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The cause of many of the current foreclosures may be simply that there is no longer any incentive to make payments. There is no equity because there was no money involved for the home owners. There was none created by paying down principal, and there is no longer any more appreciation. It’s an important thought because most people want to believe that those in foreclosure have problems that are far removed from them. Regardless of what you believe to be the cause, it is evident that foreclosures aren’t just a result of an economic downturn. Neighborhoods with a lot of foreclosures reach a tipping point where even those that normally would have made the payments, don’t. A homeowner doesn’t feel like struggling with a payment when he can walk away and rent for cheaper. There is just no reason left after a 20% (or more) reduction in values. Why struggle with the payments any more? At least that’s my understanding as I try to wrap my head around this report that came out last year that fingers the price devaluation rather than just the typical woes of a down economy. It’s a page turner.

Here’s and example of the Green Valley Subdivision in Denver, Colorado

Notice that once current home values cross the value of what was paid on the 1st position loan, there is a spike in foreclosures.

Foreclosure rates in Green Valley Ranch

just to add some more perspective…

An example of a highly localized collapse of home prices common in many cities.

It’s something to think about. It’s not just a matter of a few bad loans, lost jobs and problems paying health expenses, for many neighborhoods that may be close to a similar tipping point. Because of the substantial amount of money invested into Green Valley Ranch, I would expect that they’ll recover from the collapse within 5 years as the foreclosure sales work through the system. For other neighborhoods in Denver, I’m a lot less optimistic.

I’ll just have to get this doom and gloom post out of the way before I post another market update. Don’t worry, at least nothing new has changed in the real estate market. Slow has become business as usual for most. Now the rest of the world is starting to realize that this wasn’t just our problem. As I see it, it seems like the majority of people are just beginning to understand that there is even a problem with the financial markets. More and more people are figuring it out. Thiis new insight is not because people have educated themselves as to what’s at stake. It is starting to show up closer to home. I suspect that most people about a month from now might begin to think that $700 billion could of been a pretty good deal.

“If you don’t like this offer, you won’t like the next.”

Often times, foresight and taking action are more useful than waiting for the perfect approach. There is a lost time cost that needs to be considered.

Confidence is at the core of the problem. Perhaps we shouldn’t call it confidence, as at this point, that term is almost laughable. We’ll call it “faith”. Faith that you’ll have a job and you will continue to make a living is central to being a good little consumer. Faith in businesses is at the core of how a business may raise money to cover their operating expenses. Faithful businesses lend money as they hold the belief that the vast majority of people and other businesses they lend to are good for it (What if they’re wrong?). Faithful consumers, spend money between paychecks using credit cards because they can count on that check (What if they lose their jobs?). What happens as the once faithful businesses begin to doubt that they’ll be paid back (What if we don’t get paid for that last invoice?). What happens when the once faithful consumers can’t get credit or know that soon they could be out of a job. When minor liquidity problems turn into a financial ‘ice age’, what then?

One only wonders how Bernanke and Paulson could keep people in the ‘pews’ and involved in the day to day business of being a good consumer if those people lose their faith in the system entirely. If those people begin to feel that they could be out of a job next week what effect does that have. How much will that cost the economy. What happens when they feel that everything they’ve worked for, their house and their savings, could be lost. Heaven forbid they even take a look at their 401k plan. Pretty soon people would be (some already are) stuffing their mattresses with money and buying gold bars.

Think of Washington Mutual, people lacked faith that it was safe. They felt it was not safe enough to hold their money and not safe enough to be lent money even short term. People start pulling money out of the bank. Their credit rating gets cut down to that they can no longer raise money. Soon enough their $310 Billion in illiquid (frozen) assets are taken from them and sold to JPMorgan for $1.9 Billion where the ‘thawed out’ assets are instantly worth much more.

The concept that the value of a business, an asset, or your dollar is determined by market forces presupposes that there is a market. What happens when there is no market? That being said, bail away. Take action to establish that there is a market. Draw a line in the sand or something.