With Foreclosures On the Rise Again, Consumer Spending Is Sure to Fall

Foreclosure activity picked up in June, and problems which include high unemployment and falling homes prices will drive it relentlessly higher.

"Foreclosure filings were reported on 222,740 U.S. properties," according to the midyear report form RealtyTrac, considered a leading authority on the housing market. That's up nearly 4% from May, though down 29% from June 2010. RealtyTrac considers default notices, scheduled auctions and REOs to be foreclosure fillings.

Real estate market watchers are closely monitoring month-over-month changes to see if foreclosure activity will rise after robo-signing and bad document problems delayed a large number of filings. "Processing and procedural delays are pushing foreclosures further and further out – we estimate that as many as 1 million foreclosure actions that should have taken place in 2011 will now happen in 2012, or perhaps even later," said James J. Saccacio, CEO of RealtyTrac. "This casts an ominous shadow over the housing market, where recovery is unlikely to happen until the current and forthcoming inventory of distressed properties can be whittled down to a manageable number."

Other experts and data confirm RealtyTrac's fears. S&P/Case-Shiller information on home price values in the top 20 metro areas has shown vales are continuing to deteriorate. Robert Shiller believes prices could fall as much as another 25% in the next five years. The market could take another decade to improve, if Shiller is right.

Research firm Corelogic reported that as many as 11 million homes had underwater mortgages at the end of last year. Those homes cannot be sold, in many cases, because owners would have to pay banks the difference between what they owe on their mortgage and the new value of their houses. If Shiller is right, the number of underwater mortgages will increase sharply. Banks also hold as many as 2 million homes on which they have foreclosed, but which they have not put on the market. This "shadow inventory" will press home values even lower.

The ripple effect from foreclosures goes beyond the immediate problems of homeowners, and it will get much worse. Americans used their homes as collateral to borrow money and finance their retirements for the years preceding the market peak in 2006. People who plan to retire in the next few years won't have the nest eggs they once did. Older homeowners who might once have been looking to sell homes and downsize may now have to hold onto those homes -- and their expensive mortgages -- which will be another addition to retirement costs. Seniors, already concerned about the future of Social Security and the amount they have saved for retirement, face more financial pressure. And middle-aged Americans who once used second mortgages to finance everything from consumer expenditures to college tuition no longer have that option available. All of theses things are sharply cutting into consumption, and will do so further. In a country where consumer activity accounts for at least two-thirds of GDP, the effects have spread across the economy.

The dangerous equation in the real estate market is simple: No home price increases = no increase in consumer spending.