Over the past few months homebuyers have whittled away at the glut of distressed properties, as low prices have spurred a sales rise not seen in years. But many doubt that trend can continue, with the floodgates of housing distress about to open again.
Existing-home sales jumped a fourth straight month in July, the first such run since 2004, the National Association of Realtors says. The 7.2% increase from June broke records back to 1999, and distressed properties accounted for nearly a third of the 5.24 million homes sold.
"In some recovering markets like San Diego, Las Vegas, Phoenix and Orlando, the demand for distressed homes has spiked, and we're seeing a very high multiple of bidders because prices are so attractive," said NAR chief economist Lawrence Yun. Lack of inventory is becoming a common complaint, Yun says.
It may not be for long. "Expect millions of foreclosures" ahead despite loan-modification efforts, Treasury assistant secretary Michael Barr told a House committee last week.
Much of the problem, housing analysts say, will be with the kind of adjustable-rate mortgages whose monthly sum due can skyrocket as features such as teaser rates expire.
"Adjustable-rate mortgages will trigger the next wave of defaults, which will make the subprime meltdown look like a walk in the park," said Rick Sharga, senior vice president at RealtyTrac, a foreclosure-listing firm in Irvine, Calif.
At some point in the next year, he says, flexible "option ARMs" will likely become the majority of loans in foreclosure. Until then the majority will be a combination of other ARMs and fixed-rate loans.
Billions of dollars worth of option ARMs were originated in Arizona in the housing boom. That state, already hit hard in the downturn, still faces the reset of 128,000 option ARMs in the next 12 months, and a large percentage of those homeowners are at risk of foreclosure.
"The payment-option bubble has been looming for some time and now we're in it," Arizona Attorney General Terry Goddard told IBD. "It's going to be a very tough year if we can't get those loans modified."
Rising unemployment is also driving many prime fixed-rate borrowers toward foreclosure. And many failing loans reworked under the Obama administration's housing rescue plan are forecast to redefault.
The supply of distressed homes has hit record levels since the subprime meltdown in 2006 sparked a first wave of foreclosures.
Distress Pipeline Pumping
Inventory is split into two pools. The first includes about 1.1 million homes in the foreclosure process, which means owners are at risk of losing them to the bank. That's more than half the number recorded back in 2005 when the market was more normal, Sharga says. The other group is roughly 750,000 properties already taken back by banks, vs. a pre-crisis norm of about 120,000.
Working through the stock of distressed properties is vital to normalizing the housing market. But industry forecasts suggest the record supply of depressed homes will peak in 2010 and stay elevated through 2012. While sales are improving, median prices are expected to keep falling into next year.
Once distressed housing runs out, Yun says, prices will get a much needed boost and sales will be 10%-20% above recent months' annualized pace of around 5 million units.
"Distressed properties continue to weigh down the median price," Yun said, as "they typically sell for 15% to 20% less than traditional homes."
Moratoriums on foreclosures and loan modifications under the Obama administration's housing rescue plan have only delayed the inevitable march of repossessions, says Stan Humphries, vice president of data at real estate site Zillow.com.
Rising unemployment and negative equity, when the home is worth less than the loan amount, will put millions of homeowners at risk of default over the next few years, he says.
"We're going to see a ramp up in foreclosures, which won't peak until 2010 and (will) remain high for some time," he said. "A lot of the demand that is helping work through inventory of distressed properties is short-term."
Low mortgage rates and prices, improving economic views and the coming Nov. 30 deadline for first-time buyers to be able to claim an $8,000 tax credit have boosted sales. That has helped trim the stockpile of homes for sale down from '08 levels.
People buy distressed homes three main ways: from the homeowner as usual; in a short sale, which can be complex and lengthy; or buying lender-owned homes in a public auction.
Jeff Frieden, CEO of the nation's largest residential-auction firm, Real Estate Disposition Corp., is among those who expect a bigger flood of foreclosures ahead.
"We expect 2010 to be a watershed of a year for us as millions more of foreclosures loom," Frieden said. "Some have sensed it's the bottom of the market; we feel that's a false sense."
So far in '09 REDC has sold 25,000 distressed properties in auctions, discounted on average 10%-15%. That's vs. 34,000 sold in 2008. The firm runs about 300 auctions a year, with an average 1,700 bidders at each.
Awaiting Another Deluge
The full brunt of the distressed-property problem hasn't hit the market. Seventy percent of bank-owned properties aren't even listed as available for sale or auction yet, due to problems in and after repossession.
The delays, in Sharga's view, are not because banks are holding onto the homes waiting for them to appreciate. Instead, he says, it's things like title issues, repairs needed, required state redemption periods that delay evictions — and the sheer volume of distressed homes.
"Its going to take some time to work through the inventory, which will be flooded by another tsunami of foreclosures," Sharga said.
