“I’ve failed over and over and over again in my life and that is why I succeed.”
– Michael Jordan: is a former professional basketball player
SHADOW INVENTORY: LUCKILY, HERE IT COMES
One of the biggest challenges to the housing industry throughout the rest of the year will be the increase in discounted properties coming unto the market. There is a glut of foreclosures that have been delayed by the court systems in many states while paperwork was corrected. The banks are rectifying their paperwork and processes. Now, more and more states are clearing the way for the banks to resume repossessing these properties.
As these properties find their way to the market, the prices of non-distressed properties in the region will be adversely impacted for two reasons.
There are a finite number of homebuyers in any market. A portion of these buyers will purchase the distressed properties new to the market because they can get them at discounted prices.
As these distressed properties sell, they will become comparable sales used by appraisers to establish value on all homes (both distressed and non-distressed) sold in the future. Since these properties are sold at a discount, they will have a negative impact on other valuations.
A Perfect Example: New Jersey
As an example, let’s look at New Jersey. According to the National Association of Realtors, New Jersey’s percentage of distressed properties to overall home sales (20%) has been less than that of many other states (30-70%). However, the reason for this is the New Jersey court system has prevented banks from foreclosing on many homes for over a year. During that time, the months’ supply of ‘shadow inventory’ of distressed properties waiting to come to market in New Jersey has climbed to over 50 months, the largest number in the country.
Last week, New Jersey Superior Court Judge Mary Jacobson cleared the way for the top-four banks to resume foreclosures in the state. The impact this will have on the number of distressed properties can be clearly seen in these statistics reported by Housing Wire:
In October, New Jersey had the 24th highest foreclosure rate in the country, with servicers filing roughly 5,200 foreclosures that month, according to RealtyTrac. By July, the Garden State’s foreclosure rate dropped to 42nd with just 1,112 filings last month.
New Jersey serves as an example for many states that will see a dramatic increase in the number of distressed properties coming to the market in the fourth quarter of 2011 and the first quarter of 2012.
The Good News
The housing market will not recover until we clear this shadow inventory. The speed at which these properties come to market and are sold will determine the speed at which the housing market recovers. The latest S&P Shadow Inventory Report shows that the months of shadow inventory already is decreasing. The report explains that the number of families falling 90 days behind on their mortgages has decreased dramatically. That means that as we clear these distressed properties there will be much less of a backfill. The end to the housing crisis is finally within sight.
If you are thinking of selling your home in the next twelve months, selling sooner rather than later will probably get you the higher price. However, in 18-24 months, the market will return to historic appreciation norms.
FORECLOSURES SELL FOR UP TO 40% LESS
Foreclosures made up about one-third of all home sales during the spring quarter (April to June), and sales were about six times the percentage of foreclosures in a healthy housing market, RealtyTrac Inc. reports.
Foreclosure sales likely would have been much higher too if so many banks hadn’t slowed their foreclosure processes while state and federal officials continued to investigate possible faulty practices. Foreclosure sales — which include homes purchased after they receive a notice of default or that were repossessed by lenders — peaked two years ago at 37.4 percent of sales, compared to 31 percent in the April to June quarter.
During the second quarter, 265,087 homes sold were in some stage of foreclosure or owned by banks — but that’s down 11 percent from the same period a year ago, RealtyTrac reports.
The state with the highest number of foreclosure sales was Nevada, where foreclosure sales accounted for 65 percent of all sales. Arizona followed with foreclosure sales accounting for 57 percent of all home sales for the quarter.
Foreclosures Continue to Weigh on Home Prices
Foreclosed homes continue to sell for less than other homes. During the spring, bank-owned homes sold for 40 percent less than the average price of other homes. Sales of homes in the foreclosure process or short sales sold for 21 percent less than the average home sold.
The average sales price of a foreclosed property was $164,217, a drop of less than 1 percent from the January-March quarter and a nearly 5 percent drop from the April-June quarter in 2010.
ECONOMISTS SAY RECESSION IS NOT LIKELY
Many home buyers have been sitting on the sidelines due to economic fears and concerns that the U.S. could be heading for a double-dip recession. But a new poll from the Associated Press shows that most economists say a recession is not likely within the next 12 months, yet the economy will continue to be weak into 2012.
The 43 private, corporate, and academic economists surveyed this month by the Associated Press reported the likelihood of a recession within the next 12 months is 26 percent. They cited high unemployment and weak consumer spending as two leading culprits that will hold back the economy into 2012.
In June, American households trimmed their spending for the first time in nearly two years, and with consumer spending fueling about 70 percent of the economy, it poses a “major risk” to the economy, the economists reported.
The economists surveyed said they are optimistic that economic growth, job creation, consumer spending, and home prices will all rise over the next year — but the gains are expected to be so slight that many won’t notice, the Associated Press reported.
“We need to see the housing market stabilize,” says Sean Snaith, director of the University of Central Florida’s Institute for Economic Competitiveness. “We need to see some job creation. Until then, consumers are trying to put nest eggs that turned into Humpty Dumpty back together again … It’s just going to take time.”
Meanwhile, the markets will be anxiously awaiting Federal Reserve Chairman Ben Bernanke’s speech on Friday at a conference for the Federal Reserve Bank of Kansas City to see if he unveils any new steps to help revive the economy.
U.S. MAY BACK REFINANCE PLAN FOR MORTGAGES
The White House is considering a housing proposal that would allow millions of home owners with government-backed mortgages to refinance into lower interest rates, The New York Times reports.
“A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere,” an article in The New York Times notes.
Many home owners have been unable to take advantage of today’s low interest rates — which are averaging around 4 percent — because they don’t qualify for refinancing at the best rates since they owe more on their home than it is currently worth or because of poor credit. The refinancing plan is still under discussion of how it would work, The New York Times said.
“This is the best stimulus out there because it doesn’t increase the deficit, it accomplishes monetary policy, and it reduces defaults in housing,” Christopher J. Mayer, an economist at the Columbia Business School, told The New York Times.
The White House is also considering other options to try to stimulate the housing market or save home owners from foreclosure. Such options include more changes to its refinancing programs so more home owners can participate or a home rental program to that would rent out foreclosures instead of putting them for sale so foreclosures would stop weighing down overall home prices.