Free-market purists have to love the lead in The Washington Post story Friday about the real estate market in Prince William County, Va., a suburb of Washington, D.C.

"Freewheeling American capitalism may be falling out of fashion on Wall Street, but in the western suburbs of Northern Virginia, it is driving one of the greatest home-buying sprees the region has ever seen."

The story goes on to say that Prince William County experienced a 235 percent year-over-year increase in home sales in September, with 1,116 homes sold -- more than any other September on record.

Fans of laissez-faire capitalism have been cringing through waves of massive government interventions over the past few weeks, but can point to what is happening in Prince William County as an example of how a real estate market can recover without the giant, bumbling hand of government reaching down to help.

In fact the county's surge in sales is occurring before any of the legislation passed in Washington (just a few miles down the road and across the Potomac River) over the past few months has filtered down to local communities. Most of the provisions in the mammoth housing rescue bill passed in July -- including $4 billion to buy up foreclosed homes, of which Prince William County has been allocated more than $4 million -- did not take effect until Oct. 1. And the deus ex machina promised as a savior in the recent $700 billion bailout bill has not yet materialized.

Of course there are costs to a free-market recovery, primarily decimated home values and loss of home ownership. The county's median price is down 41 percent from a year ago, from $405,000 to $239,000, according to the Post story. And neighborhoods that once comprised primarily owner-occupied homes have transformed into more transient communities as foreclosed homes were bought up by investors and converted to rentals.

But according investor Chris James quoted in the story, "bargain-hunting investors are the best hope for stabilizing foreclosure-ravaged neighborhoods."

Author and Investor Lance Young, who has authored several eBooks on buying foreclosures, lives near Prince William County and said he's purchased "several REOs and other properties since April 2008. I am rocking and rolling properties out here in the D.C. area." (More from Young and other investors who are in full buying mode in the November issue of the Foreclosure News Report.)

So is this pattern in Prince William County evidence that the free market is still capable of a healthy and sustainable recovery, or is it a temporary uptick before things once again get worse? Do we need a bigger, more monolithic solution from Washington to truly solve the problem?

Could a flood of foreclosures that began to swell last year be close to cresting? That could be a first-blush interpretation of the numbers in the RealtyTrac U.S. Foreclosure Market Report released today. The chart below shows how the annual rate of increase in all three foreclosure actions tracked in the report -- defaults, scheduled auctions and bank repossessions -- slowed in August.

The rates of annual increase in defaults and scheduled auctions have been steadily slowing down each month this year, but this was the first month in which the rate of increase in bank repossessions (REO) has slowed since the beginning of the year. That seems to indicate (and please forgive this somewhat rambling analogy) that the torrent of defaults that began in earnest about 18 months ago may be working their way down the foreclosure river and spilling into the ocean of bank-owned inventory -- while the number of new defaults being added upriver is moderating. But alas, that would be labeled by many as a naively optimistic interpretation, given the possibility of another downpour of defaults looming from as much as $500 billion in outstanding option ARMs, many of which are expected to recast to higher payments in the next three years.

In addition, one must be careful about reading too much into a decreasing rate of increase. It's a bit like a politician arguing that a new budget will decrease spending when it's actually just slowing the rate of increase in spending. After all, the RealtyTrac report does show that foreclosure activity continues to increase across the board -- defaults, auctions and bank repossessions. And both the total number of properties with foreclosure filings (more than 300,000) and the foreclosure rate (one in every 416 U.S. properties received a foreclosure filing during the month) were the highest since RealtyTrac began issuing the report in January 2005.

View state-by-state data

U.S. foreclosure activity in July increased 8 percent from the previous month and 55 percent from July 2007, according to the RealtyTrac Foreclosure Market Report released today.

View state-by-state details.

Bank Repossessions (REOs) accounted for 28 percent of all activity during the month, while defaults accounted for 41 percent and auction notices accounted for 31 percent. That is in contrast to REOs accounting for just 16 percent of all activity in July 2007, while defaults in July 2007 were still at 41 percent and auction notices were at 43 percent. This shift in percentages shows that a higher proportion of properties that enter the forecosure process are ending up repossessed by lenders.

