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Foreclosures are a Lagging Indicator

Star Tribune reporter Jim Buchta ran a post on his blog discussing Minnesota Home Ownership Center’s data release showing that Minnesota pre-foreclosure notices rose in 2010 vs. 2009, albeit by only a small percentage.

As seems to be the case with comments I see now on most news stories, there were a lot of idiots adding their two cents of nonsense to the story.  Some of the comments though were definitely more topical and appropriate – one of the comments I saw multiple times was confusion as to why the economy can be “on the rebound” but yet foreclosure activity is still increasing?

I think it is important for everyone to understand that foreclosure activity is a lagging indicator of the economy as a whole and the real estate market too.  For one, the foreclosure process itself is can be a 12 – 24 month process since lenders often take many months to schedule the sheriff’s sale:

 

Once a homeowner gets behind on their payments it can become difficult to bring the loan current if their lender doesn’t work with them on a repayment schedule and late payments and attorney’s fees can add up quickly.  So even in a time when employment is slowly rising and the jobless find jobs, you could have many households so far behind in payments that they simply cannot recover.

Further, after a home has been through a sheriff’s sale the only way the owner can keep it is to pay the full amount of the sheriff’s sale price and since their credit has been damaged by the foreclosure process, it is almost impossible to get financing – and most people who couldn’t make their payments do not have $200,000 in cash laying around!

Once the sheriff’s sale has happened the homeowner has another 6 months to occupy the home if they wish – after that the bank will often take 15-45 days to prep the home for sale before listing it with an agent, which further draws out the timeline to clear foreclosures from our system.

The Minnesota Home Ownership Center’s pre-foreclosure notices are definitely a leading indicator for foreclosure activity so until we see those notices fall in significant numbers, foreclosure activity will remain very high, but I still see this more as a “high tide” than a next wave.

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This website is a service of Aaron Dickinson of Edina Realty, a broker Participant of the Regional Multiple Listing Service of Minnesota, Inc.