Foreclosures at record highs for 2006

Nationwide foreclosure activity in October 2006 is up 42% from the same period last year according to foreclosure tracking service RealtyTrac.

For the 8th consecutive month Colorado has registered the nation’s highest foreclosure rate – 1 foreclosure for every 327 households.

California “wins” with more than 16000 new foreclosures in October 2006 (the most for any state), Florida was second with 11413 and Texas lies in 3rd place.

Why all the foreclosure activity? Two things… partly it’s due to prices coming down in areas like California & Florida. But, what about Texas, we haven’t had a boom and we’re not in a bust? Correct… the problem here is more likely to be related to massive selling of Adjustable Rate Mortgage(ARM) products over the last 5 or so years.

Many of these products are now maturing and kicking out into variable interest rate mode and the interest rate is, surprise surprise, higher than what they were paying when they first bought the home. This is adding additional pressure to already stretched monthly income and, frankly, people cannot cope and thus the foreclosure rate is what it is, even here in Texas.

What’s the lesson in all of this? Well, don’t stretch to buy the home you want – buy well within your means. That means you should leave space in your budget for savings as well!! So, take off 5% to 10% for savings (if you’re tithing, take off another 10%) and then work out what you can afford to buy based on what’s left.

Think twice about short-term ARM products – a five-year ARM is probably ok as most people tend to move within 7 years anyway but I would recommend a much longer fixed rate (10 to 15 years) even if the interest rate is a little higher. It’s just more secure in the long run.

by Lance Langenhoven