The ominously termed “shadow inventory” is casting a pall of uncertainty over recent signs that home values have bottomed out. What’s behind it, and is it as threatening as it sounds? That’s an important question because house-price news has been decidedly good over the past quarter. The Freddie Mac House Price Index for the U.S. showed a brisk 4.8 percent gain from March to June 2012, the largest quarterly pickup in eight years; the national index posted a June-to-June rise of 1 percent, the largest annual appreciation since November 2006. Further, the improvement was relatively broad-based. In fact, 34 states and the District of Columbia posted higher home values during the 12 months through June 2012, the largest number of states registering positive annual appreciation since April 2007.
Existing home sales dropped to 4.37 million in June to the lowest level since last October. It was the fourth drop in the last five months. Economists had expected the sales pace to increase to 4.65 million from 4.55 million in May.
Existing-home sales fell in February from an upwardly revised January sales pace, the National Association of Realtors (NAR) reported this morning. February sales – completed transactions – were down 0.9 percent from January to a seasonally adjusted annual rate of 4.59 million. January's total was revised up to 4.63 million from 4.57 million. The median price of an existing home in February was $156,600, up 0.1 percent from the previous month and up 0.3 percent from February 2011. The month-over-month price increase was the first since last June. After appearing to stabilize at low levels in the first half of 2011, prices are dipping again.
Shrinking inventory often is seen as a positive sign for housing because it usually means demand is rising, which often leads to higher prices. But in the current environment, the decline in inventory may instead reflect how the market remains anything but healthy. While sales are picking up in some cities, analysts say the sharp decline in inventory also reflects the slow pace at which banks are processing foreclosures. The bottleneck in bank foreclosures has contributed to that situation. In the past year, banks have been accused by federal and state officials of circumventing legal procedures when foreclosing on homeowners.
To correct those problems, banks are moving more cautiously when repossessing a home. As a result, the number of newly initiated foreclosures has dropped to a three-year low. But the number of homes in foreclosure—a backlog of 2.1 million—is near a high, according to LPS Applied Analytics. If supply remains constrained, prices could stabilize. "We're not at the end of the housing nightmare, but we seem to be getting closer," said Jeffrey Otteau, president of Otteau Valuation Group, an East Brunswick, N.J., appraisal firm. But if banks accelerate foreclosures, inventories will swell again. Mr. Otteau says it is too soon to celebrate because "we are all expecting that foreclosure 'tidal wave' to begin sometime soon."
According to the National Association of Realtors (NAR), Existing-home sales, (completed transactions that include single-family, townhomes, condominiums and co-ops), fell 3.8% to a seasonally adjusted annual rate of 4.81 million in May from a downwardly revised 5.00 million in April, and are 15.3% below a 5.68 million pace in May 2010 when sales were surging to beat the deadline for the home buyer tax credit. There were notable regional differences in home sales. “A large decline in Midwestern existing-home sales can be attributed partly to the flooding and other severe weather patterns that occurred, but this also implies a temporary nature of soft market activity,” Lawrence Yun, NAR chief economist, explained.
The national median existing-home price for all housing types was $166,500 in May, down 4.6% from May 2010. Distressed homes3 – typically sold at a discount of about 20% – accounted for 31% of sales in May, down from 37% in April; they were 31% in May 2010. NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I., said a number of proposals being considered in Washington could further jeopardize the housing recovery. “We’re concerned about the flow of available capital, including a possible rule that would effectively raise minimum downpayment requirements to 20%,” he said. “We don’t need to throw the baby out with the bath water – increasing downpayment requirements would effectively shut many qualified families out of the market. What we critically need is a return to the basics of providing safe mortgages to creditworthy buyers willing to stay well within their budget.”
According to a RealtyTrac report released yesterday, 26% of all homes sold last year were foreclosures and short sales. Homes already foreclosed on and repossessed by banks, called REOs (real estate owned), sold for an average of 36% less than normal sales, RealtyTrac reported. Meanwhile, the discount for homes sold while they were still in the foreclosure process (short sales) was 15%. "It's like the post-holiday sales at Macy's where they're trying to clear out unwanted inventory," said Anthony Sanders, a real estate professor at George Mason University.
Nevada had the highest percentage of distressed sales of any state at 57%. That was, however, less than 2009, when 67% of sales there were foreclosures. In Arizona, 49% of sales were distressed properties; in California, 44%; and in Florida, 36%. Foreclosed properties sold for the biggest discount -- 50% off -- in New Jersey. These investment opportunities are not going away. Nearly 30% of mortgage borrowers are underwater on their loans, owing more than their homes are worth, according to Stan Humphries, chief economist for Zillow, the real estate web site. These owners are very vulnerable to foreclosure so the number of distressed properties that will go on sale only the next year or two will probably remained high.