Foreclosure Activity Analysis: Shadow Inventory not such a Big Deal?

Foreclosure shadow inventoryThe two steps forward, one step back theme of national real estate recovery continued in October, as evidenced by foreclosure activity. On the negative side: After many months of decline, foreclosures on U.S. homes rose in October of 2012.  On the positive side: The increase, while 3% over September of 2012, is still far better than October of 2011, when those filings were 19% higher. 

The 3% bump comes after record lows in September, when foreclosures fell to their lowest rate since July of 2007.

5 Highest Foreclosure Rates, by State

States who suffered the highest number of foreclosures when the market first crashed still struggle to process them.  "We continued to see vastly different foreclosure trends across the country in October, depending primarily on how each state's foreclosing infrastructure was able to handle the high volume of delinquent loans during the worst of the foreclosure crisis in 2010," said Daren Blomquist, vice president of RealtyTrac.

Based on RealtyTrac data, the top 5 states, as of October, 2012 for foreclosure filings were:

1.      Florida, with a foreclosure ratio of 1 in every 312 homes.

2.      Nevada, with a foreclosure ratio of 1 in every 352 homes.

3.      Illinois, with a foreclosure ratio of 1 in every 356 homes.

4.      California, with a foreclosure ratio of 1 in every 379 homes.

5.      Arizona, with a foreclosure ratio of 1 in every 420 homes.

As always, foreclosure catch the interest of specific buyers- many are investors who can pay cash and flip such homes, but others are potential owner-occupier buyers lured by the discount these properties can offer.  BankRate records show the average selling price of all foreclosed properties in the five states above ranged from $117,754 (in Florida) to $265,901 (California). 

Hurricane Sandy’s Impact

Though the hurricane didn’t necessarily cause more foreclosures, it did slow down the process of clearing them off state dockets. There is now a moratorium on all foreclosure processes in those hard hit northeastern states, and again according to Blomquist,  "Unfortunately the three states dealing with the biggest rebound in deferred foreclosure activity - New Jersey, New York and Connecticut - also had to deal with the devastation to homes inflicted by Superstorm Sandy." Since foreclosure is already a lengthy process, any added delay could have serious effect on each state’s ability to fully recover its property values—values already impacted by the storm itself.

3rd Quarter Declines Calm Fears of Shadow Inventory

Despite all of the above less than perfect news, the Mortgage Bankers Association’s 3rd quarter report for the year shows declines in most areas of foreclosure tracking. Most striking: seasonal and non-seasonal adjustments show drops in the number of mortgages that are 90 days or more past due. These seriously delinquent homes are now at their lowest rate since 2008. Further, new foreclosure starts are at their lowest since 2007.

How does the threat of shadow inventory play into these figures? As quoted in DSNews, Capital Economics  has suggested that threat might not be as serious as formerly expected.

“Admittedly, we estimate that there are still a very high 3.8 million homes which are waiting in the wings to join the visible supply. But this is down from a peak of 5.1m. In other words, the threat to the housing recovery from the shadow inventory is fading into the background,” the research firm stated.

For more information on foreclosures, particularly buying them, speak to an experienced Realtor®. In the meantime, we offer additional reading, below.

Anna Marie Erwert writes from both the renter and new buyer perspective, having (finally) achieved both statuses. She focuses on national real estate trends, specializing in the San Francisco Bay Area and Pacific Northwest. Follow Anna on Twitter: @AnnaMarieErwert