Analysis: No Reduction in Foreclosed Homes Inventory

Price ReducedA new report by a housing analytics firm shows that foreclosure inventories in the U.S. are holding steady. This is bad news for homeowners, because it creates a supply-and-demand imbalance and puts downward pressure on home prices.

This is a trend that will likely continue well into 2012. Clearly, the high number of foreclosed homes is one of the biggest problems for our housing market right now.

Lender Processing Services, a company that provides data and analysis to the real estate industry, released the report yesterday. The report examines mortgage trends based on a database containing millions of loans.

In the data table below, you can see there is little change in the inventory of foreclosed homes. At the yearly level, the inventory has grown by 8.2%. But in the month-over-month category, there was virtually no change at all (0.1%).

foreclosure inventory, August 2011
* Non-current totals combine foreclosures and delinquencies as a percent of active loans in that state.

Foreclosed Homes are Killing the Market

Last week, mortgage rates fell to another record low. According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage was 4.09%. The average rate for a 5-year ARM loan was below 3%. Those are some astoundingly low rates. You might think this would create a surge in home-buying activity. But that hasn’t happened.

As we have seen for months now, interest rates alone are not enough to spur the housing market. As the inventory of foreclosed homes continues to soar, home prices will continue to suffer. This, along with unemployment and tougher lending standards, is one of the biggest problems in housing right now.

[See also: How Bank-Owned Homes are Killing the Housing Market]

Home prices won’t stabilize (and certainly won’t appreciate) until demand catches up with supply. Perhaps it’s more accurate to say that supply must fall to a level where they can be absorbed. The excess inventory of foreclosed homes is one factor that prevents this from happening. Currently, it is not possible for demand — i.e., home buyers — to rise to the occasion. We will not see any balance in the housing market until inventories fall considerably. And that is not likely in the foreseeable future.

This is part of the reason why economists have such a dim outlook about home prices. A recent MacroMarkets survey of 111 economists and real estate analysts has yielded some dismal predictions. The general consensus was that home prices nationally will only rise by about 1.1% between now and 2015.

That’s not to say there aren’t some anomalies here and there — local real estate markets that are already on solid footing. There are. But they are few and far between. For the most part, we are in for a long and flat bottom (once we find the bottom).

But perhaps we shouldn’t expect a turnaround anytime soon. Maybe we are being premature and overly optimistic. After all, history tells us we have further to go before we are out of the woods.

Realtor Group Presses to Reduce Inventories

The National Association of Realtors(R) is urging mortgage lenders to make loans to creditworthy borrowers, in an effort to reduce the inventory of homes on the market. The NAR is also pushing for more short sales and mortgage modifications, to stem the tide of foreclosed homes coming onto the market.

A short sale is when a lender allows a homeowner to sell the house for less than what they owe on the loan. The proceeds from the sale fall “short” of the money owed to the lender, hence the name. On the surface, it would seem strange for a lender to agree to this kind of sale. But it prevents them from going through a long and drawn-out foreclosure process, which could cost them more than what they might lose on the short sale. The lesser of two evils.

A mortgage modification is when the lender changes the terms of the borrower’s loan in some way. By restructuring the mortgage, the lender can make the monthly payments more affordable for the homeowner. This is typically done by lowering the interest rate or extending the term of loan (as opposed to reducing the principal). Here again, the goal is to prevent foreclosure. Modification programs have helped limit the number of foreclosed homes flooding into the market. But critics argue that lenders are not being as aggressive about it as they should be.

According to Allan Dechert, president of the New Jersey Association of Realtors(R), these actions could “help reduce the growing inventory of foreclosed homes and ensure that housing leads the way out of today’s economic struggles.”