Foreclosures are old news. Down real estate values? Been there, done that, right? Well, we might all have gotten tired of hearing bad news about the real estate market, but the facts show that in many areas, foreclosure rates will rise before they decline, and a number of other indicators point to things getting worse before they get better.
Reality check: A down market is not all bad news. Weak home values translate into opportunity for buyers — especially when the government keeps rates as low as they presently are to encourage homebuying. Many of the mortgages being foreclosed were toxic and could stand to be purged.
Today’s low prices and record-low interest rates also portend well for the future stability of the housing market in that new homeowners are much less likely to face the problems this last generation of homeowners did (i.e., spiking mortgage payments and plummeting home values).
In any event, the real estate market is likely to stay down or continue to decline, in terms of home values and sales activity, and increased foreclosures, before it improves, for the following reasons:
1. The massive foreclosure backlog. The New York Times recently reported that it would take lenders 62 years — years! — to repossess the 213,000 New York state homes currently in some stage of foreclosures. New Jersey homes? Forty-nine years. Illinois and Massachusetts? A decade.
While the foreclosure pipeline moves more quickly in states where homes can be foreclosed without a court’s involvement, like California (three years), Nevada and Colorado (two years each), the fact remains that there is a massive backlog of homes in mortgage default that will take years to work through.
And the trend is for these foreclosures to take more, not less, time than before — after the robo-signing scandal and related self-imposed freezes, courts and law enforcement have imposed more verification requirements, settlement conferences and more detailed audits of foreclosure files before they will allow repossession to take place.
Despite the fact that the rate of new foreclosure filings has slowed (some say this has more to do with banks being slower to file than any real change in the default rate of homeowners), the rate of foreclosures will increase and/or stay elevated for years to come.
2. Too-tight lending guidelines. How tight is too tight? Lending guidelines are too tight when they screen out creditworthy borrowers, which many industry insiders say today’s loan standards do.
Sixteen percent of Realtors reported a contract failure in July, which usually indicates that a borrower who was probably preapproved (i.e., had a good job and credit history) had her loan declined because she failed to pass tough underwriting standards, the property didn’t pass the lenders’ muster, or there was an appraisal problem.
Ron Phipps, president of the National Association of Realtors, described this number as "unacceptably high," explaining that with "both mortgage credit and home appraisals, there’s been a parallel pendulum swing from very loose standards, which led to the housing boom, to unnecessarily restrictive practices as an overreaction to the housing correction."
Loans originated in 2009 have a default rate right around 1 percent, compared with the 22-27 percent default rate on 2007 loans and the 3 percent default rate on 2003 vintage loans.
These numbers, taken along with the contract-failure numbers, suggest that today’s lending guidelines are a knee-jerk overcorrection that is prohibiting many worthy would-be buyers from becoming owners and limiting the much-needed absorption of the excess inventory of homes on the market.
3. Job market woes and transitions. The national unemployment rate of 9.1 percent is just barely better than the average 2010 rate of 9.6 percent — and job growth totally flat-lined from July to August of this year, the latest available figures.
And those numbers are, many feel, misleadingly optimistic, as many long-term unemployed have stopped being counted, and are underemployed in part-time jobs or working freelance gigs because they have no other option.
Clearly, none of these people will be buying homes anytime soon (most thriving freelancers will need to file two years of tax returns as self-employed before they can qualify to buy); and even some employed would-be buyers are hesitant to enter the market as long as jobs are scarce because they view their own positions as insecure. Job market health is a prerequisite to housing market health.