 

The number of properties with some sort of foreclosure action against them (default notice, auction notice, bank repossession) has consistently risen for the past eight quarters (see chart). While there have been monthly fluctuations up and down during this time period, the quarterly numbers consistently have been up quarter over quarter, and the most recent quarter was no exception, according to the U.S. Foreclosure Market Report released by RealtyTrac today.

And while this upward trend in foreclosure activity is driven largely by a few populous states with volatile housing markets, there's no doubt the pain is spilling over into many other areas across the country.

“Forty-eight of 50 states and 95 out of the nation’s 100 largest metro areas experienced year-over-year increases in foreclosure activity in the second quarter," said RealtyTrac CEO James J. Saccacio in the press release announcing the Q2 report.

State governments that have gotten past the denial stage and actively addressed the foreclosure issue seem to be reaping the benefits of such foresight. One example is Colorado, whose foreclosure rate ranked No. 1 among the states in 2006, according to RealtyTrac. Some state officials initially took issue with the numbers, which engendered an important debate on how to accurately interpret and measure foreclosure data. But ultimately state officials took action by first investigating the foreclosure data themselves and then by working to curb foreclosures. The Colorado Division of Housing set up a foreclosure hotline to help people facing foreclosure. The state government enacted new laws addressing the issue, one of which gave homeowners more time on the front end of the foreclosure process to try to work out a way to stop or avoid the foreclosure.

Colorado's efforts appear to have had an impact. The state's foreclosure rate was down to No. 5 in the second quarter thanks in part to a 15 percent decrease in activity from the previous quarter. Activity was still up on a year-over-year basis, but at a much slower pace than the increase nationwide.

Late to the party as usual, the federal government is now trying to address the foreclosure issue as part of the mammoth housing bill making its way through Congress this week. President Bush has said he will sign the bill, which would allow many homeowners facing foreclosure to refinance into lower-cost, government-backed loans. The bill also earmarks $4 billion in grants for local communities to buy up foreclosed properties that may be negatively affecting the communities. Whether this bill will actually slow or stop the trend of rising foreclosures is up for debate. We'll certainly be watching to see if the third quarter foreclosure numbers translate into a ninth straight quarterly increase.

View Q2 state data.

View Q2 MSA data.

Home prices were down again in May, but a few regions of the country experienced a ever-slight uptick in prices from the previous month, giving officials at the Office of Federal Housing Enterprise Oversight (OFHEO) a chance to be cautiously optimistic in the press release announcing the numbers.

"It is very hard to draw conclusions from a one-month number, especially in these uncertain times; but the numbers in the Pacific, East and West North Central Divisions may be good signs," said OFHEO Director James B. Lockhart in the release.

Nationwide, the OFHEO report showed home prices in May were down 0.3 percent from April and down 4.8 percent from May 2007. The three Census Divisions mentioned by Lockhart were the only ones out a total of nine that did not report a monthly decrease.

The Pacific Division, which includes Hawaii, Alaska, Washington, Oregon and California, reported a 0.3 percent increase in home prices from April to May, although the region documented a 14.5 percent decline in home prices from May 2007. The East North Central Division, which includes Michigan, Wisconsin, Illinois, Indiana and Ohio, reported a 0.1 percent monthly increase, but still a 3.7 percent year-over-year decrease in home prices. The West North Central Division, which includes North Dakota, South Dakota, Minnesota, Nebraska, Iowa, Kansas and Missouri, reported no monthly change in home prices.

It will be interesting to see how these home price numbers correlate to the Q2 foreclosure numbers RealtyTrac will be releasing Friday. We'll be posting those numbers as soon as they are available.

U.S. foreclosure activity in June decreased 3 percent from the previous month but was still up 53 percent from June 2007, according to the RealtyTrac U.S. Foreclosure Market Report released today. The 3 percent decrease may lead some to speculate that the upward trend in foreclosure activity may be nearing an end, but as RealtyTrac CEO James J. Saccacio pointed out in a statement, the year-over-year change is a more indicative number of the overall trend.

