‘Shadow inventory’ keeps shrinking
CoreLogic: Investors continue to snap up foreclosures

Homes classified as “shadow inventory” fell to 2.3 million units in October, down 12.3 percent from a year ago but still representing a seven-month supply of homes, according to a monthly report from real estate data firm CoreLogic.

Homes with seriously delinquent loans attached to them made up 1.04 million of October’s shadow inventory. The balance included 903,000 homes in some stage of the foreclosure process and 354,000 bank-owned properties.

Shadow inventory refers to the number of distressed homes likely to hit the market soon, but which aren’t yet listed for sale in a multiple listing service or included in traditional pending supply metrics.

October’s shadow inventory tally represents 85 percent of the total 2.7 million homes identified by CoreLogic as having seriously delinquent loans, in the foreclosure proces or “real estate-owned” (REO). Seriously delinquent loans are defined as those overdue by 90 days or more.

“We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold,” said Anand Nallathambi, president and CEO of CoreLogic, in a statement.

Given that a significant portion of the shadow inventory has not entered the foreclosure process, it won’t have too large an effect in the coming months because of long foreclosure timelines in many states, said Mark Fleming, CoreLogic’s chief economist.

The value of the shadow inventory in October was $376 billion, a 5.8 percent drop from October 2011.

The five states where serious delinquencies declined the most in the three months ending in October 2012 were Arizona (13.3 percent), California (9.7 percent), Michigan (6.8 percent), Colorado (6.8 percent) and Wyoming (5.9 percent).

In October, 45 percent of all 2.7 million distressed properties in the U.S. were concentrated in five states: Florida, California, Illinois, New York and New Jersey.

2012 Year-end Summary

20 Metros with More Foreclosures For Sale in 2013
December 31, 2012 by RealtyTrac StaffForeclosure activity nationwide decreased in 2012, but many metros across the country experienced a rebound in foreclosure starts and foreclosure completions (REOs) during the year. Those metros should see an increase in the number of foreclosures for sale in 2013 — either as short sales or bank-owned homes.The 20 metros below are most likely to see a jump in foreclosure homes listed for sale in 2013 thanks to an increase of at least 20 percent in foreclosure starts and REOs combined in 2012. All of these metro areas had at least 2,000 foreclosure starts and REOs combined in 2012 through November.

The influx of foreclosure inventory in these metro will be good news for buyers and investors looking to land a bargain buy in 2013, but it could be bad news for home values as often-discounted foreclosure sales drag down overall home prices. Still, strong demand and a shortage of available inventory over the last year in many of these markets should keep home prices from cratering anywhere close to the extent that they did after the housing bubble burst back in 2006.

Dramatic Declines in Foreclosure Activity
Foreclosure Radar, September 2012

September 2012 California Notice of Defaults were down 20.7 percent from the prior month, and down 48.1 percent compared to last year. There has been speculation that the banks would rush to clear inventory before the CA Homeowner Bill of Rights takes affect in January 2013, causing an increase in the number of foreclosures. Clearly this is not the case as we continue to see the number of Foreclosure Starts decline. Notice of Trustee Sales remains basically flat, up 1.9 percent from the prior month.

September 2012 California Foreclosure Sales are down 17.9 percent from the prior month, and down 30.4 percent compared to last year. However, a larger portion of Trustee Sales, 39.2 percent, are being purchased by investors compared to 27.2 percent last year.

In the other states in our coverage area, Foreclosure Starts are down with Arizona down 37.1 percent, Nevada down 40.1 percent, Oregon down 40.0 percent, and Washington down 31.2 percent from the prior month. Sales are also down with Arizona down 24.3 percent, Nevada down 19.5 percent, Oregon down 0.3 percent, and Washington down 33.5 percent from the prior month.

“It was recently reported that the nation’s five largest mortgage servicers have implemented all of the 320 servicing standards required under the national mortgage settlement,” stated Sean O’Toole, Founder & CEO of ForeclosureRadar. “The continued decline in Foreclosure Starts clearly shows that even though servicers are now apparently in compliance and clear to move forward with foreclosures, they are still in no rush to foreclose on the majority of delinquent borrowers.””

