While we saw a dip in foreclosure activity nationwide in March and April, defaults are still on the increase in most large cities around the country. Even with the decrease, defaults are way up 2006 over 2005. Across the U.S. over 323,000 properties went into foreclosure in the first quarter of this year.

There are multiple reasons for this surge and, in some metros, there are converging factors that will drive households into financial distress and push defaults off their historic baselines. As we’ve said over the years, foreclosures never completely go away. Spouses die or become disabled, jobs are lost unexpectedly, lives are wasted from drugs and alcohol abuses and marriages fail – all causes of foreclosure.

But, what we’re seeing now is the result of a sort of double sea change in the U.S. economy. We had a short, but sharp recession in 2001, triggered in part by the collapse of the dot com sector in 2000.

Then people fled the stock market, turned to real estate and the party was on. We have seen a home price run up over the last five plus years that has no historical precedent. Speculators began appearing in hot markets like Nevada, California, Arizona and Florida, with over 25% of new home sales going to investors that had no intention of ever occupying the homes they bought. That was sea change # 1.

Now we have sea change #2. The housing market began a slow cycle over the top toward the end of 2005 and interest rates began moving up. After a couple of false starts in the second half of 2005, rates began an inexorable climb from sub-normal levels back to normal, driven in part by steady increases in the fed funds rate intended to dampen inflation.

Meanwhile as the price appreciation curve in many markets (most notably in the overheated coastal markets) began to flatten out, prices still remained at record levels. Affordability was in the basement. Sales volume began to fall.

So now, we have the converging factors of high prices, low affordability, rising cost of money, exotic mortgages with a high risk of payment shock, a shift to a buyer’s market, and the beginning of modest price declines. The speculators began to run at the beginning of the year. Some who overpaid for their properties have been trapped in slowing markets and are walking away from over-leveraged properties they can’t sell. Too bad they didn’t bank their profit when they bought the house, instead of wait for future appreciation (which hasn’t come).

So, where are we now?

Nationwide foreclosures are up 38% year over year from the first quarter of 2005. While this is becoming a national trend it still is spotty. Most foreclosure activity is in medium and large sized cities. These communities are impacted by the economic factors named above and also have higher localized rates of unemployment.

In Indianapolis IN, for example 10,120 new foreclosures were reported in Q1 of 2006. What’s most disturbing is that means one of every 69 households is in foreclosure. Atlanta is right in there with 20,355 new foreclosures. It’s a larger metro, but still, one in every 70 households is in foreclosure.

In Chicago, foreclosures have been rising for three straight months, jumping 57% in April in both Cook county and the surrounding peripheral counties. Last year an economist at the Federal Reserve Bank of Chicago predicted that the Windy City metro area would morph out of manufacturing into a service economy. The trouble is that a factory worker can’t morph into a health care specialist, and job losses have been severe.

Los Angeles CA, along with Riverside and Orange counties reported 15,374 new foreclosures in Q1 of 2006. That’s an impressive number, but one must realize that the population of that region is huge. The housing market there remains strong, and the foreclosure rate there actually declined a little from the first of the year, but again, is way up from the same period a year earlier.

The Bottom Line?

The foreclosure deals are out there, but you need to know where to find them. The only way to check that out is to review your foreclosure lists with care, and contact owners in distress directly, to work out a win-win deal for both of you.

But don’t disregard those deals with little or no equity. These are the properties that will wind up as REO’s. Make a note of who that foreclosing lender is and look in your Six Steps to Mastering Foreclosures REO Directory to see who to contact once the foreclosure auction has past.

Right now, the lenders are reluctant to deal at a discount, but we expect that to change as the high-risk loans they put out come home to roost. But for now, get busy! There are thousands of homeowners out there that need our help and have lots of equity to protect (rather than let them loose it all at the foreclosure auction).