Not in Our House!

Story Highlights:

• US home foreclosures for January increased 57% from a year earlier.
• Despite the fuss, estimates indicate only a little over 0.5% of homes will face foreclosure.
• Though no one wants to see anyone lose their home, the data doesn't justify today's widespread economic fears.

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Home ownership is good. Losing your home is bad. We don't think anyone will argue. RealtyTrac, www.realtytrac.com, reported a 57% increase from last January in homes facing foreclosure. Along with falling prices and declining sales, this seems to support the fear the US economy is in a tailspin from which it will not recover—at least not anytime soon. Many Americans view homeownership as synonymous to the American Dream. So it's not surprising such news sparks high emotions and dire predictions.

But successful investors divorce themselves from emotion. Headlines may terrify, but are they justified in the proper context? So let's coolly examine what seems like some pretty dire data. A 57% increase in foreclosures does seem huge—until you realize it's just a smidgeon over 1% of all outstanding mortgages. (That's mortgages, not homes.) Our research shows about 50% of all homes are mortgage-free. So, foreclosures impact around half a percent of all homes. While people losing homes is never fun, this is hardly the stuff of economic doom. Plus, foreclosure rates include default notices and auction sale notices as well as bank repossession notices. The number of actual bank repossessions in January, according to RealtyTrac's report, was roughly 45,000 of the 233,000 houses receiving notices, so we shouldn't assume all homes receiving foreclosure notices will be lost.

It's also worth noting many areas suffering from higher foreclosure rates are coming off historically low foreclosure rates. With housing prices rising 147% over the last 10 years (according to the S&P Case/Shiller Index), some pullback in housing prices is not surprising.

Regions of the US experiencing the highest foreclosure rates are generally those with price changes far above the national average. As with most areas of the economy, price spikes can be followed by corrections. However, we shouldn't act so surprised—this is how markets work.

Lastly, there is no meaningful long-term relationship between home prices and stock prices. The next time you see scary housing headlines pointing to frightening figures, take a closer look to see if the fears are justifiable. Doing so can help you become a better investor.

Source: S&P Case/Shiller Index and the Office of Housing Enterprise Oversight (OFHEO)