This common real estate ‘rule’ doesn’t really work anymore

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One longstanding guideline for property investors that has been the subject of countless articles is “the 1 percent rule in real estate.” It’s a quick and easy screening tool that can eliminate properties that may not offer good cash flow.

Sounds great, right? The problem is that in the current environment, with house prices climbing and interest rates at just about 4 percent of investment loans, the 1 percent rule would steer investors away from many properties in strong markets that are worth a close look.

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Let’s look at the 1 percent rule in real estate and see how investors have typically used it.

What is the 1 percent rule in real estate?

The 1 percent rule is a formula that says the monthly rental should equal at least 1 percent of the total cost of an investment property to return a positive cash flow.

If an investor is looking at a home with a purchase price of $150,000, therefore, she should plan to charge at least $1,500 rent:  $150,000 x .01 = $1,500

 

So, if there are renters currently in the investment property who are currently paying $1,500 or more, the property passes the test. If it’s currently vacant, and the going rent for a similar property in this market is $1,500, it also passes.

If renters are currently paying just $1,250, obviously, it doesn’t pass the test, so the investor might choose to look elsewhere, or make an offer of $125,000 or less. If the renters are currently paying $2,000, it passes with flying colors.

It’s important to remember that the 1 percent rule in real estate is just a guideline. There are many factors that weigh into an investor’s decision about whether a property is a good investment. Among them are the quality of the neighborhood, the quality of the home, vacancy rates and possible rent increases.

It’s also important to remember that many costs aren’t included in the calculation of the 1 percent rule. Expenses like maintenancetaxesinsurance and operating costs don’t enter into the equation. Some properties might meet the 1 percent rule but have huge, deferred maintenance costs, making them a less-than-solid investment.

Why the 1 percent rule in real estate is lacking in a booming market

While the 1 percent rule may have served well as a screening tool in the past, it’s not helpful in the current moment of home values soaring at unprecedented rates and interest rates still near the lowest in history.

“There are legacy screening metrics that worked very well 20 years ago,” says Thomas Stepp, Mynd Management’s director of investment services. “This rule helped the investor to know that rent on a property would cover expenses and let them put some money aside. In a higher interest rate environment, the 1 percent rule makes sense. But when interest rates are lower, and you see price and rent appreciation outpacing inflation, finding quality within that rule is highly unlikely.”

Properties that would cost an investor only $200,000 but would command $2,000 in rent “just don’t exist,” says Stepp. “The market isn’t trading that way anymore.”

As an example, the median home price for a single-family home in Austin in 2019 was $335,095. For that price, an investor would have to charge about $3,350 in rent to meet the 1 percent rule. But the median rent at that moment was about $1,550, so the investor following the 1 percent rule would have looked elsewhere.

Median home sales prices in the US

When rents are low, but appreciation is high

But that would lead to regrets. The median home price in the Texas capital, as of September 2021, was a whopping $536,000, so that hypothetical investor would have missed out on a 60 percent appreciation.

Even factoring in two years in which the investor accepted the median $1,150 in rent rather than the $3,350 required to pass the test, that’s a loss of $52,800, against a home appreciation of $200,905.

“People are paying a premium for future value in markets like Charlotte or Atlanta,” says Stepp. “They know that the rents are going to rise faster. The balance between costs out and cash flow in may not be ideal at time of acquisition, but within five or 10 years, they know the numbers will be more like what they’re looking for.”

Conversely, a novice investor applying dated metrics would end up investing in risky investment properties in unfavorable markets.

Stepp compares real estate’s 1 percent rule on real estate investing with guidance on stocks from a bygone era.

Benjamin Graham, the economist who mentored Warren Buffett, is known as the father of value investing. His books Security Analysis (co-written with David Dodd in 1934) and The Intelligent Investor (1949) were profoundly influential. Buffett called the latter “the best book about investing ever written.”

