BOULDER — Nearly 800 Boulder County residents defaulted on their mortgages in 2006, making for the highest number of foreclosures in the county in nearly 20 years. 

The county’s 790 foreclosures for 2006 was 27 percent higher than the 619 reported in 2005. The record was set in 1988, when 1,080 foreclosures were reported as the state’s oil and real estate economies collapsed and people left the state looking for work.

Other parts of Colorado also saw high foreclosure numbers this year. Broomfield reported 195 for 2006, a 57 percent increase over the 124 reported last year and a record for the county’s five years of existence. 

Public trustee’s offices in the seven-county metropolitan area reported 17,782 foreclosures as of the end of November, 3.8 percent higher than the 1988 record of 17,122. 

Mortgage fraud schemes and an increasing number of low- or no-down-payment and other higher-risk mortgage products have contributed to the high numbers of foreclosures, experts said. 

Lou Barnes, a mortgage lender with Boulder West Financial Services, said most of the foreclosure activity stemmed from loans that required little or no down payment or was in areas with soft housing markets. 

He said soft markets in Larimer, Weld and Adams counties and in eastern Longmont have come to be known as the “foreclosure belt,” where a glut of new housing has depressed prices of existing homes. 

“That means the buyer from three years ago who’s in trouble now can’t get out of their house,” he said. “If you’ve got less than 5 percent equity in your house and prices aren’t appreciating, you can’t afford to sell your house.” 

Some housing experts have predicted foreclosures could rise even further next year. 

NEW YORK (AP) - Prices of single-family homes across the nation rose in October at the slowest rate in almost a decade, a housing index released Tuesday by Standard & Poor’s showed, giving more evidence of the housing market’s deceleration, which has affected many parts of the broader economy.The S&P/Case-Shiller composite index showed a 2.4 percent year-over-year increase in the price of a single-family home based on prices of existing homes tracked over time in 10 metropolitan markets. For its 20-city composite index, prices grew 2.9 percent, the slowest rate ever for that data, according to the S&P index committee chairman, David Blitzer.

“Home price gains are continuing their steep deceleration,” said Chief Economist Robert Shiller of MacroMarkets LLC. “We can clearly see that the monthly price declines are wide spread nationally.”

The growth rate of the 10-city composite index is sharply below the 3.7 percent rise posted in September and the slowest since a 2 percent growth rate in February 1997, according to S&P.

In addition to the overall composite index, the housing indicator also measures the health of existing home sales in 20 major markets in the U.S. The S&P added 10 additional markets this month.

Among the worst performing markets were Detroit, Boston, Cleveland, San Diego and San Francisco. Seattle and Portland, meanwhile, posted strong annual returns.

Analysts predict continued slowing of sales amid a bloated inventory of homes.

The data is consistent with a report from the National Association of Realtors, which showed a tiny increase in sales of existing homes in October as the median home price fell by a record amount.

The realtors association showed that the median sale price dropped to $221,000 in October, a decline of 3.5 percent from a year ago. That was the biggest year-over-year price decline on record.

Meanwhile, the inventory of unsold homes in October reached the second-highest level ever recorded. At the pace homes were being sold in October, it would take 7.4 months to sell the currently available homes.

The Federal Reserve has been closely watching the housing market as it tries to slow the economy’s growth without pushing it into a recession. The Fed has left rates unchanged for the past four meetings, after raising rates 17 straight times since 2004.

At its last meeting on Dec. 12, a statement from the Fed said, “Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market.”

In recent quarters, economists had said the housing slump was creating a drag on the economy and pulling down gross domestic product growth. U.S. GDP fell to 2 percent in the third quarter amid a cooling real estate market.

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The housing boom ended more than a year ago, but sellers are having a tough time accepting that fact, says David Lereah, chief economist at the National Association of Realtors.The result has been tumbling sales as buyers stay on the sidelines.

Lereah was in Saratoga Springs Monday for the annual statewide industry update, talking to Realtors from across New York.

The expansion that began in November 1991, when mortgage rates fell into single digits, became a boom following the 9/11 terrorist attacks, when trillions of dollars left the stock market looking for a safe haven in real estate, Lereah said.

But 17 interest-rate increases by the Federal Reserve since June 2004, a pullout from the market by speculative investors, and a loss of confidence by trade-up buyers eventually ended the expansion, he said.

This correction is different from any others because it wasn’t triggered by a recession, high financing costs or job losses. With unemployment below 5 percent, mortgage rates still below 7 percent and a growing economy, “all you need is a price correction, a price adjustment, to bring the market back,” Lereah told the crowd at The Saratoga Hotel & Conference Center on Broadway.

