Foreclosure Update: Looks Like We’ll Be Moist for Years


It’s no secret that markets around the nation are so famished for foreclosures that discounts are shrinking and prices on distress sales are rising faster than they are for “normal” homes.  Individual investors, hedge funds flush with cash and first-time buyers desperate for a deal are falling all over each other in some places.

Distress sales are actually rising faster on a national basis that full-priced homes.  CoreLogic reported Monday that October prices that exclude distress sales rose only 5.8 percent while prices that include distressed sales increased on a year-over-year basis by 6.3 percent in October 2012, the biggest increase since June 2006 and the eighth consecutive increase in home prices nationally.

The competition for foreclosures is reducing the discount between full-priced homes and distress sales.  The discount has been a key factor in the success of so many investors’ business plans.  Discounts, which were once as high as 30 percent in some markets, now are as low as 7.7 percent nationally though they remain high in judicial state markets like Cleveland and Pittsburgh experiencing in inflow of backlogged foreclosures.

Completed Foreclosure Now a Trickle

Despite the demand, in October only 58,000 foreclosures were completed in the entire nation, a year-over-year decrease of 17 percent and a decrease of 25 percent from September.  Yet there are still 1.3 million homes in the visible foreclosure pipeline, a decline of only 13 percent from a year ago, when there were 1.5 million backlogged in the final months before the AG settlement was reached, That’s more than one quarter of all the 3.9 million foreclosures that have been completed since the housing crisis began in September 2008.

Last March when I spoke at the Summit I made the point that the AG agreement would free a two to three year supply of foreclosures in the “visible” and shadow inventories, enough to keep investors busy for years to come.

That indeed is the case, but it’s not happening quite as I and others predicted.  Instead of releasing 1.5 million foreclosures in a flood that would swamp the nation’s housing markets, foreclosures are reaching the markets in a trickle as slow as the slowest months of the post-Robogate period.  As a result, we’re not experiencing a flood.  Rather, it looks like we’ll be moist for years to come.

Two things I did not foresee last March are the continued delay involved in processing foreclosures in judicial states where lenders are awaiting new processing standards are in place after the first of the year.  The Consumer Finance Protection Bureau is finalizing rules governing bad practices and sloppy recordkeeping by mortgage servicers that are part of the CFPB’s ongoing effort to address servicing problems and create uniform standards for the mortgage servicing industry.

Second, I did not anticipate how much short sales would reduce the shadow inventory, which has declined by 300,000 homes or about 10 percent in the past year.  Through the second quarter, short sales increased 18 percent on a year-over-year basis and accounted for 14 percent of all sales during this time period, a bigger percentage than either pre-foreclosure sales or bank-owned sales.

Half a Million Additional Properties is a Healthy Storm

Do the math.  In the past twelve months, the visible inventory is down 200,000 properties and the shadow inventory has fallen by 300,000.  Short sales have grown by about 100,000 units over 2011.  Together those account for some half million additional properties absorbed by the market this.  Not the flood that I predicted, but a health rain storm.

With demand strong and new standards in place, the pace of foreclosure completions could pick up next year.  Where this will happen is very import to investors.  As time passes, the differences between markets in judicial and non-judicial states continue to increase, and a handful of markets, largely in the Midwest and Northeast, today are the hotbeds of foreclosure activity

Here’s how CoreLogic sees foreclosure completions today:

  • The five states with the highest number of completed foreclosures for the 12 months ending in October 2012 were: California (105,000), Florida (95,000), Michigan (68,000), Texas (59,000) and Georgia (54,000).These five states account for 49.0 percent of all completed foreclosures nationally.
  • The five states with the lowest number of completed foreclosures for the 12 months ending in October 2012 were: South Dakota (19), District of Columbia (64), Hawaii (452), North Dakota (511) and Maine (643).
  • The five states with the highest foreclosure inventory as a percentage of all mortgaged homes were: Florida (11.1 percent), New Jersey (7.7 percent), New York (5.3 percent), Illinois (5.0 percent) and Nevada (4.8 percent).
  • The five states with the lowest foreclosure inventory as a percentage of all mortgaged homes were: Wyoming (0.5 percent), Alaska (0.7 percent), North Dakota (0.7 percent), Nebraska (0.8 percent) and South Dakota (1.0 percent).

Photo: Henrik Sonnergård

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. I am unsure of the conclusion of this article. Are you saying that housing prices are expected to stay low for the foreseeable future due to continued flow of foreclosures and short sales? I am in california and am considering purchasing a rental unit in the orange county area. Is this a good time?

    • Irsh, thanks for yoiur question

      The point I was trying to make is that the supoply of foreclosures is being controlled lenders’ legal concerns rather than the market, and that new completed foreclosures will be available for a matter of years.

      Most new foreclosures also will be concentrated in the Midwest and Northeast. California would be minimally affected.


  2. That’s the funny thing about shadows, they can make a small object appear enormous. As you and I have discussed before Steve, the mainstream media kept changing the definition of shadow inventory to keep everyone’s attention. The truth is just because a homeowner is in foreclosure doesn’t mean the owner wants to sell or will their home will get foreclosed on. There are always more favorable outcomes available (short sale). Ironically, the lack of supply has benefited many underwater homeowners because their values have increased. That said, I agree there will still be plenty to go around for real estate investors. In greater-Phoenix, for example there were still 2,477 completed foreclosures in October. Michael Orr with Arizona State University estimates the “normal” amount of completed foreclosures would be around 1,400.

    • Marty;
      Thanks for tweaking me on “shadow inventory.” You are absolutely right–it’s not a hard metric but one of those squishy terms like “pre-foreclosure” or “pending inventory” that is subjective and varies by state and market. “Shadow inventory” is an invention of the media with the help of a few PR people in the fall of 2010. It makes wonderful headlines, but as someone who writes about this stuff, it’s a real pain. As you know, states define the status of foreclosures differently as do leading news sources like CoreLogic and RealtyTrac. One person’s delinquency is another’s shadow foreclosure. As you point out, an increasing number of these are cured, modified or sold via short sale.

      In light of the above, and the fact that the process of compiling and reporting on distress sales is far from an exact science makes it hard on the reporter.. and even harder on the reader. Sometimes I chuckle when I get news releases from leading sources in conflict with another. A good example is foreclosure discounts. Zillow recently calculated the national median discount around 7.7 percent. This morning RealtyTrac reported the average sales price of a bank-owned home in the third quarter was 38 percent below the average price of a non-foreclosure home, up from a 33 percent discount in the second quarter but down from a 39 percent discount in the third quarter of 2011.

      Go figure.


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