Foreclosures Don't Matter in Housing Recovery


For months now I've been calling the foreclosure crisis the "thorn in the side of the housing recovery."

Amid all the positive indicators we saw in June, sales rising, inventories falling and price declines easing, the latest foreclosure numbers hit a new record.

Continued job losses, meager loan modifications and underwater mortgages are pushing the numbers ever-higher, and, to me at least, that means that prices at least cannot recover.

But RealtyTrac's Rick Sharga, who saw no good news in his own report, begged to differ on the overall housing recovery:

If we'd had this conversation a year ago, and you'd asked me if the housing market could recover simultaneously while foreclosure numbers were spiking, I would have said probably not, but we are seeing some data that almost looks contradictory. We're seeing increased levels of foreclosure activity, and we're seeing price stabilization at the same time. So it could just be that there is so much buying interest because the affordability levels have become basically record levels, and there's this inventory sitting out there waiting for the buyers. The market might be recovering at what amounts to the "new normal" level of foreclosure activity at least for the time being.

Sharga talks of bidding wars in some of the harder hit markets, like Stockton, CA, Las Vegas and Phoenix.

Sales there are way up, and the competition among bottom feeders is actually pushing some of those rock-bottom prices up ever so slightly.

And the other thing, as we get into the cycle, you are seeing properties at a higher price point go into foreclosure, and as those are sold again it'll will have an effect on median and average prices, so it could be one of those recoveries that is an accounting recovery rather than a market recovery, but there are some signs that the buyers are ready to come out of hibernation.

Throughout the housing crash, we talked quite a bit about pent-up demand. Clearly it's beginning to emerge, but I still wonder about the changing face of foreclosure.

Yes, 57 percent of foreclosures still come from the usual suspect states of California, Florida, Arizona and Nevada, which saw the highest price appreciation during the housing boom and hence the biggest price plunges. But some unusual suspect states, like Kansas, Oregon, and Minnesota are seeing huge jumps in foreclosures, all thanks to job losses. Since these are not your typical investor/speculator states, like CA, FL, AZ and NV, I wonder how fast those properties will be absorbed, and whether or not pent-up demand really exists there.

Questions? Comments? RealtyCheck@cnbc.com