What Recovery? Home Prices May Hit Roadblock Soon
The recent growth in U.S. home prices may hit a roadblock in the coming months, thanks to a new supply of distressed properties hitting the market.
Banks are moving more delinquent loans through the pipeline at a faster pace, according to a new report released Thursday by foreclosure sale website RealtyTrac. The number of homes starting the foreclosure process for the first time grew for the second month in a row on an annual basis.
Just over one million properties received some kind of foreclosure filing in the first half of this year, an increase of two percent from the previous six months, according to RealtyTrac.
The numbers are still down 11 percent from a year ago, largely because banks were still in settlement talks over the so-called, “robo-signing” foreclosure paperwork scandal. After a $25 billion settlementearly this year, the banks began moving loans again.
Foreclosure starts, the first stage of the process, rose 9 percent in the second quarter of this year from the previous quarter, with the volumes growing in 31 states. For the first time since the housing crash began, California earned the dubious distinction of holding the nation’s highest foreclosure rate in June. This new surge may be just the start.
“Lenders and servicers are slowly but surely catching up with the backlog of delinquent loans that under normal circumstances would have started the foreclosure process last year, and that catching up is why the average time to complete the foreclosure process started to level off or decrease in some states in the second quarter,” said RealtyTrac CEO Brandon Moore in a release. “The increases in foreclosure starts in the first half of the year will likely translate into more short sales and bank repossessions in the second half of the year and into next year.”
That will surely weigh on home prices, which have been recovering of late and causing some to claim that the housing crisis is over.
“The residential housing, we’re seeing a pickup, and it’s noticeable. It’s from a very low base, and it doesn’t amount to a whole lot yet, but it’s getting better,” Buffet said.
Recovering home prices in the first half of this year helped to ease the number of borrowers who owe more on their mortgages than their homes are currently worth. 11.4 million borrowers were in a negative equity position at the end of March, down from 12.1 million at the end of December, according to a new report from CoreLogic.
That’s still close to 24 percent of all properties with a mortgage, and if you add near negative equity (less than 5 percent equity in the home), that grows to 28.5 percent. Those borrowers are stuck in place, unless they are willing and able to pay to move.
While negative equity is largely centered in the sand states (California, Nevada, Arizona, Florida), other states are not immune. 37 percent of borrowers in Georgia are “underwater” on their mortgages, 35 percent in Michigan and 28 percent in Illinois. Negative equity prevents many borrowers from refinancing their loans to today’s record low rates. The 30 year fixed rate mortgage fell to just 3.56 percent on the Freddie Mac weekly survey.
Borrowers in a negative equity position are also more likely to default on their mortgages. While new delinquencies have been falling, lackluster growth in the job market puts that improvement in a precarious position. The new wave of foreclosures hitting the market will likely turn home prices down again before they can hit a real bottom.
Investors in distressed properties, hoping to cash in on the hot rental market, have been frustrated lately at the current lack of supply of foreclosed homes for sale. That, in turn, has pushed home prices higher, as they compete for this small supply. So much of the current market has been made up of these sales, that this supply drain could cause a big drop in overall home sales over the summer.
Home prices on a national level may look as if they’re growing, simply because the share of distressed homes selling will drop and the share of non-distressed, higher priced properties, will grow, skewing the averages artificially. We saw that in the National Association of Realtors’ May home sales report.
If this theory holds, their June report could show a big drop in sales and a rise in prices, which doesn’t make a lot of sense, but this housing market is unlike any other.
- By CNBC's Diana Olick