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Foreclosures: Their Impact on Real Estate 2010

I firmly believe the foreclosure situation will be the main story line in real estate for the rest of 2010. There will be other key factors (unemployment, government involvement, interest rates, etc.). However, no issue will have the same impact as the tidal wave of distressed properties about to come to market.

For purposes of this blog we will always consider distressed properties as those that fit into one of three categories:

  1. Real Estate Owned (REOs) by banks currently
  2. Houses that are in the process of foreclosure
  3. Houses that are 90+ days delinquent on their mortgage payment (the reason we include this category is that recent studies have shown that less than 1% of the borrowers who fall 90 days behind ever catch up. That means that 99% of these homes will turn into distressed properties).

How many such properties are we talking about?

Below is a graph from an article in Servicing Management in February that addresses this point:

As we can see the number is almost 2 million homes and that doesn’t include any homes currently on the market. Many experts see this as a very conservative estimate.

When will this inventory start coming to market?

It already has begun. First American Core Logic released a media alert on April 8 addressing the issue. In the report they stated:

The report indicates that distressed home sales – such as short sales and real estate owned (REO) sales – accounted for 29 percent of all sales in the U.S. in January: the highest level since April 2009…The rebound in distressed sales occurred due to increases in both the REO and short sales shares. The REO share increased to 22 percent in January 2010, up from 19 percent in December but down from a year ago when it was 27 percent. Short sales accounted for 8 percent of all sales in January, up from 7 percent in December and 5 percent a year ago. During the last 12 months, there were 974,000 distressed sales: 740,000 were REO sales and 234,000 were short sales.

Even though delinquencies continued to mount, the number of distressed properties entering the market slowed over the last several months as more and more homeowners attempted to get their mortgages modified. We are now past that point and banks are taking foreclosure action on the homes that did not qualify for the modification programs. There will be a surge in distressed properties over the next several months.

According to the Irvine Housing Blog:

The west coast manager of real estate owned, Senior Vice President Ken Gaitan, stated that Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010.

That is one bank calling for a 600% increase in the number of foreclosures coming to market.

How will this impact prices?

We will cover this point at length in tomorrow’s post.

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