Affordability rather than leverage is the way homebuyers are looking at mortgage loans today. In an environment where interest rates are fluctuating, adjustable rate mortgages no longer appear as attractive as long as others are losing their homes due to the inability to meet higher mortgage costs along with higher energy costs. That could be the impact behind the slowing housing market.

What's interesting is that most of the cities that are showing increased foreclosures aren't the speculative coastal hot-spots of the last five years. Indianapolis, Atlanta, Dallas, Denver, Memphis, and San Antonio lead the list of cities with the most foreclosed properties, according to RealtyTrac, an online marketplace for foreclosure properties.

Further, most are considered to be relative real estate bargains with housing that is neutral or underpriced by national standards. Tracking median house prices quarterly are National City Corp, a financial holding company, and Global Insight, a financial information provider which found that in the first quarter of 2006, Atlanta was overpriced by 1 percent, while Dallas was underpriced by 19 percent. Denver was deemed overpriced by 6 percent while Memphis was underpriced by 10 percent. San Antonio was underpriced by 11 percent.

That suggests the problem may be more complex than the high home prices and adjustable rate mortgages blamed by the popular press for the slowing housing market and increase in foreclosures. Dallas, for example, has been below the national median for home appreciation for well over 15 years.

Mortgage data differs, but the numbers are ominous. Fannie Mae says that nearly one-third of mortgage debt is set at an adjustable rate. Adjustable rate mortgages are about 25 percent of all outstanding U.S. mortgage loans, says Economy.com, with about $400 billion in loans to reset to higher fixed rates this year, and another $2 trillion in 2007, reports Chuck Jaffe, of CBS Marketwatch. Further, notes Jaffe, the prime rate two years ago was about 4 percent and it's nearly doubled, which means payments on some ARMs will double, too. That could increase defaults by as much as 10 percent.

What's troubling is that foreclosure process begins months ahead of their final disposition, when homeowners are at least three months behind on their payments. RealtyTrac says its foreclosure listings have grown by as much as 39 percent in the last year, with houses going for as little as 70 percent of their current market value, writes Linda Stern for Newsweek.

Foreclosures will get worse before they get better, and will add more pressure to the softening housing market.

But some silver linings in the clouds have appeared, which could prevent housing from losing more value on a national scale.

Perhaps seeing the "underwriting" on the wall, the Federal Reserve paused in raising short term interest rates holding at 5.25 percent. Long-term mortgage rates follow, and should remain well below the psychological benchmark of 7 percent. This could reignite the housing market for those who have been sitting on the sidelines waiting for buying conditions to improve, as well as allow many borrowers whose adjustable rates are about to reset to refinance at a lower fixed rate.

Next, the building industry has curtailed production, which should lower inventories (absorption) over time. And the recent buyer's market, nationally speaking, has prevented many new borrowers from getting into the same fix as some of their neighbors. This has put pressure on rents as buyers have dropped out of the market, but as rents continue to rise, they may well jump back in, but to more affordable homes.

Published: August 11, 2006

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Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.