“His book served as the Bible for investors for a long time,” says Stepp, “but if you tried to apply those principles today, you’d never buy anything, because the stock market today looks to the future.”

Similarly, smart real estate investors may now look at an area where rents are modest but where population and employment are forecast to grow, which will drive demand for housing, and see a promising investment.

Stepp acknowledges that in the future — perhaps an environment with higher interest rates — the 1 percent rule may be useful once more. So, while it may be a good moment to put the 1 percent rule on the shelf, an investor might at some point want to take it down and dust it off.

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This article
originally appeared on 
Mynd.co and was
syndicated by
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Foreclosure rates for all 50 states

Foreclosure rates for all 50 states

The number of US properties with foreclosure filings in May was 10,821, according to ATTOM Data Solutions. That’s up more than 23% from May last year, when foreclosures remained exceedingly low due to the COVID-19 foreclosure moratorium for federally guaranteed mortgages under the CARES Act. (Note: President Joe Biden’s executive order to extend the foreclosure moratorium, as well as the mortgage payment forbearance enrollment window, ended on June 30, 2021.)

That said, May foreclosure filings were down roughly 8% from April, a substantive change compared to the negligible decline of 0.005% between April and March. Read on for the foreclosure rates in May 2021 — plus the five counties with the highest rates within those states.

As just noted, foreclosures are on the rise compared to last year but down compared to April. Read on for May foreclosure rates for all 50 states, plus the District of Columbia, beginning with the state that had the lowest rate of foreclosure filings per housing units.

Related: Can you lose your house with a reverse mortgage?

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Ranking in population just above the country’s two least populated states – Vermont and Wyoming – Washington, D.C. had six foreclosures in May. With a total of 315,176 housing units, the District’s foreclosure rate was one in every 52,529 households, putting it in between Idaho (No. 47) and North Dakota (No. 46) for foreclosures.

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The fifth least populated state ranks in the 50th spot with just two homes going into foreclosure in May. With 388,569 total housing units, the state’s foreclosure rate was one in every 194,285 households. Only two counties in the state had foreclosures. The counties with the most foreclosures per housing unit were (from highest to lowest): Pennington followed by Minnehaha.

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Of Vermont’s 334,999 housing units, three homes went into foreclosure in May. The second least populated state’s foreclosure rate is one in every 111,666 households. Only three counties in the state had foreclosures. The counties with the most foreclosures per housing unit were (from highest to lowest): Caledonia, Rutland and Chittenden.

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The 38th most populated state, West Virginia has 892,182 homes, of which eight went into foreclosure in May. That means the foreclosure rate was one in every 111,523 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Boone, Monongalia, Putnam, Marion and Kanawha.

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North Dakota’s foreclosure rate is one in every 93,266 homes. That puts the fourth least populated state – with a total of 373,063 housing units and four homes in foreclosure — in 47th place. Only two counties in the state had foreclosures. The counties with the most foreclosures per housing unit were (from highest to lowest): Ward followed by Cass.

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The 39th most populated state had 16 homes go into foreclosure in May. With 723,594 total housing units, the state’s foreclosure rate was one in every 45,225 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Lemhi, Gooding, Nez Perce, Kootenai and Canyon.

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In Montana, the 44th most populated state, there were 12 foreclosures out of 510,180 housing units. That puts the foreclosure rate for the Treasure State at one in every 42,515 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Big Horn, Stillwater, Silver Bow, Park and Lincoln.

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Ranking 35th for most populated, Kansas has 1,273,297 homes. A total of 33 went into foreclosure in May, making the state’s foreclosure rate one in every 38,585 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Osborne, Ottawa, Geary, Pawnee and Greenwood.

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The 21st most populated state ranked 43rd for foreclosures in May. Of its 2,386,475 housing units, 62 went into foreclosure, making for a foreclosure rate of one in every 38,492 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Logan, Rio Grande, Delta, Fremont and Adams.

