Business Beat: Craig Allen

Current statistics show that approximately 6 percent of all homeowners are at least two payments behind on their mortgages.

As of June 30, some 22.5 percent of all U.S. homes, or about 10.9 million, had a mortgage that was under water, (CoreLogic). Another 2.4 million borrowers had less than 5 percent equity in their homes.

Those statistics are likely even worse today. The foreclosure pipeline contained 2.2 million homes as of Oct. 31. Foreclosure starts jumped 5.7 percent from September to October, to 232,865.

There is a bit of a silver lining in the data, however. The number of borrowers who were behind on their loans by at least 90 days but who were not yet in foreclosure at the end of October dropped by nearly 19 percent from January, to 1.76 million. That’s a 42.5 percent drop from a peak of 3.06 million in January 2010.

Sadly, if you add those 1.76 million that are not yet in foreclosure, to the 2.2 million or so that are currently in the process of foreclosure, we have approximately 4 million homes that could potentially be placed on the market in the near future at severely distressed prices. This will not only stuff the inventories across the country — and especially in those markets that experienced the largest percentage and dollar increases — but will also depress prices for other sellers who are not in foreclosure, but who need or want to sell.

Foreclosure activity slowed recently from a year ago after problems surfaced with the way many lenders were handling foreclosure documentation — namely shoddy mortgage paperwork comprising several shortcuts known collectively as robo-signing. Many of the nation’s largest banks reacted by temporarily ceasing all foreclosures, refiling previously filed foreclosure cases and revisiting pending cases to prevent errors. But banks appear to have corrected these issues and are aggressively moving forward with foreclosures.

The massive number of foreclosed properties posed several structural problems for major banks in terms of processing such huge volumes, but most of these kinks have been worked out, and now the process has been streamlined. Additionally, the government, which had been very vocal about bank foreclosure practices, has fallen silent. Apparently the Obama administration is either focusing more on the coming elections, or has realized the futility of the situation.

My feeling is that many homeowners who are upside down on their properties — they owe more than the home is worth — have been holding out, hoping that prices will rebound so they can get out without such a large loss. Unfortunately, these homeowners have now realized this is not going to happen anytime soon. One has to wonder what motivation these homeowners will have to remain in mortgages with no realistic chance of getting even within any acceptable time period.

In Santa Barbara, we are in a very different real estate environment than almost every other market in the country. Here, the land is where most of the value lies. In contrast, you have places like Las Vegas, Phoenix and all throughout Florida where prices skyrocketed, but the land values are a small fraction of the total property value. In these markets, one has to understand that, if it takes 15 or 20 years for prices in general to rebound to anything close to the peak prices we saw in 2007, the current homes will have deteriorated significantly. New homes built in these same markets will be far more valuable. This will put even more downward pressure on the existing home values. Homeowners who live in these areas are all too familiar with this certainty.

My belief is that many homeowners, even those who can afford to continue paying their mortgages, will end up walking away from their properties, simply because there is no realistic chance that they will ever get back to even or close to it. A 20-year-old house in Las Vegas that has been sitting in 115-degree heat, day after day, week after week, year after year, and that has not been maintained because the homeowner does not want to put “good money after bad” and invest in a property that they owe more on than it is worth, is going to be almost worthless. Why would any buyer want a 20-year-old home in Las Vegas, when they can buy a brand-new one, unless they can get the older home for a really low price?

It stands to reason that we can expect the existing inventory in markets like Las Vegas to increase dramatically over time, as more and more homes enter the foreclosure process. This certainty underscores my belief that it will take many more years for the real estate cycle to make a bottom and then begin any reasonable rebound. That rebound, when it finally comes, will not be robust. Instead, it will be very slow, taking many years. As a result, with so much potential inventory hitting the market over the coming years, even in markets like Santa Barbara, I do not believe we will see significant price appreciation for many years.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.