Foreclosure Wave Cresting, May Never Break

By Andrew Jeffery It's refreshing to see that in this time of great polarity, at least we all agree on something: "[Standard & Poor's] predicts the nation is about to see a deluge of new foreclosures that will drive real estate values back down." -- The National Policy Institute "I believe we are about to see a tsunami of foreclosures." -- Saxo Bank Chief Economist David Karsbol on CNBC

(To read Justin Rohrlich's article on Brandi Favre's meth business, click here.)

"The housing market is about to get hit by a new wave of foreclosures." -- National Public Radio With new data out yesterday from real estate website RealtyTrac predicting that 2011 is going to see the highest foreclosure rate on record, it's pretty clear where the housing market is headed. Or is it? Let's review the quotes again, but this time with date stamps. "[Standard & Poor's] predicts the nation is about to see a deluge of new foreclosures that will drive real estate values back down." -- The National Policy Institute (February 19, 2010)

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"I believe we are about to see a tsunami of foreclosures." -- Saxo Bank Chief Economist David Karsbol on CNBC (August 25, 2009) "The housing market is about to get hit by a new wave of foreclosures." -- National Public Radio (April 15, 2009) So when CNBC.com said yesterday, "It's coming, no question," about the impending flood of bank-owned homes, it's best to question it. After all, home prices are still up since each one of the aforementioned dire predictions was made. The coming deluge/tsunami/wave of foreclosures has been long predicted, yet stubbornly hasn't show up. Indeed, 1 million foreclosures in 2010 and a record 1.2 million forecast for 2011 is nothing to scoff at, but predicting a flood of bank-owned homes overwhelming the market and pushing home prices back into the abyss is downright illogical.

(To view Jay Pestrichelli's position on how to protect your investments in this market, click here.)

The country's big lenders simply have zero incentive to jam REOs (real estate owned) through the system and onto the market. Wells Fargo (WFC) has no interest in deliberately destroying the value of the assets it holds, nor does Bank of America (BAC), JPMorgan Chase (JPM), or Citibank (C). Washington isn't exactly urging bank CEOs to kick downtrodden Americans onto the streets and consumer advocates are feverishly arguing that sloppy paperwork outweighs missing mortgage payments for months, and even years. All this points to a long, steady stream of REOs released to the market after what's likely to be a heavy first quarter in the wake of the robo-signing scandal. And anyone who thinks investor appetite for distressed real estate has dried up doesn't spend much time in the business of buying and selling it. Meanwhile, as novice housing market watchers focus on foreclosure data, others with an eye to the future (and opportunities rather than headline chasing) are looking at long-term demographic trends. Recessions are always rough on an economic metric known as "household formation." Unsurprisingly, young adults in their early 20s tend to be the most active household formers, as they leave home, graduate from college, get married, and start families. Data indicate that new household formation is running at one-third its normal level, in addition to over 1 million households having been destroyed during the Great Recession.

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