There are indications that foreclosure sales are starting to pick up, but the sheer volume means it will be a long time before the housing market is back to normal.
New loan delinquencies are down, but a “bloated” pipeline of foreclosure properties continues to drag down prices and will depress the market for years to come, according to a new report.
As of March, foreclosure inventories were running at eight times historical norms, as servicers move to correct paperwork and revise their processes, according to an April performance report by LPS Applied Analytics.
At the same time, the sheer volume of delinquent properties has overwhelmed servicer capacity, leading to bottlenecks in processing.
“We’ve seen the problem progress from newly deteriorating loans to the foreclosure pipeline” of older real-estate-owned properties (REOs), says Herb Blecher, LPS senior vice president.
The numbers behind this backlog are staggering:
- Foreclosures and loans that are delinquent more than 90 days outnumber foreclosure sales 45 to one, according to LPS.
- Almost twice as many loans are more than 90 days delinquent versus those starting the foreclosure process.
- The average length of time that homes remain more than three months delinquent but are not taken back by the bank is about a year — 368 days.
- For 31% of loans in foreclosure proceedings, no payment has been made for more than two years.
- A total of 6.33 million loans are delinquent or in foreclosure, more than many analysts had predicted.
“Everything is moving in slow motion now,” says Leo Nordine, a Los Angeles-area real-estate agent who has sold thousands of foreclosures in recent years.
The good news in the report is that more loan modifications are being done; 23% of loans that were more than 90 days delinquent a year ago are deemed current today.
The beginning of movement?
Indeed, after months of stagnation, there are some signs that foreclosure sales are starting to pick up — good news for buyers, but not so great for traditional sellers.
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According to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, 48.6% of all March sales transactions were distressed properties, everything from short sales to REOs or bank-owned properties.
The huge number of foreclosures is affecting appraisals of traditional listings, Campbell says, as many appraisers are using the square footage of damaged or vacant bank-owned properties to value traditional listings nearby. Indeed, in some cases virtually no traditional comps are available to use in valuation.
The national median existing-home price for all housing types was $159,600 in March, according to the National Association of Realtors, down 5.9% from March 2010.
One glimmer of hope: The number of short sales boomed in March, and the number of damaged REOs fell. Short sales swelled from 17% of transactions in February to a record high 19.6% in March, keeping these properties from becoming “damaged goods.” A property is considered damaged if it is uninhabitable or not ready for move-in at purchase.
“The best way to prevent damage is a short sale,” says Thomas Popik, research director for Campbell Surveys. “This is the biggest unheralded success of the foreclosure market in the last 18 months.”
Just 12% of properties sold in March were damaged, compared with 14.9% in February, a statistic that could signal greater home valuations in many areas.
What about demand?
Of course, servicers will need more buyers to purchase these properties coming out of the foreclosure pipeline.
Finding them will be a challenge now, Popik says, given the difficulty of getting a mortgage loan as lenders have tightened up their underwriting, and caution on the part of consumers as they’ve watched the cost of everything from gasoline to food to Federal Housing Administration mortgage-insurance premiums rise.
One-third of all sales today, he says, are going to investors. And that traffic remained flat in March. Reported traffic from current homeowners and first-time buyers declined between February and March, according to Campbell Surveys.
This continued weakness in the market caused financial services firm Morgan Stanley to revise its estimates, predicting an additional 6% to 11% decline in home prices this year, according to reports. The NAR is more optimistic, projecting a 1.8% drop in the median price of U.S. existing homes, slightly steeper than the 1% it had predicted in March.
Those price drops wouldn’t surprise Nordine.
In some foreclosure-riddled areas of the country such as Lancaster, Calif., he says, prices have rolled back to mid-1980s levels.
“I don’t think prices are really going to go up for another 10 years,” Nordine says. The banks will just keep selling them off bit by bit, he says, to keep from flooding the market. “I don’t see a hint of a turnaround. There are just a lot of investors out there.”