3 Ways Foreclosures Are Holding Home Prices Hostage

First quarter foreclosure activity hit its lowest level since the fourth quarter of 2007, but foreclosures — and the threat of more foreclosed homes for sale — continue to hold home prices hostage.

The latest home price report from S&P/Case-Shiller shows that home prices decreased on a monthly basis in February for the sixth straight month. That six-month slide in home prices followed a five-month incline from May 2011 through August 2011 — continuing a roller coaster pattern that started back in April 2009.

In the months following April 2009 it may have appeared that home prices finally had hit bottom after a 33-month free-fall that began in late 2006. Starting in May 2009 there were five consecutive monthly increases in the Case-Shiller home price index.

Foreclosure Prevention Milestone

What happened around April 2009 that slowed the free-fall in home prices? The first national foreclosure prevention program from the Obama administration was unveiled, taking effect in March 2009. Called the Home Affordable Modification Program (HAMP), it was the first in a long series of foreclosure prevention programs, both at the national and state level.

These programs have, at best, had a modest impact on actually preventing foreclosures (for instance 43 percent of the approximately 2.4 million loans modified since 2008 have ended back up in default or foreclosure, according to the latest OCC Mortgage Metrics report). But they have certainly helped delay a bigger flood of foreclosures in the last three years.

Foreclosure Flood Averted, Large Reservoir Remains

While the flood of foreclosures was averted, a large reservoir of distressed properties continues to loom large over the housing market, preventing home prices from staging any long-term recovery that lasts more than six months.

Three ways foreclosures and potential foreclosed homes continue to hold home prices hostage:

• Excess unsold REO inventory: although the pace of new foreclosures has slowed, there is still a substantial excess supply of bank-owned inventory that needs to be absorbed by the market. Nationwide, RealtyTrac estimates a 16-month supply at the current sales pace.

• Logjam of seriously delinquent homes not yet in foreclosure: According to the most recent National Delinquency Survey from the Mortgage Bankers Association, 3.35 percent of outstanding mortgages nationwide are seriously delinquent, meaning the homeowner is more than 90 days late on paying the mortgage. While this has been trending downward over the past year, it still represents more than 1.4 million homeowners.

• Large pools of underwater homeowners: RealtyTrac data shows that 12.5 million homeowners nationwide, representing 28 percent of all outstanding mortgage, are seriously underwater, meaning the amount of the loan is at least 25 percent higher than the estimated market value of the property securing that loan. These underwater homes are at higher risk for so-called strategic default and foreclosure.

Until these pools of distress are dealt with, either through foreclosure, short sale or long-lasting loan modifications, home prices will continue to bump along the bottom.

By Daren Blomquist, RealtyTrac Vice President

Rob Alley, Realtor/Owner of Virginia Real Estate Solutions at RE/MAX Assured Properties
434-220-7133
roballeyrealtor@gmail.com
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