Interesting post at Effective Demand on the flow of foreclosed homes into the market, primarily making the point there's not a huge "shadow inventory" of REO
The net difference between REO resales and Trustee sales since the beginning of 2008 is around 30,500 homes, about a months to a month and half supply at current REO absorption rate. This number can easily be explained as mostly homes in the pre-list stage getting readied for sale.
While I believe the situation is more nuanced than this particularly (there are differences region to region and may even be differences from bank to bank) the big backlog is in delinquent but not yet foreclosed homes. Banks simply cannot foreclose fast enough to keep up.
Title of this post is something my grandmother often said to me or my brother when one of us cried "that's not fair" perhaps about allotment of cake or similar. I was reminded of this today while reading the Arizona Daily Star:
If you are trying to sell your home in this market, your biggest challenge probably is ... the foreclosure down the street. Not only do you have to compete in price with it, but that foreclosure is going to factor into your appraisal as a comp, possibly scuttling a deal. Is it fair? Probably not.
The key insight of this article derives from appraiser Edward Madson:
"The way the banks feel is, they want the lowest value possible," said Edward Madson, of Madson, Brown & Assoc. Real Estate Appraisers. "They are worried the statistics for Arizona (show) that it is a declining market." Not only are lenders pushing appraisers to include foreclosures as comparable sales for non-foreclosures, but they are also limiting appraisers to finding sales within a one-mile radius and three months time, Madson said.
Banks don't have any agenda about low or high values, they want "accurate" and "conservative" values, because if the borrower defaults selling the house is how they get their money back. A tightening of appraisal rules was inevitable after the abuses of the past few years but even without that motivation in a market where more than half of all sales are foreclosures ignoring them as comps is simply nonsensical. I certainly didn't hear many RE journalists whining about including guaranteed-to-default-option-ARM-funded-8x-income purchases as comps during '05 and '06.
What's important about this phenomenon is that it can be a self-feeding cycle, just like inflated appraisals were on the way up. As more houses are valued based on foreclosure comps values will sink, equity will disappear, and more homeowners will be underwater, increasing the likelihood that they will also default. For cities like Tucson and Phoenix that saw huge bubbles (cf. Housing Doom) the result could be catastrophic. In January Tucson was already 19th on the list of top subprime foreclosure areas, this is unlikely to help tamp that down.
And then the two Dropt to the cove, and watch’d the great sea fall, Wave after wave, each mightier than the last, Till last, a ninth one, gathering half the deep And full of voices, slowly rose and plunged Roaring, and all the wave was in a flame.
--Alfred, Lord Tennyson, “The Holy Grail”
Matthew Padilla writes today on debunking the idea of distinct foreclosure waves, pointing to research that shows while completed foreclosures have been going up and down delinquencies are headed one way--up:
There is no second foreclosure wave coming, says Sam Khater, senior economist, First American CoreLogic.
“To say there is a second wave implies the (current) wave has receded,” Khater told me. “I don’t see that the wave has receded.”
I've been arguing for a while that any apparent abatement in foreclosures is due to the system becoming clogged. Based on this chart it seems there may even be a positive feedback effect--as delinquencies spiral out of control banks are less able to cope with work load and so fall even further behind on the process.
On a side note that Tennyson poem inspired the title of one of my all time favorite albums, Kate Bush's The Ninth Wave so here's a little musical interlude you can fire up while you catch up on the rest of EoL.
