Job Losses Foreshadow More Foreclosures Deals, Risk

The numbers are staggering. The list of firms: a virtual who’s who of corporate America.

Ford Motor Credit: 1,200 jobs lost. Bank of America: 35,000 layoffs over the next three years. Starbucks: closing 600 company-operated stores. Goodyear: planning to pass out 5,000 pink slips. The tally keeps growing on almost a daily basis.

Another tally that keeps growing is the number of homes in some stage of foreclosure across the nation. The correlation between high unemployment and a high foreclosure rate is clear: people lose their primary source of income and then can’t pay their mortgage on time. After several missed payments, the lender initiates foreclosure proceedings, and a few months later, in most states, the lender repossesses the house.

But the full impact of the nation’s rising unemployment rate — which reached 9.8 percent in January — has not yet been seen in the foreclosure numbers. That’s because lenders don’t typically initiate foreclosure until after at least three months of missed payments. And the logjam of foreclosures many lenders are already dealing with, along with the plethora of foreclosure prevention measures, is likely delaying foreclosure initiations even further.

The net result: an unemployment-induced wave of foreclosures is likely to crash down on the nation’s already battered housing market later this year and into next.

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“If the job losses continue, (foreclosures) will be the last thing to improve. That means we’ll be facing foreclosures not just from the mortgage readjustment but from the real economy as well,” said Dr. Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University in Orange, Calif. “Unfortunately, foreclosures are going to be with us throughout this year and maybe even for a second year in 2010.”

Adibi’s home state of California documented 523,624 properties with foreclosure filings in 2008, accounting for 22 percent of all foreclosure activity in the nation, according to RealtyTrac. The state also registered one of the nation’s highest unemployment rates last year, climbing to 12.2 percent in September.

Florida reported 385,309 properties with foreclosure filings, 17 percent of all foreclosure activity in the country in 2008. The state’s unemployment rate was at 11 percent in September.

Similar patterns can be found in other states with high foreclosure numbers: Arizona, Ohio, Michigan, Illinois, Texas, Georgia, Nevada and New Jersey. Investors considering purchasing in these states should carefully consider the area’s employment situation in their investing strategy. People without jobs can’t buy a home, no less rent one!

No More California Dreamin’
Like most states, California is still suffering the impact of the “toxic loans” originated between in 2005 and 2007. Many of these loans continue to recast at higher monthly payments — some this year and some possibly as late as 2010 or even 2011. Added to that is one of the highest state unemployment rates in the country.

Based in one of the hardest hit foreclosure capitals in the nation, Bruce Norris believes California’s unemployment rate may hit as high as 13 percent by 2011 before receding.

“This is definitely having a very negative impact on the real estate market,” said the Riverside County investor, author and trainer. “A lot of people who were thinking they were paying more for their house than it was worth but can still stay in it are losing their jobs. The dominoes are going to fall in California during the next 12 months.”
 
To Norris, who has spent decades studying the California economy, unemployment will cause more people to leave their California dream behind, walking away from their homes in some cases, departing California altogether in others. Both scenarios will likely create more foreclosures, thus more opportunities for investors.

Sun Continues to Set on Florida
Similar to California, the Sunshine State is having an identity crisis of its own. Florida’s beaches and warm weather has lured many to move there in the past, but now Florida is seeing an outmigration of population to other parts of the country as real estate values continue to plummet, foreclosure activity remains high and the state’s unemployment rate trends higher.

“The fundamentals in Florida are really making the foreclosure situation worse. The level of foreclosures depends on the market area. Foreclosures dominate the resales in closing information. There’s evidence people have renegotiated their loans and they’re back in foreclosure. It’s a very bad situation,” said Lewis Goodkin, president of Miami-based Goodkin Consulting. He characterizes the relationship between foreclosures and unemployment as absolute.

Unlike previous economic downturns, the foreclosure problem in this down cycle originated with the way loans were being made, not with unemployment, according to Goodkin. Now, however, unemployment has taken hold and added a second encumbrance to an already struggling state economy.

“In Florida we have a bad situation because unemployment is increasing, and the financial environment is very difficult because lenders have made up their minds they’re not going to lend on condos,” Goodkin said. “The reason is because condos are a moving target in terms of pricing. It’s difficult for a lender to make a loan on something when he doesn’t know what the value is.”

Goodkin does not expect to see a bottom to the recession before 2010, with strong growth to the economy holding off until sometime in either 2011 or 2012. In the meantime, he is seeing evidence that fewer people are investing in and moving to Florida, a state known for its retirement and second-home sector and international sales activity.

“This year will bring more layoffs and additional foreclosures; it’s that simple,” Goodkin said. “Now we have real reasons to generate foreclosures. More people are in a discouraged mode.”

Going Bust in Nevada
High-rollers at the casinos are not the only ones losing in Las Vegas; many local residents are losing their homes and their jobs as well.