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The 27th most populated state was 42nd for foreclosures. Of its 1,768,901 homes, 55 went into foreclosure, making for a foreclosure rate of one in every 32,162 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Harney, Wasco, Baker, Josephine and Jefferson.

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With 102 of its 2,963,486 homes going into foreclosure, Tennessee’s foreclosure rate in May was one in every 29,054 households. In the 16th most populated state, the counties with the most foreclosures per housing unit were (from highest to lowest): Wayne, Marion, Weakley, Carter and McMinn.

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Ranked 13th for most populated state, Washington came in at 40th place. It has 3,106,528 housing units, of which 107 went into foreclosure, making the state’s foreclosure rate one in every 29,033 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Lewis, Skamania, Clallam, Kitsap and Whatcom.

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Ranking 10th for population, Michigan took the 39th spot in May with a foreclosure rate of one in every 28,026 homes. With a total 4,596,198 housing units, the state had 164 foreclosure filings. The counties with the most foreclosures per housing unit were (from highest to lowest): Jackson, Cass, Monroe, Ingham and Montcalm.

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The 41st most populated state was 38th for foreclosures. Of 634,726 homes, 23 went into foreclosure, making for a foreclosure rate of one in every 27,597 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Belknap, Carroll, Cheshire, Coos and Grafton.

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The 12th most populated state had 134 homes go into foreclosure in May. With 3,514,032 total housing units, the state’s foreclosure rate was one in every 26,224 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Craig, Covington City, Galax City, King George and King and Queen.

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Ranked 22nd for most populated state, Minnesota came in at 36th. It has 2,438,203 housing units, of which 95 went into foreclosure in May, making the state’s foreclosure rate one in every 25,665 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Isanti, Wadena, Benton, Houston and Crow Wing.

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In Mississippi, the 33rd most populated state, there were 54 foreclosures out of 1,322,808 housing units. That put its May foreclosure rate at one in every 24,496 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Winston, Quitman, Chickasaw, Marshall and Holmes.

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Ranked 32nd for most populated state, Arkansas came in 34th place for foreclosures. It has 1,370,281 housing units, of which 57 went into foreclosure, making the state’s May foreclosure rate one in every 24,040 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Howard, Cleveland, Lonoke, Garland and Scott.

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Of Utah’s 1,087,112 housing units, 50 homes went into foreclosure in May. The 31st most populated state’s foreclosure rate was one in every 21,742 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Juab, Millard, Sevier, Carbon and Kane.

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In Arizona, the 14th most populated state, there were 142 foreclosures out of 3,003,286 housing units. That put the May foreclosure rate at one in every 21,150 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Mohave, Cochise, Yavapai, Santa Cruz and Pima.

Sean Pavone / iStock

The 40th most populated state was 31st for foreclosures. Of 542,674 homes, 26 went into foreclosure, making for a foreclosure rate of one in every 20,872 households. Only three counties in the state had foreclosures (from highest to lowest): Honolulu, Hawaii and Maui.

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The eighth least populated state stayed steady with 25 homes going into foreclosure in May compared to 26 in April. With 468,335 total housing units, the foreclosure rate for the Ocean State was one in every 18,733 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Providence, Bristol, Washington, Kent and Newport.

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Pennsylvania ranks fifth for most populated and has 5,693,314 homes. A total of 306 housing units went into foreclosure in May, making the state’s foreclosure rate one in every 18,606 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Lawrence, Columbia, Cambria, Delaware and Perry.

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With a total 1,983,949 housing units, Kentucky saw 107 homes go into foreclosure in May. That put the foreclosure rate for the 26th most populated state at one in every 18,542 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Grayson, Lee, Laurel, Hardin and Washington.

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With 454 out of a total 8,322,722 housing units in foreclosure, New York had a foreclosure rate of one in every 18,332 households, putting the fourth most populated state in the 27th spot. The counties with the most foreclosures per housing unit were (from highest to lowest): Putnam, Franklin, Orange, Rensselaer and Broome.

