,its more like the end of the beginning.

The fact is,everybody in the food chain here is going to feel lots of pain. Lenders, Banks, hedge funds that hold these mortgage securities and investors are going to get a haircut.I guess the question is going to become : How much pain will these entities take before they start serious calls for a bailout? Anybody ?

Five? Try 7 to 10 or more...

As to the implications...I would rather my house value go up then down...thanks

I laugh because the banks really screwed the pooch on this one...all except one...

I don't see any advantage to home prices going up, unless you're checking out permanently or you like to play trading games with houses. You may get more if you move, but you'll just have to pay that much more for your next house.

@nytmare: If there is a stream of inexpensive houses being built (starter homes) and the prices of all the others are going up then it's pretty good for all. You can "Climb the ladder" so to speak pretty easily.

When the houses are all being built bigger and lavisher, just the banks are willing to loan more money, but no one is actually coming into the market, well, that can't really last.

feel sorry for the house flippers (no not really)

@Erwos: I support personal responsibility as much as anyone, but don't think life's going to be all roses for you when their homes are foreclosed. You may not even be approved for a mortgage once the actuaries crunch their latest numbers and realize they don't want to take any risk for a while.

Maybe I can afford a condo in DC!

There's something wrong when a 1 bedroom condo costs more than my parents 3 bedroom house in Phoenix.

my fear is the collapse of HGTV. seriously though folks, we have 2 more resets coming down the pike... so get ready for more bad news - probably worse actually. eek.

Don't worry about the banks too much. I'm sure that the government will step in and bail them out. With our tax money, or, more exactly with our non-existent tax money will will become future debt for everyone.

I'll go on record now and say that there WILL be a government-financed bailout, at the expense of the American taxpayer.

And the government will say something like "We're doing this to stop something like the great depression," when we are in the exact same condition that lead to the great depression, only with real estate instead of stocks.

Not to be paranoid, but stock up on canned food and shotgun shells...

@Erwos: Erwos for president! (Seriously, just in case that sounds sarcastic, it's not.)

I live in Santa Monica, CA. I earn in the top 1% per latest US census. And I can't afford a 1000 sq ft home. Why? Because a bunch of people earning half as much as me bought homes they couldn't afford, increased demand for housing, contributed to the bubble, and priced me out of the market. Rather than join in the frenzy I acted responsibly and waited on the sidelines.

Let them all burn. I don't care. There should be as much pain and suffering as possible. I know my 401K will suffer, along with that of 250 million other Americans. So be it. But EVERYONE who bought a home he/she couldn't afford deserves to suffer.

I can't put it any more plainly than that.

Remember Clubber Lang in Rocky 3? "My prediction? PAIN."

@Crymson_77: One year out of BK/Forclosure you can get a loan with 30% down. Two years and 20%. The rates will kick your ass but you can get a house.

I guess people are making the decision that they have a bigger obligation to thier family than the bank.

@Erwos & BrianH

I couldn't agree more. I live/rent in Southern Orange County. It even costs Mega $$$ to rent an outhouse!

Stupidity Should Hurt!!!!

I don't feel bad for anyone who got in over their head. Especially around here where there are two and usually more families living in one house. Illegals!!! and they still can't pay the mortgage.

Plus, what is the true % of forclosures to all mortgages in the US? It's probably a very small %. Let those few idiots suffer, the market will eventually correct itself. We get houses we can afford and live like normal human beings!

From the article: "New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier."

So, I guess that means about 99% of all home loans aren't in default? Can you say overblown crisis? Let the idiots suffer....

[articles.moneycentral.msn.com]

@MissTic: It's 0.83 now but with way more going into foreclosure phase (read on yahoo news today). That dynamics is something we should all worry about.

From [biz.yahoo.com]

The delinquency rate for all mortgages climbed to 5.82 percent in the fourth quarter. That was up from the 5.59 percent in the third quarter and was the highest since 1985. Payments are considered delinquent if they are 30 or more days past due.

@BrianH: It really sucks, doesn't it? I, too, have a statistically high income but feel almost poverty-stricken when I consider local housing prices.

The problem isn't just excess demand brought on by overly optimistic buyers, though. It's largely that the supply has been restricted by political forces, and by building that is only occurring in impractical-to-commute-from-all-the-way-over-there places.