Eighty-seven percent of foreclosures reported in Nevada during 2008 were located in Clark County, home to Las Vegas, according to RealtyTrac. The state led the nation in foreclosure rate for the entire year. Unemployment was at 13.3 percent in September.

“It’s not just a lot of jobs cut, we’re also seeing salaries cut. A lot of jobs out here are on commission. Realtors and other guys have seen 50 percent cuts in our commissions and incomes. It’s crazy; it’s affecting everyone. Bonuses are gone too,” said Adam Hunt with Liberty Realty in Las Vegas.

“One nice thing about it though, is at least in this market we’re seeing prices come down to affordable levels. That’s why we’re so busy. Now you can own for about same amount you can rent.”

Hunt expects to see more bad news — higher unemployment, price depreciation and foreclosure activity — before the local economy turns around. The city has lost much of its luster as consumer confidence wanes and fewer people visit the city — not to mention move there.

“The only hope we’ve got is everybody’s got to have a place to live,” Hunt said, noting that even that assumption is being turned on its head by the consolidation of households. “Two to three families living together is not uncommon. We’re starting to see that a lot in Vegas. We did not see that before. Even with the same amount of people you’re still gaining inventory because people are living together now.”

Heating Up in Arizona
Foreclosure activity heated up for the Grand Canyon State during 2008. The state ended the year with 116,911 properties with foreclosure filings, third highest total in the nation and up more than 200 percent from 2007. Unemployment rose to 9.1 percent in September.

But the unemployment rate alone does not fully demonstrate the scope of the employment problem, according to Jay Q. Butler, Director of Realty Studies, Morrison School of Management and Agribusiness at Arizona State University. “Unemployment is the percentage of people actively seeking employment. It doesn’t count those not looking for jobs.”

Butler estimated that foreclosures are accounting for around 40 to 44 percent of all sales activity in the state, and he expects to see another wave of foreclosures to hit in the next several months.

Another contributing factor — in addition to unemployment — is income reductions in the form of furloughs and pay cuts.

“Those trying to hang on are getting overwhelmed. A lot of time it’s more difficult because you’re furloughed — a pretty strong hit on their paycheck. My feeling is they’re getting clobbered everywhere and struggling to keep a home in an area where there’s a lot of foreclosures,” Butler said.

Ohio Less of a Target
Since the mortgage crisis began one of the regions of the country most harshly affected has been the Rust Belt — including the state of Ohio, which was highly dependent on manufacturing employment (especially in the auto industry) — and a top 10 foreclosure center.

Ohio ended 2008 with the fourth highest level of foreclosure activity in the nation. The flow of new foreclosure filings appears to be leveling off somewhat, although an unemployment rate of 10.1 percent in September could mean foreclosure activity could swell again in the coming months.

Cleveland Realtor Dan Merkle noted the local picture has gotten bleaker over the past decade as major corporations uprooted, relocating their headquarters to more tax-friendly cities, and taking many white collar jobs with them.

“Everybody knows someone who’s been laid off. The default industry has really perked up,” Merkle said. “I’m doing tons of BPOs (Broker Price Opinions) for lenders. They’re starting to realize they can’t sit on these assets forever. For a while the banks had the luxury to sit back, but now there’s a glut and they know there’s more to come.”

Layoffs and resulting foreclosures are occurring across the income spectrum with high-end homes just as prone to foreclosure as low-end homes, according to Merkle. Like other cities Cleveland is not just losing jobs, it is losing population.

“There’s all this talk about the brain drain in Ohio. People get educated here and then go somewhere else where the jobs are,” Merkle said. “There are a lot of people bugging out if they can. It’s a great time to pick up properties if you can get them. We’re seeing a lot of cash buyers.”

The Payoff for Investors
Once-in-a-lifetime property bargains are likely to be had in the next year as rising unemployment continues to spur more foreclosures for homeowners who aren’t likely to qualify for even the generous refinancing and loan modification plans introduced by President Barack Obama last month. But those bargains could come at a steep price if buyers aren’t prepared to deal with deteriorating economic conditions in the short term.

“The only possible thing that could make a difference is how effective the TARP programs will be and what they will do to stem foreclosure activity and generate jobs. All those are unknown. We’re going to pour a lot of money into those. I don’t have any high hopes for any miracle out there,” said Goodkin.

While unemployment and foreclosures are generally unwelcome news for the great majority of the population, the combination in down economic times presents an opportunity for investors who really understand the inner workings of their market.

In Las Vegas, for instance, Realtor Hunt noted that builder DR Horton recently held an event they called the “Short Sale” where it basically sold out the remainder of its existing new home inventory for $100 per square foot.

“They sold off everything they had,” he said.

Plus, Hunt has worked deals where the banks have accepted cash offers for $10,000 under the asking price because they know the deal is going to happen.

Smart investors should be looking for these types of deals. Given current market conditions, any advantage an investor can have over the competition makes a real difference.

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