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Optimistic Predictions Ignore Reality - Foreclosures Going Up, Going Down, Going Forward

The good news is foreclosure rates have dropped slightly below the rate one year ago.   Unfortunately, that's the end of the good news at the moment as last year was a disaster for housing in the U.S.  The foreclosures occurring today are not usually for homes purchased with risking subprime loans and adjustable rate mortgages.   Instead, the current foreclosures are driven by long term unemployment and loss of income through underemployment when work hours are cut.

The numbers are staggering.  The government reports 1 in 78 homes are at risk of foreclosure in the United States today.  During the first half of 2010 there were 1.6 million foreclosure actions filed and the estimate for the year is three million.  The impact of this goes far beyond one mortgage.  Homeowners able to make mortgage payments find the value of their home is constantly decreasing due to the flood of foreclosure properties appearing on the market.

Falling home values have created a new phenomenon in the housing market - willful foreclosures.  Homeowners with a $250,000 mortgage on a $300,000 home may find their home is now valued at only $175,000.  The same floor plan with more luxurious upgrades may be sitting vacant across the street.  That home is a foreclosure with a price tag of $125,000.  It hasn't taken long for economically savvy homeowners to see the value in buying the cheaper home and then walking away from the mortgage on their current home and allowing it to fall into foreclosure.  The current low interest rates on fixed rate mortgages adds allure to this option.  

Willful foreclosures have been condemned as dishonest and unethical but there is not apparent legal reason that would stop this behavior.  The continuing economic stress has led consumers to do whatever they can to protect their financial resources and the respect for big financial institutions holding the mortgages has been degraded by bailouts, predatory lending and a continuing tight credit market.

For home buyers, the current housing market is a boon that has not been seen before.   Homes flood the market and banks compete to get those foreclosures sold.  Buyers with significant funds for investment who have the real estate savvy needed to choose wisely can buy investment homes at fantastic deals right now.   Builders can by damaged properties cheaply and rehab them later for a profitable sale and site flippers should be in the element.   The possibilities for profitable investment in real estate are enormous but the risks are also high.

Successful real estate investors will analyze facts and figures endlessly but in the end it is the gut reaction from years of experience they may rely on.  How do you evaluate how many more homes in a high end subdivision will go into foreclosure and reduce prices further?   How can you evaluate where the recovery will occur first and which cities or areas in cities will see real estate prices appreciate first?

Some home buyers in the current market are buying with an eye toward investment, too.  The high unemployment rate has created an increasing group of middle class homeowners who will have to downgrade their housing expectations.  This market sector will not be able to buy a home for some time after foreclosure and when they do purchase again it is likely to be a less expensive home.

Perhaps the best way to profit from the foreclosure rate is open to homeowners with carpentry and building skills.  Buying a distressed property that needs work is an opportunity to buy cheap and improve the property for a potential resell later.  This group of buyers considers the needs of their family and focuses on school districts and home size that will suit them for the long term.   They can buy cheaply if they are willing to purchase properties that have been poorly maintain or have damage caused by an angry previous owner when he lost the home to his bank.

If you want to have a chance to profit from the current glut of properties appearing on the real estate market today, you need some money to invest and some knowledge of location and location potential.  The foreclosure market is devastating homeowners across the country.  Yet there will be some who will emerge on the other side of the economic crisis well positioned to make good profits.  Investing in real estate now should be viewed as a long term investment whether buying for your own family or as an investment property.   There is no way to predict when housing prices will begin to rise again and short term thinking will not succeed.