Cities Hardest Hit by Mortgage Crisis


Real Estate
America’s Most Distressed Housing Markets
Matt Woolsey, 08.21.08, 4:00 PM ET

During the recent real estate run-up, flippers who bought and sold homes within a year often reaped great profits.

Today, you still see a lot of flipping, only buying and selling within a year often results in staggering losses.

Who is suffering? Regular homeowners, speculators and the foreclosed upon who try to get out of loans they can’t afford or properties worth less than the value of their mortgages.

Hardest-hit are those in Las Vegas, Sacramento, Calif., and Los Angeles. There, more than half of last quarter’s sales were for a loss, and as much as 20% of overall sales were by people who had lived in their homes for less than a year.
In Depth: America’s Most Distressed Housing Markets

It’s a similar story in places like San Francisco, Phoenix and Detroit.

“Nationally, one-third of homes are underwater, and 20% of transactions happening across the country are foreclosures,” says Stan Humphries, vice president of data and analytics at, an online aggregator of real estate listings and public sales records. “That’s what drives up the number of home sales for a loss.”

Behind The Numbers
Using data from, we looked at the country’s 50 largest metropolitan statistical areas as defined by the U.S. Census and ranked them based on how many homes were sold at a loss in the second quarter of 2008 and what percentage of overall sales were made by sellers who’d lived in the home for less than a year.

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Both are signs of the urgency felt by homeowners and speculators to relinquish properties due to distress, whether that’s a result of a bad loan or a poor market. Distress is commonly used to describe homeowners behind on their mortgage payments but not yet foreclosed upon. This can come as the result of resetting adjustable-rate payments, job loss or from loans that should never have been written in the first place. The result, however, is the same: The mortgage is unlikely to be fully paid off by its current owners.

In cities that didn’t experience a rapid run-up in home sale prices over the last five years, a large percentage of people selling at a loss is a part of a bigger economic decline. For Detroit or Memphis, Tenn., where 56.4% and 43.8% of last quarter’s home sales were for a loss, it’s a sign of rough times.

For markets like Phoenix or Atlanta, where prices spiked by double digits annually from 2002 to 2006, selling for a loss can be a positive sign that housing markets are actively correcting and that come-lately speculators are being flushed out.

That’s little consolation to sellers there, however.

In Phoenix, 21.4% of last quarter’s sales were flips made within the last year, and 52.1% of overall sales were for a loss. Not surprisingly, Phoenix home prices are down by 22% in year-over-year-terms, based on data from the National Association of Realtors. San Francisco, another market on our list, is down by 19%, which has sellers rapidly turning over properties to cut their losses.

Zillow’s research of second-quarter sales and earlier selling prices showed that 48% of San Francisco metro homeowners sold at a loss and that 20% of overall sales were within a year of their last purchase.

Of course, it’s important to note these are metro area statistics. In San Francisco’s case this includes Oakland, where prices have dropped 35% over the last year, based on data from California’s multiple listing service.

Part of that has to do with the number of foreclosures occurring in the area. According to RealtyTrac, a national aggregator of foreclosure listings, Nevada, Florida and California have the highest share of the nation’s 1.5 million foreclosures.

California is a non-judicial state. This means that once a homeowner fails to remedy defaults within 117 days, his or her lender can publicly list and sell the property.

The result? In California markets like Riverside, Sacramento and Los Angeles, homes sold while in some stage of foreclosure represent 50%, 39% and 38% of total sales, respectively. That’s bad for the people selling the homes, but good for the overall market’s recovery as excess inventory gets burned off.

In Florida, a judicial foreclosure state, the courts are involved.

That gums up the works in a state with the second highest number of foreclosures in the country, according to RealtyTrac. Sales take longer, and judges can slow down the process further in an attempt to get the best deal for the seller.

“As prices go further down, and there are further losses, judicial states can be harder because judges are trying to protect sellers,” says Pat Lashinsky, chief executive of ZipRealty, a national broker. “If the judge feels like it’s not a good deal, there are situations where the judge might make a seller sit on the offer for 30 days.”

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That slows the market down, and helps explain why Florida cities like Miami, Orlando and Tampa are absent from our list despite unsold housing inventories at, or near, the top of national tables, according to the U.S. Census Department. What’s more, home prices there have crashed by more than 25% in the last two years, according to the National Association of Realtors.

Even though foreclosure inventories are piling up and prices are down, sellers either cannot find buyers, or foreclosure homes are being held up in the courts. Florida markets’ corrections are, as a result, delayed.

This is bad news, even as prices have started to head back toward pre-run-up levels.

“I hesitate to say that you’re going to see markets stabilize around those historic levels,” says Humphries. “But it means you’re getting closer to rational levels.”

In Depth: America’s Most Distressed Housing Markets

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