Correction - the link for the above is [biz.yahoo.com]

@Erwos: @Erwos: @BrianH:

Thank you. I feel the same way. If it takes wannabe house flippers walking away from ridiculous mortgages they never should have taken out from banks that never should have approved them for housing prices to go down, that's what it takes. Maybe then I'll be able to take the money I've been saving up as I've listened to my coworkers sneer at me for STILL being a renter, and actually afford to buy something.

Otherwise, what's the alternative? For banks to sit around forever with unsold inventories of houses that are worth millions on paper? Granted, a lot of newly-built houses are cheap ticky-tacky and should be allowed to sink back into their swamps, but without a correction in prices there will be a lot of solid housing out there going begging.

Thanks a lot, banks, for convincing people who couldn't afford these elaborate mortgage products that they need to get them anyway.

I remember just a couple years back when all anyone could talk about was how renting was throwing money away. I should give them all some handkerchiefs to wipe all that egg of their faces.

@modenastradale: That's true. NIMBYism is a lot of what has restricted housing to "luxury" (i.e. granite-and-hot tub) condos and huge McMansions. No jurisdiction wants to be a magnet for poor households and their children, who tend to use more services. It's a good reason for removing school funding from the strictly local, property-tax-based level.

@Erwos: There is nothing selfish about free-market economy.

@MissTic:
Overblown or not, I'm watching house prices steadily fall here in southern california. The prices were insanely high for absolutely no reason. Now, they are going down and soon they will go down enough I can get for myself a nice starter home for 200k, like a condo or something. That will be in a couple of years though.

@BrianH: I totally agree - we purposely stayed in an apartment for the past few years, even after the birth of a child, because when we were ready to buy a 3 bedroom, 1 bath split level on a postage stamp sized lot had jumped to $425,000! Today, the same houses can be had for around $275k which is still slightly too much but a marked improvement. Anyone who was dumb enough to buy more than they could afford at a clearly inflated pricing system deserves to default. One of my husband's dopey friends decided last year that he needed to buy a house immediately, when signs were clear that the bubble was about to burst. In 6 months time, his house has lost $100k in value.

Dumb dumb dumb.

@laserjobs:
Please stop trolling here.

@csdiego:

I have a feeling the lack of affordable housing will bite these areas in the ass. I know many of my neighbors in my apartment complex have left or are leaving CA due to housing prices.

You can make 100k in LA and be faced with a 300k + CONDO or make 60k else where and pay 100k for a 2-3 br house.

Nice weather or not it's to expensive for mere mortals to actually afford a house in socal.

@MissTic: 0.83% (almost 1%!) sounds utterly, ridiculously huge to me. Certainly crisis-level.

Well, we bailed out the Savings & Loans scumbags 20 years ago so why would the banks worry about the same thing not happen again?

Oh they will "learn" their lesson for a few years and in 2028, we'll do it all over again.

i am in agreement with everyone that the housing market is going to open up for a lot of people as prices start to fall... but this doesnt have to go hand in hand with people losing their homes. it's not about punishing people because this is now affecting the global economy.

and you are right to worry that your 410k will be affected... but that's not all. neighborhoods are literally being shut down in some cities... new developments, closing up. more american cities looking like new orleans after katrina.

what will become of those homes? are we witnessing the beginning of a new age of slums? its frightening to imagine what it must be like to be one of the only homeowners left on a street full of empty REO homes. the government has to work with banks to allow these people to stay in their homes... cities and counties are losing money and aren't going to be able to provide the services necessary to maintain all of the abandoned properties.

@yesteryear:

it's not about punishing people

Nobody is punishing people. The lenders are upholding their end of the contracts which the borrowers signed.

new developments, closing up.

Five years ago those "new developments" were cornfields and forests. The only downside now is that nobody is paying to knock down all the unnecessary houses.

cities and counties are losing money and aren't going to be able to provide the services necessary to maintain all of the abandoned properties.

Actually, you're pretty close on that. But the municipalities are starting to figure out that they have leverage. To wit - they can file liens against the abandoned property for maintenance costs, and then seize the property from the Banks that foreclose on them, or the owners if the owners abandon them. Then they put the land into a Land Trust for redevelopment as affordable housing, parks, ... who knows, maybe the forests that were there before.

Obviously people don't see the value of good, old-fashioned arson.