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The total number of May foreclosures was 613. With a foreclosure rate of one in every 17,842 households, this put the second most populated state with 10,937,026 housing units in the 26th spot. The counties with the most foreclosures per housing unit were (from highest to lowest): Atascosa, Liberty, Carson, Hutchinson and Houston.

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The 15th most populated state, Massachusetts ranked in the middle at the 25th spot for May. Of its 2,897,259 housing units, 165 went into foreclosure, making for a foreclosure rate of one in every 17,559 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Berkshire, Hampden, Plymouth, Nantucket and Worcester.

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The ninth most populated state, North Carolina has 4,627,089 homes, of which 265 went into foreclosure in May. That means its foreclosure rate was one in every 17,461 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Jones, Pitt, Onslow, Scotland and Nash.

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Ranked 19th for most populated state, Maryland came in at 23rd. It has 2,448,422 housing units, of which 144 went into foreclosure, which made the state’s May foreclosure rate one in every 17,003 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Charles, Baltimore City, Talbot, Prince George’s County and Queen Anne’s County.

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Ranked as the 20th most populated state, Wisconsin’s 161 foreclosures out of 2,694,527 total housing units put it in 22nd place in May. The state’s foreclosure rate was one in every 16,736 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Clark, Shawano, Marinette, Washburn and Richland.

FierceAbin

Alaska’s May foreclosure rate was one in every 14,984 homes. That put the third least populated state, which saw 21 homes go into foreclosure out of a total of 314,670 housing units, in 21st place. The counties with the most foreclosures per housing unit were (from highest to lowest): Sitka, Matanuska-Susitna, Anchorage, Kenai Peninsula and Fairbanks North Star.

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The 18th most populated state, Missouri was 20th for foreclosures. Of its 2,790,397 homes, 193 went into foreclosure, making for a foreclosure rate of one in every 14,458 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Gasconade, Randolph, Audrain, Mississippi and Madison.

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Ranked 25th for population, Louisiana had 145 homes out of a total 2,059,918 go into foreclosure in May. That means one in every 14,206 households went into foreclosure. The counties with the most foreclosures per housing unit were (from highest to lowest): Plaquemines, Lafourche, Tangipahoa, Iberia and Vermilion.

Ranked the least populated, Wyoming came in at 18th for foreclosures. With 276,846 housing units and 21 homes in foreclosure, the state’s foreclosure rate was one in every 13,183 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Weston, Crook, Sweetwater, Campbell and Goshen.

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The 36th most populated state was 17th for foreclosures. Of its 937,920 homes, 79 went into foreclosure, making for a foreclosure rate of one in every 11,872 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Sandoval, Lincoln, Otero, Bernalillo and Valencia.

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Ranked 24th for most populated, Alabama came in at 16th in May. Of its 2,255,026 homes, 193 went into foreclosure (nearly the same as April’s 194), making for a foreclosure rate of one in every 11,684 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Mobile, Bullock, Coffee, Montgomery and Sumter.

Sean Pavone

Ranking 37th for population, Nebraska came in 15th with a foreclosure rate of one in every 11,317 homes. With a total 837,476 housing units, the state had 74 foreclosure filings. The counties with the most foreclosures per housing unit were (from highest to lowest): Box Butte, Burt, Douglas, Dawes and Keith.

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The eighth most populated state, Georgia was 14th for most foreclosures. Of its 4,283,477 homes, 380 were foreclosed on. That put the state’s foreclosure rate at one in every 11,272 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Candler, Screven, Meriwether, Crawford and Butts.

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With 136 of its 1,516,629 homes going into foreclosure, Connecticut’s foreclosure rate in May was one in every 11,152 households. In the 29th most populated state, the counties that had the most foreclosures per housing unit were (from highest to lowest): Hartford, Windham, New Haven, Litchfield and Middlesex.

