Increased foreclosure activity and potential REO inventory growth point to trouble for real estate market

Signs point to trouble ahead for the housing market as recent growth in foreclosure filings suggest REO Inventories may balloon in coming months according to the Radar Logic July 2011 Monthly Housing Market Report. On the heels of a couple of upbeat articles I’ve been able to write about the market, I get hit with the glumness of this one….ugh. However, as I have said before, I have a lot of respect for this company and have found their market forecasts to be reasonably accurate, unfortunately.

Even though Radar Logic’s RPX Composite price remained about the same as the prior month, it declined from the year before for the 13th month in a row. According to the report, home prices, in the 25 metropolitan areas covered by the report, declined 4.7 percent in July 2011 from July 2010.

The main obstacle to a recovery of the housing market is “the disparity between demand and the supply”, according to the report. The concern is that the supply of homes for sale will grow in the coming months if the recent increases in foreclosure filings become a lasting trend. As I wrote about last week, foreclosure filings in August, as reported by RealtyTrac, were up 33 percent from July.

REO Inventories have declined; but, over 10 million more coming??….

According to economist Tom Lawler, as of the end of June, 2011, there were approximately 548,000 REO properties (foreclosures that are still owned by the lender and have not been sold) in the U.S. The inventory of REO’s has declined over the past couple of quarters, but the report states this is in response to “documentation problems and scandals surrounding their foreclosure practices”, in other words, not because things are improving. In recent testimony before the Senate Committee of Banking, Housing and Urban Affairs, Laurie Goodman, Senior Managing Director at Amherst Securities Group, estimated that 10.4 million additional borrowers are likely to default on their mortgages. This works out to about 1 of every five homes in the U.S. with a mortgage, which would be a nightmare if it were to happen.

Could this happen?

Looking back at a story I did last November, at that time Corelogic predicted there was a “shadow inventory” (homes with seriously delinquent mortgages, in foreclosure or owned by a lender but not listed on the market for sale) of 6.3 million homes as of August 2010. Since then, there have been about 4.8 million homes sold with, according to the National Association of REALTORS, about 30 percent of those being foreclosures and other distressed sales. So lets just say 1.5 million homes of the 6.3 million counted in “shadow inventory” are gone, that leaves 4.8 million. However, while I haven’t seen a recent report on “shadow inventory”, with all the delays caused to the foreclosure process by robo-signing and other scandals, I would venture to say there has probably been an increase in shadow inventory during this period, so my guess is the number today would be higher than the 6.3 million it was last year. In addition, even though mortgage delinquencies are improving, there are currently 6.4 million properties that are 30 ore more days delinquent on their mortgage or in foreclosure.

When you look at the shadow inventory numbers, the current foreclosure rates and the number of properties in foreclosure or delinquent it certainly makes me think that there is a possibility we could see 10 million more foreclosures in the future (I don’t believe Ms Goodman said what time period she expected these to occur in) however, I would expect to see something more on the order of 1.5 million to 2 million foreclosures a year for the next couple of years.


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