@the-wanderer: The federal government bailout of the banks started last summer. They opened the discount window wider than ever, they've been cutting rates like crazy and are going to do so again by probably 75 basis points in a couple of weeks, we've had not one but two government "encouraged" programs introduced by the feds and Fannie Mae and Freddie Mac suddenly have new loan limits. The only thing the feds haven't done yet it is formally call it a bailout. When all of this stuff still doesn't work, and it won't, then we will get the formal bailout pronouncement and related mega-giveaway program from Washington DC. I'm guessing that based on the ARM resets and the election coming later this year that along about Labor Day we'll get the formal announcement.

@BrianH: @spiderman1369: this kind of blows me away...I've never been a homeowner, but you can be damn sure that I'd make sure I could afford what I purchased (obviously there are catostrophic exceptions).

Not to be an asshole, because I do genuinely feel bad for so many of the low-income people who have been dealing with foreclosure, but why is owning a home the prerequisite to a "successful" existence? Under some circumstances, certain people are actually better off renting. It's NOT the end of the world if you have to give up a home and rent. Many good people have done so.

I believe home prices are going to fall much more than the media and government are letting on. And rightfully so. If you look at a graph of inflation-adjusted home prices in America over the last 100 years, it was only in the last decade or so that they jumped way beyond the baseline they had been periodically returning to every 10 years or so. In the last decade, real estate prices jumped a ridiculous amount. So if prices fall back to somewhere near that baseline we could be looking at a 40-50% decline in prices. I doubt they will fall all that way, because I'm sure some of the price increase is just that more Americans are living in ridiculously high-end homes than in the past. But it's going to fall a LOT. We're not looking at a 5% correction or something.

Recessions are not all bad. It's during these times that the economy consolidates capital around the smart investments and weeds out the stupid ones. Let's face it: home prices were stupid high.

@BayStateDarren: I think the rate on that's gone up, too.

I read somewhere that the average down payment on a home in the past five years or so was 9%. NINE! No wonder so many people are upside down in their mortgages.

Also -- hey banks? There's a reason you make your borrowers pay private mortgage insurance if they put down less than 20%. It's called risk. As in, that stuff you want to avoid too much of? Maybe all those contracts you were processing should've tipped you off that you were risking too much.

Good for them. Fuck the banks and their predatory practices. Of course, like someone above me said, I'm sure Bush will sweep in and save all of his banking buddies.

Empty pools at abandoned houses bring back fond memories of watching boys on skateboards!

@richcreamerybutter:
home ownership is the measure of a successful existence because it build wealth.

You always need to pay for where you live. If you pay rent for 30 years, you need to keep paying for the rest of your life.

Pay a mortgage for 30 years and you own a home. More than that if you get a fixed mortgage your monthly payment stagnates. It is very unlikely that your apartment rent will stay the same for 30 years.

It also provides a gateway to generational wealth. Your future generations can enjoy greatly reduced cost of living. That is the exact reason the Katrina wiping away poor section of New Orleans was a big deal.

If you own your home you can subsist on poverty wages or less.

The less money you have the more important it is.

@BrianH:

"let them burn" so wrong. yet i agree.
serves them right for buying things they can't afford to begin with. and mortgage lenders for lending them money? yes let them all burn. i'm getting burned in the stock market too but at least i know my mortgage is fixed. and it's an apartment building that I have paid 70% of already.

i'm one of the few who pays more than the monthly payment. screw the banks for trying to get more money from me. the fast I can get rid of the loan the better, then i can save up for my next house.

@johnva: "I'm sure some of the price increase is just that more Americans are living in ridiculously high-end homes than in the past."

Houses are only worth what someone is willing to pay for them. A house can have all the granite countertops, home theaters, and lap pools it wants, but if there aren't enough high-end earners out there, it won't go for a high-end price. You're free to believe that your house is worth $1 million because that's what houses sold for on your street in 2006, but if nobody's willing to pay $1 million for it now, that's not what it's worth.

Other than that I totally agree with you: the correction will be big. I think with gas prices going through the roof the way they are, the cachet of the way-out suburbs is going to plummet, and that's where a lot of these new houses have been built. Closer-in houses and urban condos may keep some of their increase in value, but on the other hand those are subject to higher property taxes because they're located in more infrastructure-intensive areas.

@csdiego: Oh I agree. What might have changed is that more Americans were willing to spend a larger percentage of their income on those things. But yes, ultimately supply and demand will control the price.