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With 1,397,087 homes and the same number of foreclosures for April and May (134), the 30th most populated state’s foreclosure rate stayed flat at one in every 10,426 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Wapello, Greene, Madison, Taylor and Wayne.

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Ranked as the ninth least populated state, Maine saw 74 foreclosures in May. With a total of 742,788 housing units, the state had a foreclosure rate of one in every 10,038 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Oxford, Washington, Penobscot, Somerset and Androscoggin.

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With housing units totaling 1,731,632, the 28th most populated state saw 174 homes go into foreclosure at a foreclosure rate of one in every 9,952 homes. The counties with the most foreclosures per housing unit were (from highest to lowest): Latimer, Murray, Ottawa, Dewey and Pawnee.

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Ranked number one for most populated state, California took the ninth spot for foreclosures in May. Of its 14,175,976 housing units, 1,529 went into foreclosure, making California’s foreclosure rate one in every 9,271 households. The counties with the most foreclosures per housing unit were (from highest to lowest): Lake, Trinity, Kern, Madera and Sonoma.

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With one in every 8,728 homes going into foreclosure, South Carolina took eighth place. Ranked 23rd for population, South Carolina has 2,286,826 housing units and saw 262 foreclosure filings in May. The counties with the most foreclosures per housing unit were (from highest to lowest): Barnwell, Colleton, Dillon, Allendale and Darlington.

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The 17th largest state by population, Indiana ranked seventh with a foreclosure rate of one in every 8,319 homes. Of its 2,886,548 homes, 347 homes were foreclosed on. The counties with the most foreclosures per housing unit were (from highest to lowest): Randolph, Clinton, Wayne, Howard and Tipton.

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Ranked the seventh most populated, Ohio was sixth with a foreclosure rate of one in every 7,719 homes. With a total 5,202,304 housing units in the state, the state had a total of 674 filings. The counties with the most foreclosures per housing unit were (from highest to lowest): Scioto, Cuyahoga, Erie, Fulton and Lawrence.

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With a foreclosure rate of one in every 7,679 homes, New Jersey took the fifth spot. The 11th most populated state has 3,616,614 housing units, 471 of which went into foreclosure in May. The counties with the most foreclosures per housing unit were (from highest to lowest): Salem, Cumberland, Camden, Ocean and Warren.

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With the third largest population in the country, Florida’s foreclosure rate of one in every 7,207 homes put the Sunshine State into the fourth spot. Of its total 9,448,159 housing units, 1,311 went into foreclosure in May. The counties with the most foreclosures per housing unit were (from highest to lowest): Gilchrist, Union, Gadsden, Levy and Hernando.

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The sixth most populated state, Illinois ranked number three. Of its 5,360,315 homes, 908 went into foreclosure, making the state’s foreclosure rate one in every 5,903. The counties with the most foreclosures per housing unit were (from highest to lowest): Tazewell, Champaign, Mason, Lee and Pope.

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The sixth least populated state in the country, Delaware slid from first for foreclosures in April to second in May. With a foreclosure rate of one in every 5,854 homes and a total 433,195 housing units, Delaware saw a total 74 foreclosure filings, down from 76 in April. With only three counties in the state, the counties with the most foreclosures per housing unit were (from highest to lowest): New Castle, Kent and Sussex.

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Ranking 34th in population, Nevada took the top spot with the highest foreclosure rate of one in every 5,535 homes. With a total 1,250,893 housing units, the state had 226 foreclosure filings in May. The counties with the most foreclosures per housing unit were (from highest to lowest): Lincoln, Clark, Nye, Carson City and Lyon.

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Of all 50 states, California had the highest number of foreclosures (1,529) and South Dakota had the lowest (2). The South region had the largest presence among the ten states that ranked the highest for foreclosure rates. 

These states were (from highest to lowest): Delaware, Florida, South Carolina and Oklahoma. The West region had the largest presence among the ten states that ranked the lowest for foreclosure rates. 

These states were (from highest to lowest): Oregon, Colorado, Montana and Idaho.

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