New U.S. Home Sales Held Near 2-Year Highs in August

New U.S. home sales held near two-year highs in August and prices vaulted to their highest level in more than five years, adding to signs of a broadening housing market recovery. The Commerce Department said on Wednesday sales slipped 0.3 percent to a seasonally adjusted 373,000-unit annual rate, but the decrease was from an upwardly revised 374,000-unit July pace that was the fastest since April 2010.

Home prices in the nation’s biggest cities have risen to their highest level in nearly two years, according to the housing market’s leading index, indicating that a strong summer selling season has helped put real estate on its most stable ground since crashing five years ago.

After reaching a two-year peak, pending home sales fell in August but are at elevated levels compared with a year ago, according to the National Association of Realtors. The Pending Home Sales Index,* a forward-looking indicator based on contract signings, declined 2.6 percent to 99.2 in August from an upwardly revised 101.9 in July but is 10.7 percent above August 2011 when it was 89.6. The data reflect contracts but not closings.

More Banks Open to Short Sales

To meet the terms of the $26 billion mortgage settlement, the nation’s five largest banks are becoming more agreeable to short sales, Inman News reports.

The five banks — Bank of America, Citi, JPMorgan Chase, Ally Financial, and Wells Fargo — have issued most of their relief from the settlement so far in the form of short sales or deeds in lieu of foreclosure.

Under the settlement, the five banks are required to provide $17 billion in aid to home owners, either through loan modifications, principal reductions, or short sales.

To date, 74,614 home owners have received an average of $116,200 each as either a short sale or deed in lieu of foreclosure.

Since January sales of homes in the pre-foreclosure process — usually taking the form as short sales — have been rising. In fact, they reached a three-year high in the first quarter, RealtyTrac reports. Meanwhile, the number of foreclosure sales has been declining.

Besides short sales and deed in lieu of foreclosure, mortgage servicers are also increasingly offering first-lien loan modifications to struggling home owners. According to a progress report on the settlement, 7,093 borrowers received first-lien loan modifications, averaging about $105,650 per borrower.

Source: “Banks Using Short Sales to Meet Robo-signing Obligations,” Inman News (Sept. 4, 2012)

Foreclosure Prices Rise, Highest Increase Since 2006

Foreclosure sales prices rose 6 percent in the second quarter and were up 7 percent year-over-year, RealtyTrac reported this week. This marks the largest annual increase in foreclosure-related sales prices since 2006.

Still, foreclosure and bank-owned homes sold at an average price that was 32 percent lower than the average price of a non-foreclosure home, RealtyTrac reports.

Meanwhile, the gap between REO sales and short sales continued to narrow during the second quarter. REO sales outnumbered pre-foreclosure sales by 9,833 — the smallest difference since the third quarter of 2007.

Sales of existing homes rose in every region except the West, where inventory is very tight.

The number of short-sale transactions rose 18 percent year-over-year, accounting for 14 percent of all sales during January through May time period, RealtyTrac reports.

“The second-quarter sales numbers provide solid statistical evidence of what we’ve been hearing anecdotally from real estate agents, buyers, and investors over the past few months: There is a limited supply of available foreclosure inventory to choose from in many markets,” says Daren Blomquist, RealtyTrac vice president. “Given this shortage of supply and the seasonally strong buyer demand in the second quarter, it’s no surprise that the average foreclosure-related sales price increased both on a quarterly and annual basis.”

REO Shadow Inventory Weighs on Market

Fannie Mae and Freddie Mac are being accused by some housing analysts as purposely keeping some foreclosures off the market as the mortgage giants wait for housing prices to pick up more across the country, HousingWire reports. About half of the foreclosed homes that Fannie Mae owns are on the market or being prepared to be listed soon. However, the other 47 percent of Fannie’s REO inventory is sitting in limbo and not on the market.

Fannie says some of its inventory have not been listed yet because of some states’ slower foreclosure processes and because some home owners have not yet been evicted and are still occupying some homes in default. Also, about 8 percent of its inventory is being rented in Fannie’s Tenant in Place or Deed for Lease programs, a pilot program that rents homes back to the borrower.