"The year-over-year increase of more than 50 percent indicates we have not yet reached the top of this foreclosure cycle," he said.

In fact, the RealtyTrac report has shown month-to-month decreases in previous months, even during the dramatic run-up in foreclosure activity that has occurred over the past year and a half: in February 2008, November 2007, September 2007, June 2007, April 2007, and February 2007.

What may be a better argument -- although certainly not an ironclad case -- that the foreclosure surge is starting to run out of steam is the trend over the past 18 months in YOY percentage changes, broken down by type of foreclosure filing. As can be seen in the chart below, the default and auction categories experienced double- and triple-digit YOY percentage increases for much of 2007. But the increases in those categories started to slow down in 2008. Meanwhile, REO (bank repossession) activity actually decreased on a YOY basis in January and February of 2007 but gradually started to gain momentum in the second half of 2007, and increases in REOs have far outpaced the increases in defaults and auctions in all six months of 2008.

One could argue that this chart shows that the bulk of the properties that were at risk for foreclosure have migrated through the process and are now being repossessed by the foreclosing lenders. There is not a continued massive surge in defaults and auction notices, so once the lenders have disposed of their REO inventory, the real estate market can start to return to normal. On the other hand, some might argue that many properties are still at risk for falling into foreclosure, but the default notices against those properties may have been delayed by artificial means -- for example laws in Colorado, Maryland and Massachusetts requiring lenders to give homeowners more time before initiating foreclosure. Those artificial means may just temporarily be forestalling another wave of defaults that we'll see sometime in the coming months.

We'd like to hear if you buy into either of these theories or have another theory of your own that explains the foreclosure trends.

Foreclosure activity continued its upward climb in May, increasing on a year-over-year basis for the 29th consecutive month, according to the RealtyTrac U.S. Foreclosure Market Report released today. The report showed one in every 483 U.S. households received a foreclosure filing during the month, the highest monthly foreclosure rate since RealtyTrac began issuing its report in January 2005.

Bank repossessions (REOs) accounted for 28 percent of the total activity and the biggest increase among the three types of foreclosure filings tracked in the report. REOs were up 35 percent from the previous month and 158 percent from May 2007. Default notices increased 1 percent from the previous month and were up 35 percent year over year, while auction notices decreased 3 percent from the previous month but were still up 13 percent year over year.

View state-by-state data.

It's apparent from the report that a high inventory of foreclosures will continue to saddle the real estate market. But for how much longer? Does the slowing rate of increase in defaults and auctions represent a patch of blue sky in the midst of a torrential downpour of foreclosures? Let us know what you think.

The first quarter MBA National Delinquency Survey released today largely supports the findings of the RealtyTrac Q1 2008 U.S. Foreclosure Market Report released at the end of April, which found overall foreclosure activity increased 23 percent from the fourth quarter of 2007 and 112 percent from the first quarter of 2007.

That closely mirrored the trend in MBA’s foreclosure rate, which put the percentage of loans in the foreclosure process at 2.47 percent at the end of the first quarter, up 21 percent from the 2.04 percent reported in the fourth quarter of 2007 and up 93 percent from the 1.28 percent reported in the first quarter of 2007.

The trend lines are even closer when looking at the RealtyTrac first quarter foreclosure rate (0.515 percent of total housing units with a foreclosure filing during the quarter), which was up 21 percent from the fourth quarter of 2007 — exactly the same percentage increase as the MBA foreclosure rate — and up 109 percent from the first quarter of 2007.

The record-high delinquency rate reported by the MBA in the first quarter indicates that foreclosure activity has not peaked, which is also reflected in the numbers RealtyTrac has reported so far for the second quarter. The total number of properties with foreclosure filings in the RealtyTrac April report was the highest monthly total since RealtyTrac began issuing the report in January 2005.