@humphrmi: don't get me wrong - i'm not a sprawl-lover... but the damage is done. the homes are there (as you said yourself, no one is paying to knock them down) and they are going to be abandoned. perhaps some towns that are dealing with a few foreclosures are getting the whole land trust thing together - but what about cities where there are hundreds if not thousands of foreclosures? where the new homes were the only tax base to speak of as commercial and industrial uses were still being recruited. i dont agree with this type of planning and i think they made some bad decisions (not to mention the fact that they created some hideous, soulless tract-home communities in the process), but we are looking at a major health/safety/quality of life issue here. no one wants to see entire neighborhoods abandoned... right?

ahh... but then again, when you compare this to how the government has helped those who, through no fault of their own, lost their homes after katrina - you could make the case that these homeowners should have to deal with the consequences of their own mistakes. geez... its dicey. the whole thing. quite the ethical puzzle. what's more valuable? protecting the economy as a whole or not letting banks/homeowners get a free pass on a stupid decision. can't figure it out.

While I agree that homeowners made bad decisions, it's important to keep in mind that greedy lenders encouraged them and made them believe the decisions were good ones. It's similar to giving credit cards to college students. Those offering a line of credit know they're high risk borrowers and likely to make bad decisions, but they want to target people who are inclined to live beyond their means and convince them their means are greater so they can extract more money from them.

It's long past the time when laws need to be made to protect the entire economy from unethical lenders who sell the equivalent of snake oil.

In the early 1970s, my starter house was a new 1100 sq feet, 3br, 1 bath with a separate living room on a small lot. Today a young couple would turn up their noses at that. They absolutely must have at least 2000 sq feet, formal LR & dining, 2 1/2 baths and a garage. And in a new subdivision. That is what the banks want you to buy so that is what the builders are building. You cannot find a small house in a new or even relatively new subdivision. Now that I am retired I would love to have that starter house again but houses like that are nearly impossible to find.

The strangest thing about this report is that people are defaulting BEFORE the reset. Implying 2 things that I don't understand:

1 - They are even foregoing the IDEA of selling. Not even trying for a loss.

2 - Is it that they couldn't afford the monthly nut to begin with? what I meann is - This WHOLE mess started with the idea (teaser rate) that for a short period of time your monthly payment will be this: a number low enough that you can 'afford'. THEN it will go up to an undetermined number that you don't need to worry about.

The ORIGINAL monthly payment got them literally through the door because they could "afford" that.

I understand that SOME people are delusional to what they can afford. But THIS many people? Really?

Is there something else going on beneath the surface that we don't see or at least is not described here? I don't mean anything bizzaro/tinfoil hat I just wonder what happened between the time they signed the mortgage that had a monthly number that was doable to today?

@bben46: I don't know who these young couples are who turn their noses up at small houses. We would have loved to buy a small house like the one you describe. I think the problem is more that they're zoned out of most jurisdictions, which don't want low-income households or non-wealthy families with kids, because those residents tend to use more public services.

@pastabatman: The teaser rates are NOT the root of the problem. The root problem is people buying beyond their means. The teaser rates were just a gimmick that enabled that phenomenon to go on a bit longer.

People were ignoring a lot of the old rules that existed to mitigate real estate risk like that you should put 20% or more down, that you shouldn't spend more than a certain percentage of your income on housing, that you should have 1 year of house payments in savings, etc. It's hard to untangle the cause and the effect, but lenders were giving out loans to people they shouldn't have, and buyers were taking loans they shouldn't have.

Some people bought beyond what they could afford because that was all that was available in their area (those people should have just rented, instead). Many other people bought beyond what they could afford because they assumed that real estate prices would go up forever and that they could just sell for a profit in the future/refi in the future/etc.

We really need to change the fundamental culture of money and personal finance in this country, or this country is going to sink under the weight of its poor and the collapsing middle class. We need to stop living beyond our means, and we need to give people the ability to have a decent life within their means so that they aren't so tempted to live beyond their means. This will require political reforms - I want everyone to get a fair deal from society, but I don't want handouts to just take the place of personal responsibility. I want a new sort of "responsibility liberalism". I also suspect there will be fewer snide comments now about how you're "throwing money away" if you rent or how you're "not a real adult" until you're a homeowner. Sure, home ownership can be a great deal long-term. But hopefully people won't just accept it on faith anymore that it's always the best deal for every situation.

@csdiego: Me either. I would love to buy a small "starter" house. We have no need for tons of space, and no need to pay for mortgage, taxes, insurance, and heating/cooling on a big house either. Given how many young people have been priced out of home ownership nowadays, I suspect there would be a LOT of demand for homes like that if the market would provide them. Like you said, I suspect government is conspiring with developers to prevent that out of greed for property tax money.