He said the Capital Region experienced “a moderate boom” without the extreme price run-ups or overbuilding seen in parts of California and Florida. As a result, “you don’t need as much of a price correction,” he said.

The transition to lower prices is already under way nationwide, Lereah said, and will result in a more balanced market than the one that has been dominated by sellers. The transition in the Capital Region likely would be completed by the end of this year, he added.

Sales have tumbled locally even as prices have continued to climb. In July, the median sale price of a single-family home was up 7 percent to $197,250 from year-earlier levels, according to figures from the Greater Capital Association of Realtors Inc. Sales for the month, meanwhile, were down 15 percent from a year ago, the fourth consecutive decline.

“We certainly are seeing a slowdown,” said James Ader, executive vice president of GCAR, an Albany-based trade group. But “we haven’t seen a huge price correction.”

Lereah predicted prices will drop nationally over the next six months, and that each percentage point drop “will bring thousands and thousands of buyers back into the marketplace.”

He said the inventory of unsold houses nationally is at an all-time high.

Ader described the inventory of unsold houses in the Capital Region as “pretty healthy.

“We did have some supply problems during the sellers’ market,” Ader added.

The correction is hitting new construction harder than existing sales, Lereah said, with new-home sales nationally down 16 percent this year, while existing-home sales are off just 8 percent.

He predicted new-home sales would be off a further 8 percent next year, while existing home sales would be flat.

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Next year will likely bring a second annual decline in existing home sales, the National Association of Realtors predicted on Monday.

Sales of existing homes are expected to decline 8.6 percent to 6.47 million for 2006 and contract another 1 percent to 6.40 million units next year. Still, the housing sector should see a rebound by the end of next year, said David Lereah, the association’s chief economist.

“By the fourth quarter of 2007, existing-home sales will be 4.6 percent higher than the current quarter,” Lereah said.

Sales of new homes should fall a sharp 17.7 percent this year and another 9.4 percent next year, the Realtors said.

About three-quarters of the country will see a sluggish expansion of existing home sales next year, Lereah said.

The health of housing markets across the country will vary, he said, but “general gains in value next year will be modest by historic standards.”

In the last three months of 2005, homes across the nation were appreciating at a 12 percent rate, according to the Office of Federal Housing Enterprise Oversight. From July to September this year, home price appreciation had slowed to a 3.5 percent rate.

Lereah also predicted that 30-year mortgage rates would increase to 6.7 percent by September. Those rates were at 6.11 percent last week, mortgage finance company Freddie Mac reported.

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WASHINGTON (AP) - Mortgage delinquency and foreclosure rates are on the rise, and the impact could be greatest on low-income families that took out higher-interest loans for risky borrowers, some experts said Monday.Treasury Secretary Henry Paulson said the government wants to issue guidelines to banks and savings and loans that will allow people to get home loans “without taking unnecessary risks.”

“Expanding opportunities for more people to buy a home is a good thing. But we do not want Americans to become overextended and see their dream end in foreclosure,” Paulson said at a conference on the housing market organized by the Office of Thrift Supervision, a Treasury Department agency.

Some experts are concerned that the increase in mortgage foreclosure rates could affect the banking system’s financial health.

There have started to be “early signs of credit distress” in financial institutions’ holdings of so-called “subprime” mortgages, especially in California, Richard Brown, chief economist for the Federal Deposit Insurance Corp., said at the conference.

In the sizzling housing boom that waned in the latter half of last year, many people took out subprime mortgages - higher-interest loans for people with blemished credit records who are considered higher risks - with adjustable interest rates.

When interest rates rise, as happened last spring, it can raise monthly payments for people with adjustable-rate mortgages, potentially creating a strain if they stretched to buy a home and don’t have a financial cushion in their savings.

William Longbrake, a senior policy adviser to the Financial Services Roundtable, an industry group, said he is among a minority of experts “who believe the worst is still ahead in the housing market” for home prices to continue to fall.

“There is worse to come. … The bottom is probably still many months ahead,” Longbrake said. He noted that the rise in delinquencies and foreclosures in subprime mortgages particularly affects low-income families.

Mortgage defaults could snowball in the coming months, a situation that bears close watching, he said.

The Mortgage Bankers Association reported in September that mortgage foreclosures climbed in the second quarter as higher interest rates and energy prices made monthly payments harder for some homeowners.

The percentage of mortgages that went into the first stages of the foreclosure process in the April-to-June quarter rose to 0.43 percent, up from 0.41 percent in the first quarter and the highest level in just over a year. Foreclosure rates were highest for subprime borrowers.

