Debt Burden

Foreclosures continue to rise; lack of credit lines hamper housing market

A huge driver in the Knox County economy has always been the housing industry. Compare the housing stock in Knox County from 25 years ago to the McMansions that dot West Knox County today and imagine the total amount of money spent on building supplies, builder profits, furniture sales, appliance sales, real estate commissions, insurance sold, and the myriad other expenses involved to support development. Paving contractors, engineers, landscapers, roofers—well, you get the picture.

So when the housing industry stalls, the local economy loses a driving force. We may live on government checks, but a large percentage of us live on sectors providing people getting those government checks with a place to live.

Not only is it hard to build houses, buy houses, or sell them, it is also becoming harder and harder for some people to hang onto the houses they have.

Last year's foreclosures in Knox County were 56 percent higher than the "normal" year of 2006. Since 2006, the foreclosure rate has been marching ever upward.

The monthly two-digit foreclosures of 2006 started hitting three digits in 2007. In 2008 and 2009, it hit three digits every month. There were almost as many foreclosures in the first six months of 2010 as in all of 2006. The trend line continues upward and if the present trend continues to the end of the year, foreclosures will have increased 68 percent above normal. The usual number of foreclosures per month in 2006 was 65 to 80. In 2010 it's 130 to 159.

There were 957 foreclosures in 2006, and the number at the end of this year will likely be over 1,600.

Low interest rates have allowed many people to refinance their mortgages and save some money, but the prospects for builders to construct new houses and sell them continue to be grim. The disruption in the credit market is stalling recovery.

Houses that do sell these days are in the $170,000 range. It's a price that allows the builder a profit and a mortgage the owner can live with.

In normal times, a builder needed about $17,000 in cash to build the house, to get land, engineering, and approvals done. Then with a bank line of credit, the house was built, sold, the bank paid, and the builder had his profit. Nowadays, a builder may need close to $100,000 cash for upfront construction costs to get a $170,000 house to market. Then wait for it to sell. Multiply these numbers by the number of units in a subdivision and you get some idea of the problem. It is beyond the capability of many "normal" builders and developers. Without the credit lines to rely on, most builders can't get a project going.

Selling a new house is also a problem when you consider how many existing houses are on the market competing for buyers. Mortgage rates are low, yes. But you have to be able to get the loan. Mortgage bankers find these days that loans that used to take three days to get approval now take weeks.

In past years, local builders would slow down, hunker down, and ride out a slowdown in housing sales. They could do this because the interest rate on their credit lines might go up, but it was a cost of doing business. But in this recession, builders found that when they hunkered down to operate on their credit lines until things improved, the banks said no more money. Even to those builders who had pre-approved lines of credit. From the bank perspective, they don't think the builder can sell the house they are being asked to finance, and they fear getting stuck with it. (See foreclosure rate figures above.)

Experts that I talk to expect that interest rates will remain low, but are really immaterial to a recovery. It doesn't matter if the interest rate is low if you can't get a loan. Builders might build if they could pay a higher rate and get a loan, but it isn't going to happen. A government that owes trillions will not allow interest rates to go up—they can't afford it.