The real estate numbers are just not getting any better. If all of the rosy predictions are accurate, the real estate sales numbers should be showing improvement. Yet January’s pre-owned sales numbers decline 7.6%. That decline occurred even amidst the politicians trying to motivate would be homebuyers to buy homes through the extension of tax incentives.

Then we are still dealing with this ongoing foreclosure crisis. The Obama administration has taken heroic efforts to fix that problem through home modification programs. It was reported by the treasury that this program has modified only 66,000 troubled loans through the end of last year. That hardly puts a dent in the problem.

There are two aspects of the foreclosure situation that are worth considering. The first aspect is what is referred to as the shadow inventory.

The shadow inventory consists of all of the homes that are in foreclosure and have not yet hit the market. Currently, there are a little over 3 million homes that are for sale and on the market. It is estimated that there are 7 million homes in shadow inventory about to hit the market. That will triple the current level of inventory sitting on the market.

The bigger challenge is the continuation of the domino effect. More foreclosures create a larger inventory of homes which puts pressure on home prices which decreases values of home which can lead to more foreclosures. In addition, foreclosure creates more losses in the credit markets, which adds fuel to the credit crisis which affects the economy, the banking system, and employment. It is a vicious cycle.

At the heart of the foreclosure problem is the adjustable rate mortgage or ARMS. Once the ARM period is up, the rate changes and in most cases the payment goes up to the point where the homeowner cannot afford it. As a result, the home goes into foreclosure. Now that is an oversimplification look at the problem. However, it is not to far off. Last year was pretty quiet for adjustable rate mortgages. Look out for 2010! We will have the highest number of ARMs coming due since this crisis started. We don’t get a slow down in ARMs adjusting until roughly mid 2012. With unemployment this high, homeowners upside down in their homes, and the inability to refinance in many cases, how many of these ARMs will result in foreclosure?

This is just one aspect of the debt crisis that is going to take a while to resolve. Unfortunately, there are no good solutions when you are talking about a debt induced problem. Debt induced problems have to work themselves out over time until all of the bad debt has resolved itself.

Tags: adjustable rate mortgages, Bob Brooks, debt crisis, economy, Foreclosure, shadow inventory