Also in September, the federal banking regulators directed financial institutions to properly explain the risks posed to borrowers from interest-only and other nontraditional mortgages. Such mortgages have exploded in popularity in recent years and raised concern that there could be a sizable number of defaults if borrowers cannot meet rising mortgage payments.

The regulators also said banks must make sure the loans they made were “consistent with prudent lending practices, including consideration of a borrower’s repayment capacity.”

Paulson said Monday the Treasury Department wants to “make sure that we have the right guidance in place to help people access home financing without taking unnecessary risks.”

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Foreclosure filings for 2006 nearly toppled 1 million, a 51-percent increase from 2005.

In the Northeast, foreclosures peaked at 64.6 percent. The region closed the books for 2006 with 96,101 foreclosure filings, up from only 58,394 in 2005. In the midst of rising foreclosures, the region did have states that actually showed decreases in foreclosure filings. Maryland (down 26.1 percent) and Delaware (down 32.9 percent) could be a glimpse of what may be ahead.

The Southeast region ended the year with a 37-percent increase. For 2006, the region reported 220,189 foreclosures compared with 162,259 in 2005. Florida alone filed 120,989 foreclosures but fell second to California for the highest number of foreclosures in one state.

Manufacturing layoffs and a tough economy fueled the 70-plus-percent increase for the Midwest region. The region filed 204,656 foreclosures. Illinois, Michigan, Missouri, Nebraska, and North Dakota faced increases of 80 to 96 percent, while Iowa and Kansas struggled with triple-digit increases.

The Southwest region led the nation in foreclosures for 2006, where one out of every 2.2 foreclosures in the nation took place. California, the nation’s leading state in foreclosures, filed 157,417 foreclosures. Colorado increased 55.4 percent with 68,310 filings. Texas increased only 35.2 percent to 106,845. Possibly indicating that better times are ahead, Louisiana, New Mexico, Oklahoma, and Oregon showed slight drops in fourth-quarter filings compared to third quarter.

The housing market terrifies me. It was recently announced that median new home prices fell 9.7% year over year, the largest such drop in 35 years. And I think that it could get worse. Consumers are over-leveraged, they’re used to low interest rates, and they’ve purchased expensive real estate using unconventional mortgages. This combination could lead to disaster. Big bad debt
Consumer debt has grown significantly during this housing boom. In 1985, the ratio of household debt to disposable income was about 73%. Today, this ratio is well above 125%. I see several reasons for this huge amount of debt. First, instead of paying off their mortgages, consumers are borrowing money against the equity in their homes. In the third quarter of 2005, homeowners borrowed $235.9 billion against their equity — a huge number equal to 10.4% of their after-tax income. The amounts declined in 2006 to $152 billion in the second quarter and $113.5 billion in the third quarter, but still represent about 5% of after-tax income. 

Second, housing prices have gone up, forcing consumers to shell out more money for housing. Yale professor Robert Shiller examined housing prices from 1890 to the present. According to his calculations, if you exclude inflation, a house that sold for $100,000 in 1890 was selling for about $110,000 in 1997. During that 107-year-span, even at the peaks of the market, that house never sold for more than $125,000. Yet in 2006, that home was selling for almost $200,000. So we’re way higher than we’ve ever been before. A third reason for consumers’ increasing debt is that unconventional adjustable-rate mortgages like hybrid ARMs and option ARMs are enabling homebuyers to increase their debt by reducing their initial payments. Hybrid ARMs typically have a low fixed “teaser” interest rate for several years, after which the interest rate resets to the market rate. Option ARMs allow borrowers to pay only the interest on the loan, or sometimes even less. After years of payments, the buyer can owe more than they did initially. The initially low rates of unconventional mortgages can be deceptive. If homebuyers believe that their short-term mortgage payments are representative of their long-term cost, they may purchase more expensive houses than they can actually afford. 

These loans have become common — in the first quarter of 2006, 26% of new loans were interest-only or negative amortization. And option-ARM borrowers aren’t paying them off. According to UBS, about 70% of option-ARM holders make the minimum payment. A catalyst for a crash
The combination of these effects is startling. In 1985, the equity-to-value ratio for homeowners was 69% — homeowners owned 69% of their homes. Today, we’re at an all-time low below 54%. My concern is that the huge consumer debt load combined with unconventional mortgages could cause a housing crash. When the market’s going up, option ARMs are manageable, since growth in the house’s value accrues to the homeowner, increasing equity. When the market’s going down, the option ARM borrowers’ equity can vanish quickly, leaving them with more debt than the house is worth. Combine this observation with Schiller’s observations that housing prices are way higher than they’ve ever been before, and it seems like there’s room to fall. 

