Foreclosures drift to Sun Belt from Rust Belt
A new survey shows foreclosure clusters are on the move from industrial centers to coastal and southern states.
NEW YORK (CNNMoney.com) -- For sheer volume, housing foreclosures across the nation appear to be moving from the Rust Belt to the Sun Belt.
A study for CNNMoney.com by RealtyTrac, an online marketer of foreclosure properties, showed that 139 of California's ZIP codes fell within the top 500 for total foreclosure filings in the United States. The next highest count for any state is less than half that at 72 and is in another sun-belt state - Florida.
The geographic shift shows up in the mix of properties listed by the auction web site RealtyBid.com, which mainly features foreclosed homes.
RealtyBid spokeswoman, Daphne Shannon, said, "The Midwest has always been very solid for us, but the properties we're seeing are moving across the country - they're from California, Arizona and Nevada."
The number one ZIP code in the nation for foreclosures is still, however, in the Rust Belt. It's Cleveland, 44105, with a total of 783 filings during the three months ended June 15, according to the RealtyTrac study.
The hardest hit ZIP in California was Sacramento, 95823, where there were 634 default notices, repossessions and auction notices. It had the sixth most foreclosure filings for any zip code in the nation.
California boasts a vibrant economy and a fast growing population. According to Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), foreclosures, overwhelmingly, used to come courtesy of serious underlying economic problems such as job layoffs or plant closings.
But the California foreclosure spike, as well as those in Florida, Arizona and Nevada, was set up by runaway appreciation that boosted home prices beyond affordability.
Double-digit price increases had attracted hordes of investors, who added to swiftly rising values. Developers bid up land prices in a scramble to get product to market. When markets cooled, speculators added to downward price pressure by unloading their properties onto already lengthening inventories.
"In many of these markets," said Duncan, "prices fell below what investors paid. Many have simply walked into their banks' offices and handed in their keys."
Many Sun-Belt buyers bought their high-priced houses using 2/28 adjustable rate mortgages (ARMs) which featured very low initial, or "teaser," rates that reset much higher after the first two years of fixed payments.
But ARMs are best used, according to Duncan, as credit-repair products. They're set up for borrowers to show they can keep up mortgage payments and then refinance out into affordable fixed-rate loans after two years.
Many buyers used ARMs to get into a house with little regard for whether they could afford the payments, betting that rising prices could build enough home equity they could tap for cash.
When prices stabilized or fell, that safety valve disappeared. Owners couldn't pay monthly bills, and they had no equity to draw on.
In the Rust Belt, it was the ripple effects of a dying industrial economy instead of rampant speculation that crushed the finances of many borrowers in states like Michigan, Ohio and Indiana.
Neighborhoods of Cleveland 44105 were once filled with Eastern European immigrants and their descendents. Residents worked in nearby woolen factories and steel mills.
Today it's a mixed-race area with lower than average income, higher than average unemployment and a large stock of older, single-family homes. Many of them sell for less than $100,000, some for under $30,000.
According to Cleveland city councilman, Tony Branchatelli, who represents the district, more than 600 homes in the neighborhood are vacant and boarded up. Many have little value because the rehabilitation costs would exceed their selling prices. Some have had their plumbing, wiring and other hardware stripped.
In Sacramento, 95823, by contrast, residents depend more on government jobs and service industries for employment, although wages are still below average for the state.
Homes there are more modern and more valuable than in 44105; even modest three-bed/two bath houses go for several hundred thousand dollars.
Neither the Rust Belt nor Sun Belt are likely to see easier conditions any time soon. In the Sun Belt, the subprime mortgage mess will take many months to work through as the many borrowers who took out 2/28 and 3/27 ARMs during 2005 and 2006 will hit their reset points this year and next.
And the rust belt appears likely to endure more economic trouble before conditions turn around in heavy industry.
"Delinquencies," said Duncan, "will probably peak by the end of the year and foreclosures in 2008."