2010-03-12 04:00:00As unemployment persists, more affluent borrowers facing inevitable
A few months ago, one of my columns focused on the tie-in between unemployment in the financial sector and the high-end home market.
As it turned out, my theory that the formerly well-paid employees of giant financial firms had managed to stow away enough assets to withstand long-term unemployment, but after a year of no work would begin to wind down their savings -- with many losing their gorgeous homes -- has, unfortunately, panned out. And on a broader scale than I at first imagined.
I had been thinking too narrowly. It's not just former financial types who have lost well-paying jobs, but others throughout all industries all across the country have done so as well. These formerly well-paid executives are now facing the ultimate personal finance nightmare: a dead-end mortgage situation.
Truthfully, I would like to report otherwise, but recent statistics are bearing out this uncomfortable conclusion: Intransigent unemployment, with many states' jobless rates stuck in double digits, has meant an increasing number of families living in hill-crested, custom, historic, gated, scenic or mansion-like homes will meet the same fate of millions who have lost smaller homes in less manicured neighborhoods.
Stan Humphries, chief economist at Zillow.com, has been parsing foreclosure data and he has noticed an unusual surge in failed mortgages at the top of the market.
Foreclosures over specific price tiers had remained stable until about 2006, Humphries explains, with the bottom tiers of the housing market consistently making up at least 55 percent of all foreclosures, then 29 percent in the middle tiers and 16 percent at the high end. Then, between 2006 and 2009, a tsunami of change occurred, with foreclosures at the high end almost doubling to 30 percent of the market.
"Right now, each of the price tiers are (at) parity, with as many foreclosures coming from the low end of the market as the middle and high end," says Humphries.
Before 2006, the reason for the lower end of the market experiencing upwards of 60 percent of the foreclosures had to with the traditional dynamics of failed mortgages -- quite simply, if problems occurred, lower-end homeowners had fewer financial resources to avoid losing the house. At the same time, as Humphries notes, "More affluent homeowners had more resources to navigate household crises that result in foreclosures."
The trouble is, after 12 months of unemployment, homeowners in high-end homes have worked through their considerable assets and now, too, have fewer financial resources to avoid losing a home.
Let's take a look at one market not generally considered a financial center: Dallas-Fort Worth.
In the tier of homes at $99,999 or less in the Dallas-Fort Worth area, there were 10,692 properties posted for foreclosure in 2008, but in 2009 that number declined by about 10 percent to 9,597, reports George Roddy, a principal in Roddy Information Services, an Addison, Texas, research company.
That was the completely opposite direction of homes in the high end of the market. In 2008, 597 homes in the $500,000 to $999,999 category were in foreclosure. By the following year the number pushed upward to 614 homes, about a 3 percent increase. In homes costing $1 million or more, in 2008 there were 132 homes in foreclosure and that increased to 161 homes in 2009, or a jump of 22 percent.
What's happening in Dallas-Fort Worth is the same phenomenon being experienced by other parts of the country. "At the high end of the housing market, homeowners generally have had greater resources to create staying power," Roddy explains, "whereas the rest of us down in the lower tiers are living month-to-month without a lot of reserves. It has taken longer for an individual in the higher-end homes to run out of money."
Unemployment is about 8 percent in Dallas-Fort Worth, compared with 10 percent in the country, but that's still a lot of people unemployed -- and a lot of jobs that have disappeared even at the executive level.
Also, at the top tier of the housing market, the psychological barrier against walking away from a home was much stronger than at the lower end of the market. This too, is giving way.
"If you live in a home where you borrowed $750,000 and now the market has created a degradation in home value across your neighborhood, then even you lose incentive to bust your butt to keep making those payments when your loan is in excess of the value of your house," says Roddy.
Roddy Information Services also surveys San Antonio and Austin, and Roddy says those cities mirror Dallas-Forth Worth in regard to foreclosure data. "These markets have stabilized," he says. "We expect the rate of foreclosures to continue through 2010 without any escalation, except in the higher-end homes."
Roddy seems to be suggesting that unemployment might pick up for those who in the past could afford homes of $500,000 in more in Dallas-Fort Worth, San Antonio and Austin. If that's true, he would be in the same camp as Humphries, who said, "Unemployment is picking up in that (higher-salaried) segment as well."
Still, Humphries doesn't expect the data to get much further out of whack in regard to house prices and foreclosures. With all price tiers at parity, he says, "I'm expecting that shift to flatten out."
If you're wondering how all this will affect housing prices, well, you can probably guess. With more of the higher-end stuff falling into foreclosure, expect traditional patterns to emerge -- that is, defaults and short sales -- to undermine existing pricing patterns. In short, this tier of the market should see not stabilization but further price erosion.
In high-end markets, says Humphries, "Prices are sticky on the way down (hence the lag time), whereas they are less sticky in less affluent areas because people can't ride it out. However, you are now seeing value declines in higher-priced communities; prices are falling."
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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