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Are foreclosures leveling off or poised for another spike?

Dante Chinni

Posted: 07.08.2009 / 8:33 AM PDT

There are two big interconnected questions about the foreclosure crisis, and the answer to both is foggy and potentially scary.

Where is the United States in the foreclosure crisis – near the middle, at the beginning of the end? And, at this point, is it a driver of the recession or merely another factor?

The past few months have brought some hope that things might be getting better on the housing front – or at least may be bottoming out, as we noted in this blog. If this turns out to be true, many will hold on to their homes, and slowly, values will begin to rise. The economy will get a boost.

But a new set of economic theorizing holds that any bottom that might have been glimpsed was a false one – just a plateau before a bigger drop, when lenders try to clear their books of bad loans. If that’s the case, the economic hole starts to look a lot deeper, and the housing crunch becomes another part of a larger, vicious cycle.

Time, of course, will provide the ultimate test for these two views. But for now, a look through the Patchwork Nation prism shows there is reason to believe either of these scenarios – with a lot hinging on the wealthier “Monied ’Burbs.”

The positive view

As we noted in mid-June, the numbers of properties in any stage of foreclosure fell in five of our 12 community types between March and May.

Those community types were the socially conservative “Evangelical Epicenters,” agricultural “Tractor Country” communities, collegiate “Campus and Careers” counties, big-city “Industrial Metropolis” locales, and “Military Bastions,” which are located in and near bases for the armed forces.

This was the first time, since we began tracking the data more than a year ago, that we had seen a drop among such a broad range of community types. It was certainly a good sign.

Even in the “Monied ’Burbs,” where foreclosures increased by 43 percent in that period, things looked a bit better. From February to April, the increase had been 69 percent.

In the early rounds of the foreclosure crisis, the “Monied ’Burbs” hadn’t been harmed as much as other community types had been, and there was a question about how far the housing problems would reach in the “ ’Burbs.” The 69 percent figure earlier this year wasn’t a good sign. So when the next set of data showed a slowdown in foreclosures, that was welcome news.

The other shoe?

To be sure, a 43 percent increase is still large – particularly when it’s added to the increases of earlier months.

The raw numbers in the “ ’Burbs” from January to May also show an increase. About 63,794 homes in these places were in some state of foreclosure in January. By May, that number was 79,429.

More trouble may very well be on the horizon, say the people at RealtyTrac, a firm that monitors foreclosures. April, they say, was the worst month ever, with more than 340,000 properties in some state of foreclosure nationally. So the improvement in May was probably not as good as it seemed. They are expecting June’s numbers (to be released next week) to “give April a run for its money” as worst month ever.

Many of those foreclosures, they expect, will be among nonsubprime mortgages that were thought to be safe – like those in the “Monied ’Burbs.”

Even more troubling, RealtyTrac has noticed that the number of homes with delinquent payments is rising more rapidly than the number of homes in foreclosure. That makes RealtyTrac think that many more foreclosures will happen down the road.

Still, the biggest concern is what another dip in the housing market would mean for the overall economy.

The common belief is that the housing bubble led the US down a path of recession. But another dip in the housing market, particularly in those wealthier “Monied ’Burbs,” could have another meaning: The housing market is simply becoming another problem in the recession – with rising unemployment, rather than bad loans, leading to the foreclosures.

Next week’s foreclosure numbers will just be one month’s data, but keep an eye on the foreclosures in the “Monied ’Burbs”: It may give a strong indication of where the economy is headed.