If you’re searching for a catalyst, you don’t need to look any farther than the hybrid ARMs. According to Fannie Mae (NYSE:FNM), in 2006, the teaser rates disappeared on about $300 billion worth of mortgages. But in each of 2007 and 2008, $1 trillion in mortgages will reset — roughly 12% of all mortgages each year. Furthermore, borrowers have to adjust to more than just the loss of the teaser rates. Market rates are higher as well. Some borrowers could see interest rate increases of 4%-5%, causing a huge spike in their monthly mortgage payments. The results could be catastrophic. The virtuous cycle that pushed up housing prices and allowed consumers to increase leverage and spending on the way up could turn into a vicious cycle on the way down. A housing crash could hurt the entire economy, and not just through job losses. If 5%-10% of consumer spending is a direct result of people borrowing equity in their homes, that money could quickly dry up. Investment opportunities
However, uncertainty also can also bring the opportunity for profit. If you are prepared to consider a very risky short strategy, then homebuilders and lenders might seem like obvious targets. I’d start by looking for the most leveraged companies. And when it comes to lenders, I’d look at mortgage lenders like Countrywide Financial (NYSE: CFC) and consumer finance operations like Capital One Financial (NYSE: COF), since most lenders are likely to be hurt. 

One “problem” with these companies is that they’re relatively cheap on a P/E basis. If a crash doesn’t materialize, then they may actually increase in value. So, another way to play the short side is to target the entire market. If a housing meltdown causes consumers to reduce spending, most companies would be hurt. I’ve bought a few SPDRs (AMEX: SPY) puts to guard against such a scenario. If you’d rather focus on the long side, it can be challenging finding investments that will benefit from a housing bust, since most companies suffer during a recession. However, collection agencies like Portfolio Recovery Associates (Nasdaq: PRAA) could potentially gain business.  The best strategy might be to wait for the depths of the bust, then buy the companies with the strongest balance sheets and biggest competitive advantages. I’m thinking about companies like Lowe’s (NYSE: LOW) in home improvement and LandAmerica Financial (NYSE: LFG) in title insurance. At that point, these businesses will likely have unusually low profits and be trading at low multiples.  The Foolish bottom line
I think this is where investors will reap maximum profits — by buying great companies at the point of maximum pessimism. Just look at how well the survivors of the savings and loan crisis of the early 1990s have done. Some of those companies went on to become 50-baggers. In 15 years, we may see the same from the survivors of the housing crash.  

ANTIOCH, Calif. (AP) - Donald Anthony has slashed the price on his four-bedroom, two-bathroom house by almost $80,000 - and added $40,000 worth of improvements, including a new kitchen and landscaping in the leafy yard.He’s used three different agents. He’s listed the 1,800-square-foot home - an immaculate ranch on a quiet cul-de-sac - on for-sale-by-owner sites, in newspapers, on cable television and community site Craigslist. He or his agents have spent at least 50 idle afternoons hosting open-house events.

But the 74-year-old retired physicist cannot unload the house, now listed at $489,950 - well below the price of comparable homes in the fast-growing region between San Francisco and Sacramento.

“The buyers have vanished,” Anthony shrugged in front of new Shaker maple cabinets and never-used appliances. “If this doesn’t sell post haste, I’m going to bite the bullet and pull it off the market.”

If Anthony can’t wait another year or more, he might as well rip out the for-sale sign now.

Although few experts predict that home values will fall dramatically in 2007, many economists say that prices won’t improve for 12 to 18 months. And without the cushion of rising home equity - which softened the blow of high oil prices last year and kept consumers buying big-ticket items at a rapid clip - Americans may lose confidence in their finances, and the broader economy is likely to suffer.

Ambitious building booms in many markets in the past half-decade, combined with mortgage interest rates that have increased about 1 percent in the past year, have resulted in residential real estate stagnation. The gridlock defies conventional wisdom, stubbornly remaining neither a buyer’s nor a seller’s market.

“We are currently experiencing the worst of the market freeze, which is being exacerbated by the gap between the buyer’s desire for bargains and the seller’s fantasy of what they once thought their homes would be worth,” said Diane Swonk, chief economist for Chicago-based Mesirow Financial, who forecasts a rebound in early 2008. “The good news is that there are some signs of stabilization. The bad news is that a substantial backlog of unsold homes still exists.”

Global forces and U.S. monetary policies play important roles in the housing slowdown, which already appears to be depressing the national economy.

The newest forecast by Moody’s Economy.com, a private research firm, projected that the median sales price for an existing home will decline in 2007 by 3.6 percent - the first decline for an entire year in U.S. home prices since the Great Depression of the 1930s.

