“Defaults, foreclosures plummet in January. Are thes signs of stability.”

“Defaults, foreclosures plummet in January."

So read the headlines of my local paper.
Signs of Stability? Really? Now what might those be? I saw an image of Christ on a piece of toast once so I know we tend to see what we want to see, but not all my signs are spelling relief.

In fact, some things appear to be getting worse. I keep seeing “Vacant Stores and For Lease sign on office windows.”

Last year, I correctly argued against the common wisdom that there was this shadow inventory of foreclosed property that banks were holding back that would soon swamp the market. They weren’t showing up anywhere. So far, so good.

But, as continuing price declines push more and more homeowners deeper and deeper underwater, we are going to see a second wave of defaults. And, this one is not only going to swamp the market, it’s going to take the future with it when it recedes. It's like this all over the country and in some parts of Hawaii and Honolulu county, it's no exception.

The employment numbers don’t mean anything. They don’t count failed business owners and other self-employed, and there are a lot of them, who are not entitled to unemployment insurance. There are those who have simply given up looking for work or those who have “graduated” and have maxed out their benefits.

Without substantial job creation, more homeowners will lose their grasp on their finances as unemployment insurance, savings, and retirement accounts are depleted.

Then there is the thorny issue of deferred interest loans made between 2005 and 2007, the peak of the market, that will adjust upwards in the months to come. Property values in some parts of the islands have fallen by as much as half, making the possibility of a refinance on Hawaii Real Estate remote and increasing the likelihood that the borrower will exercise a strategic default.

I’m not sure where the good news is being found, but according to RealtyTrac:

One in every 409 homes in America was sent a default notice, scheduled for auction or bank owned in January, while 87,000 homes were seized and that is 31% more than January 2009.

Last year there were a record 2.8 million households facing foreclosure and that number is supposed to increase 40% to 3.5 million this year, according to RealtyTrac.

Consequently, that good news about stability is just the first wave receding.

There are two parts to a Tsunami. The first big wave is usually more of a curiosity, and then the water pulls way back from the coastline. It’s time to run for higher ground. When that tide comes back in, it comes with a vengeance and a wall of water several stories high.

There comes a point when the idea of continuing to struggle to make payments on something worth half the loan amount stops making sense. At that point, you no longer own the home; it owns you—for life. Because, we tend to believe, that we are not going to see these prices double in our lifetime.

The only way to avoid more and deeper pain across all sectors of the economy is principal reduction to market value. What is a short sale but a principal reduction for the new owner? How does that solve anything while getting us to the same place?

Those who have referred to the economic collapse as a Tsunami may be faulted for being overly dramatic, but not for being inaccurate. Prepare for the next wave.

If you know of anyone that is underwater on their mortgage and trying to consider their options, suggest to them that they call me, to see what we can do to help them either stay in their home, or work out an amicable agreement with their lender.

-Mahalo,

Don Dietz - 255-3598