State trends
The four states with the highest foreclosure rates in the RealtyTrac first quarter report — Nevada, California, Arizona and Florida — were also the four states identified in the MBA report as having the most severe foreclosure problems. Those four states accounted for 47 percent of the total foreclosure activity in the RealtyTrac report and 42 percent of the foreclosure starts in the MBA report.

Both the RealtyTrac and MBA reports identified Ohio and Michigan as states where foreclosure activity decreased in the first quarter. It’s too early to say that the lower foreclosure numbers in states such as Ohio and Michigan represent a light at the end tunnel for the battered real estate industry, but it’s certain that the continued surge in foreclosures in populous states such as Florida and California will cast a shadow over the entire U.S. housing market for several months and even years to come.

Over the past three months, my clients and I have presented nine contracts to pre-foreclosure, REO and short sale sellers. Out of those nine contracts, nine have been beat by better offers. In the Northern Seattle area there currently very few REO properties, and in terms of real short sales, I have seen under 10 that are decent over the past month. I wish I had the finesse to illustrate the how important it is to negotiate a Win/Win offer. I can simply say writing a contract for bottom dollars in the hope of catching a whale is only going to bring up a boot. The Seattle market is not what you see on the news, hear on the radio, or read in the paper in terms of the rest of the nation’s foreclosure woes. The money in this town has just shifted from buying retail to buying wholesale, and there are a lot of hungry wallets burning holes for positive equity investments.

Here are some things to keep in mind when investing in the Seattle market:

1. Land is an extremely limited resource in this city. Seattle did not experience the “urban sprawl” boom seen in so many other cities plagued with foreclosure woes.
2. The Seattle metro area has a strong economic foundation with many companies doing extraordinarily well due to international business.
3. Seattle has one of the most highly educated populations in the country.
4. Our median household income is about $72,000 annually — among the highest in the country.
5. Because of the lack of “urban sprawl” in Seattle we do not have the inventory of foreclosure homes that the rest of the country has. I say this all the time to my buyers, at auction there is a huge crowd competing over six to 10 properties. Even then these homes are being purchased at 20 percent less then market value.

So, if you want to beat the competition when it comes to an equity positive real estate investments do not think cheap, think Win/Win. It makes a transaction so much less of a nightmare, and in a few years you will have built yourself a great real estate portfolio in one of the best cities in the United States.   

Contact Nova Ukariha Shank or post comments below.

According to the RealtyTrac U.S. Foreclosure Market Report issued today, the total number of properties with foreclosure activity in April reached the highest level on a monthly basis since RealtyTrac began issuing the report in January 2005. Foreclosure filings were reported on 243,353 U.S. properties during the month -- certainly a big number, although only a tiny fraction of the nation's 126 million total housing units. Still, nearly a quarter million properties in one month can have a significant impact on a housing market that is registering about 5 million existing home sales for the entire year.

"Although only about 2 percent of households nationwide will be in some stage of foreclosure this year, these properties contribute to already bloated inventories of homes for sale, and put downward pressure on home values," said James J. Saccacio, chief executive officer of RealtyTrac. "Areas of California, Florida, Nevada and Arizona continue to be particularly hard-hit. Property tax bases are eroding, putting municipal budgets in peril. For example, the city council in Vallejo, California -- part of a metropolitan area with a foreclosure rate that ranked sixth highest in the nation in April - last week voted to have the city file for bankruptcy."

View full RealtyTrac report.

We'd like to know more about how foreclosures are affecting local housing markets across the country. To get the conversation started, we've asked some members of the RealtyTrac Agent Network to provide insight into their local markets in a series of blog posts on Foreclosure Pulse over the next few days. The first post is provided by Gloria Tate of Raso Realty, Inc., in Cape Coral-Fort Myers, Fla. -- where the foreclosure rate ranked fifth highest among the 230 metro areas tracked by the RealtyTrac report.

View Gloria Tate's post about the Cape Coral market.

Look for more local market perspectives coming soon and please post a comment on any of these posts if you have something to add, a question or a different perspective.