Fall Foreclosure Report

We’ve been reporting on a lot of positive numbers for the housing market – pending sales are looking good across much of the country, prices are rising as a result of steady demand and low housing inventory. But what about the old elephant in the room – the shadow inventory of foreclosures? Is it still casting gloom over what looks to be a housing recovery?

More money in our pockets

While the unemployment rate is still in the high 7’s, consumers have done well by tightening their belts. S&P Dow Jones just released a report this week on the consumer credit default rates to measure how many people are defaulting on various types of loans. The report tracks 5 indices: a composite, first mortgage, second mortgage, bank card, and auto loans.

In the latest report for September 2012, 4 of 5 of those indices – all except auto loans – saw an improvement in their rates. The first mortgage default rate decreased from 1.40% to 1.36% from August to September hitting a post-recession low, and the second mortgage default rate fell to .64%, an 8-year low! Translated: less people are defaulting on their mortgages (or other loans) means less people are in serious financial trouble means less foreclosures in the future.

 

Foreclosures in the pipeline

This is good news, to be sure, but what about all those foreclosures that are still being worked through? Right now, foreclosures take about two years for a bank to process, up a whole year from 2008. This is why real estate pundits have been warning of a shadow inventory that would flood the market with foreclosures, dragging home values through the mud again.

So far, the flood hasn’t been much more than a trickle, but the states are not all faring the same. The Federal Reserve Bank looked at the rate of foreclosure activities and made a map predicting where REO inventory would increase, and where it would decrease.

As you can see, most of the country is headed for declines in foreclosure inventory, which is a great thing, but New York and New Jersey are bucking that trend. Developments gives this explanation for the disparity:

Foreclosures generally take longer in states that require banks to foreclose by going to court. New York and New Jersey, which are both “judicial” foreclosure states, have also had additional moratoria and bank- or court-driven delays, creating larger backlogs of loans in the foreclosure process.

Yikes.

 

Good news on the national front

But now the good news. Overall, according to RealtyTrac’s latest U.S. Foreclosure Market Report, foreclosure filings hit a five-year low for the third quarter of 2012. In September alone, filings decreased by 7 percent from August, 16 percent lower than September of 2011. So nationally, the foreclosure situation is looking quite good, even if some states have it harder than others:

‘We’ve been waiting for the other foreclosure shoe to drop since late 2010, when questionable foreclosure practices slowed activity to a crawl in many areas, but that other shoe is instead being carefully lowered to the floor and therefore making little noise in the housing market — at least at a national level,’ said Daren Blomquist, vice president at RealtyTrac. ‘Make no mistake, however, the other shoe is dropping quite loudly in certain states, primarily those where foreclosure activity was held back the most last year.’

Talk to your local agent about whether shadow inventory is affecting your neighborhood, or where you’re looking to buy.

 

Sarah Louise Green lives in the San Francisco Bay Area and writes about national and local real estate trends, home financing, advice for buyers, and DIY projects for the home and garden. Follow Sarah on Twitter:@slouisegreen

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