Housing Recovery Delayed by Homes ‘Stuck’ in Foreclosure

Foreclosure inventory has long been cited as one of the key problems for the U.S. housing market. Unusually high levels of foreclosed homes for sale continue to suppress home prices and delay a return to normalcy in the housing sector. Here are two charts that show (A) the problem is still very real, and (B) it may get better over the next 6 to 12 months.

Chart #1 – Many Homes ‘Stuck’ in Foreclosure Pipeline

This first chart shows the age of foreclosed homes in the United States. These are homes that have entered the foreclosure process, but have not yet been resold (for whatever reason). This is a three-year data pull ranging from January 2009 to January 2012. This information was provided by LPS Applied Analytics.

Percentage of aged foreclosures
Foreclosure data provided by Lender Processing Services. Click to enlarge image.

Notice how the orange bar gets bigger as the chart moves to the right. The orange bar represents seriously delinquent foreclosures, properties that have been in a foreclosed status for more than two years without having been resold. In 2009, you’ll notice that these properties only made up a small percentage of the overall foreclosure inventory. The orange bar on the far left is even too small to be labeled.

Now move across to the far-right side, three years later. You can see that the orange bar has steadily grown, month after month and year after year, since 2009. In January 2012, foreclosures that were more than two years past due accounted for 42% of the total. This means it is taking longer to process and resell these homes. The average length of time between (A) the initial default and (B) the eventual resale of the home has grown considerably.

Of course, this won’t come as a surprise to anyone who follows the housing market. Much of it can be traced back to the robo-signing scandal that broke in 2010, wherein mortgage-servicing companies were found to be rushing (and slopping) their way through mounds of foreclosure paperwork. This led to a partial freeze in foreclosure processing, which created a bottleneck pipeline. Homeowners were still defaulting at the same rate — they just weren’t being foreclosed on. This created a backlog of pending foreclosures that followed us into 2012.

As the pipeline starts to move, it could hurt home prices initially by increasing the number of distressed (and often underpriced) homes for sale. But in the long term, it is a necessary process that must occur before the national and local housing markets can return to a state of balance.

Charts #1 and #2 are based on data compiled by Lender Processing Services (LPS), The company’s database includes more than 40 million active mortgage loans. So their data gives an accurate representation of what’s happening in the U.S. housing market as a whole.

Chart #2 – Percentage of “Aged” Foreclosures Leveling Off

Chart #1 shows that the foreclosure process has lengthened considerably over the last three years. It’s a negative trend that could delay recovery in the housing market. But the chart below shows that the problem is no longer worsening. It’s the closest thing to good news we can pull from this data.

Aged foreclosures stabilizing in 2012
Percentage of “aged” foreclosures is stabilizing. Click to enlarge image.

The long upward slope from 2008 to 2011 indicates a higher percentage of aged foreclosures, those homes that were “stuck” in the processing pipeline for more than two years. Thus, the upward slope represents a seriously ailing housing market. It was a situation where homes were going into foreclosure at a high rate, but they weren’t being resold fast enough. They were piling up, as it were.

The leveling off that you see toward the right side of the graph indicates a slow but significant shift in this trend. It doesn’t mean the inventory is going down — it just means the percentage of seriously delinquent (2+ years) foreclosures is no longer rising. Given the situation we are in, this can be viewed as a positive sign.

Bonus Chart: Year-over-Year Drop in Delinquencies

At the end of February, many in the media were writing about the significant rise in foreclosure starts during the month of January. (A “start” occurs when the bank initiates proceedings to foreclose on a property.) Viewed in isolation, an increase in this metric would seem like a bad thing. But the rise in foreclosure starts was inevitable and fully expected by most housing analysts. After all, we knew the banks were repossessing homes more efficiently, in anticipation of the foreclosure settlement that took effect recently.

The real story from the January data is the year-over-year drop in delinquencies. Why is this so significant? Because it gives us a broader insight into the future of the foreclosure situation, regardless of what is happening with the banks and their foreclosure processing.

Mortgage Delinquencies, January 2012

Notice the third line of data in this image, the “year-over-year change in delinquencies.” We have seen a reduction in this area by more than 10%. This is a positive sign for the long-term health of the housing market, and it will help move the market further toward recovery. Here’s why. Delinquencies are a measure of homeowner activity — not bank activity. This number tells us how many homeowners have fallen behind in their mortgage payments by 30 days or more. These are people who could be entering the foreclosure pipeline down the road. The fact that it looks at a year’s worth of data makes it all the more significant (more so than the monthly snapshots).

A reduction in delinquencies will lead to an eventual reduction in foreclosure filings and inventory across the board. In turn, this kind of inventory reduction brings us closer to a state of normalcy, a balance between supply and demand.

Foreclosure Settlement: Changing the Tide for the Better

Regardless of how you feel about it on a personal level (and there has been no shortage of criticism), the recent foreclosure settlement will have a long-term positive impact on the foreclosure situation in the U.S. It allows lenders and mortgage-servicing companies to process foreclosures at a normal pace again. The moratoriums and “freezes” that followed the robo-signing scandal have created a tremendous backlog of distressed homes. That’s the primary reason we are seeing such a high percentage of aged foreclosures today.

“The settlement is not a silver bullet that will solve the foreclosure crisis, but it should help to clear the cloud of uncertainty that’s been hanging over the foreclosure process over the past 16 months, said Daren Blomquist, vice president of RealtyTrac. It is a sentiment echoed by many in the housing industry.

Before we can see housing recovery at the national level, foreclosure sales need to outpace foreclosure filings. It’s simple math. Excess supply and weak demand creates a surplus, and this surplus puts downward pressure on home prices. By reducing the total inventory of distressed homes — and the aged foreclosures in particular — we can eventually reach a state of balance and, ultimately, a true recovery in the housing market. As it stands now, supply is a mountain and demand is a molehill.