The Commerce Department reported Nov. 29 that gross domestic product grew at a 2.2 percent annual rate in the third quarter, down from 2.6 percent in the second quarter. The residential construction falloff subtracted 1.2 percent from growth, the department stated.

Peter Morici, business professor at the University of Maryland, said artificially low interest rates over the past half-decade encouraged China and other exporting nations to purchase 10-year bonds, which kept U.S. mortgage rates low and fueled the housing bubble - despite a gaping trade deficit that should have sapped investor confidence years ago.

“In order to play this ponzi scheme, the value of the homes had to go up faster than the economy grew and faster than people could service their debt. We’ve reached that limit,” Morci said. “The housing market sustained the economy at a time of very large trade deficits. It’s been a false prosperity.”

In addition to macroeconomic forces, regional U.S. housing markets faced particular challenges.

In expensive coastal cities, economists say, price appreciation hit a wall. San Francisco and Boston - where many investors enjoyed double-digit property gains in the late 1990s and the first half of this decade - have simply become unaffordable.

The number of Californians who could comfortably pay the mortgage on an entry-level home fell to 24 percent in the third quarter - down from 44 percent in 2003, according to the California Association of Realtors. The median price statewide was $563,190.

“I don’t see how the economy can continue with these prices,” said Stephen Levy, senior economist of the Center for Continuing Study of the California Economy.

Housing prices in New England grew an average of 10 percent per year from 2000 to 2005, compared with 8.3 percent for the nation as a whole.

But a forecast released Nov. 14 by the New England Economic Partnership, a nonprofit forecast organization with members are from private industry, government and academia, projects prices in New England will be flat through 2010, below the U.S. forecast of 2.1 percent growth per year. Housing prices in Massachusetts are expected to decline 9 percent through 2010.

“Areas along the coast of the nation and the large urban areas tend to see stronger price gains in housing upturns, and stronger declines in downturns,” said Celia Chen, a housing economist with Moody’s Economy.com in West Chester, Pa.

In Sun Belt havens such as San Diego, Las Vegas and Phoenix, overzealous construction resulted in a glut of new homes and condos. Real estate experts say sellers and developers there will struggle throughout 2007.

“We have to work off the inventory,” said Daniel Nussbaum, a licensed investment adviser and CEO of Calabasas-based TheUSARealty.com. “I honestly think we’re past the worst of it, but if you don’t take out your magnifying glass you might not notice.”

Florida will likely remain the toughest market for buyers and sellers.

Building frenzies in Miami, Orlando and the Caribbean coast resulted in a plethora of for-sale signs. Developers desperate to unload inventory offer free granite countertops, appliances and furniture - even cars, vacations and mortgage payments for up to six months.

Meanwhile, insurance companies dramatically raised premiums after Hurricane Katrina. Depending on where they live and their policies, Florida home owners may pay as much as 10 times more for flood and wind insurance than last year; premiums can exceed $30,000 per year on mansions. That’s caused monthly costs to skyrocket, pinching current owners and making it all but impossible for renters to buy.

Throughout Florida, 12,773 existing single-family homes were sold in October, down 22 percent from a year ago, according to the Florida Association of Realtors. Florida’s median price was unchanged at $242,500, but more than half of the urban areas posted declines. Around Fort Myers, the median price plunged 44 percent to $249,200 from October 2005.

Not everyone is pessimistic - even in beleaguered Florida.

Long-term demographic shifts from the Midwest and New England bode well for the notoriously boom-and-bust state, said Dave Denslow, professor of economics at the University of Florida. Florida, which gained 430,000 new residents in the past year, is a popular destination for Latin American immigrants and retirees from northern states, Canada and western Europe.

“People start thinking about buying a retirement home in their late 50s, and baby boomers are approaching that age,” Denslow said. “The demand for residential housing here is only going to get stronger through 2020.”

Meanwhile, back in Antioch, where Don Anthony is struggling, Zach and Katherine Chouteau are looking for a house or condo with a home office and room for twin Pug dogs.

They’d love to buy in Antioch, but the couple - who moved from suburban New York five years ago to start their own business - are reluctant to commit.

Like many shoppers, they’re discouraged by higher interest rates - and rampant appreciation in recent years and the perception that many San Francisco Bay Area owners have halcyon-day notions of multiple offers and bidding wars.

“It’s definitely a friendlier market than earlier this year, but not a dramatically cheaper one,” Zach Chouteau, 41, said. “People have gotten really spoiled by the rapidly escalating prices, and it seems like they’re in denial that things have leveled out. They’re just fishing for the best price.”

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