“Fannie Mae’s goal is to sell HomePath properties at market competitive rates as quickly as we can so that neighborhoods stabilize and recover.” It’s the “at market competitive rates” that proves our original suspicion that the GSEs are holding back inventory until prices rise. And in the meantime, the government is following the same foolish course it always does…and is creating the next great real estate bubble scenario!

Source: “Nearly Half of Fannie Mae REO Unable to Reach Market,” HousingWire (Aug. 22, 2012)

Short Sales to Get Faster With Fannie, Freddie

The Federal Housing Finance Agency announced Tuesday that it is issuing new guidelines that set out to more quickly qualify borrowers and speed up the short-sale process.

Among the new guidelines, home owners with a mortgage backed by Fannie Mae or Freddie Mac will be able to sell their home in a short sale even if they are current on their mortgage, assuming they can prove a hardship. Eligible hardships often include death of a borrower or co-borrower, divorce, disability, or job relocation (such as a job transfer or new employment 50 miles away from their current home).

The new FHFA guidelines also permit mortgage servicers to speed up the processing of short sales for borrowers with eligible hardships without needing additional approval from Fannie Mae or Freddie Mac.

“These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” FHFA Acting Director Edward J. DeMarco said in a public statement.

Also among the new guidelines:

— Military service members who are being relocated will automatically be eligible for short sales, even if they are current on their mortgages.

— Fannie Mae and Freddie Mac will waive the right to pursue deficiency judgments for borrowers who short sale who have sufficient income or assets and can make a financial contribution or sign a promissory note.

— Freddie Mac and Fannie Mae will offer up to $6,000 to second lien holders in order to quicken the pace of a short sale. “Previously, second lien holders could slow down the short sale process by negotiating for higher amounts,” according to the FHFA.

The new guidelines will go into effect Nov. 1.

The National Association of REALTORS® worked with the FHFA and the government-sponsored enterprises in creating the new short sale guidelines. NAR applauded the FHFA’s approval of the guidelines.

“REALTORS® appreciate the FHFA’s efforts to increase the number of short sale approvals, which limit the losses incurred by home owners, lenders, the federal government and taxpayers,” says Moe Veissi, NAR president. “We hope these new guidelines will allow many more hardworking American home owners that would have previously been denied a short sale to now be approved and avoid defaulting on their mortgage loan.”

For more information on the new guidelines, visit

Source: Federal Housing Finance Agency and the National Association of REALTORS®

Tim’s Comments

The incipient rebound in the housing market may be good for the economy as a whole, but it’s not good for the average American looking to buy a new home. Almost 74 percent of all new and existing homes sold in the United States during the second quarter were affordable for families with the median national income of $65,000, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index. That may sound pretty good, but it’s down from 77.5 percent in the second quarter. Median home prices gained in 92 percent of the markets polled during the second quarter, while median income was unchanged.

Asking prices rise 2.6 percent nationwide


The number of for-sale real estate listings continued to drop on an annual basis in July, falling 19.3 percent from July 2011 to a total of 1.87 million listings nationwide, according to data through July 2012. This trend, along with a 2.6 percent year-over-year median list price increase last month to $194,900, points to some stability in the nascent housing recovery that’s slowly settled in this year.

The nationwide median age of inventory, down 9.3 percent from a year ago, climbed four days from June to 88 days, mirroring previous years’ trends of increases toward the end of the spring buying season.

Data point Percent change, July 2011 to July 2012

July 2012 value:

Number of listings -19.3% 1.87 million
Median age of inventory (days) -9.3% 88
Median list price +2.6% $194,900


Though the nationwide median list price dipped slightly in July to $194,900 from June’s $195,000 (a 2012 high), its monthly value has held fairly steady for the last two years after sliding precipitously from a high of $250,000 in 2007, when first started keeping track.

July’s data, like June’s, further solidifies a geographical recovery trend. The inventory drop and simultaneous median list price jump that occurred in Florida during the last half of 2011 has shifted to California (and Seattle and Atlanta) in the first half of this year. These areas account for eight of the 10 metros to see the sharpest year-over-year inventory drops (by percentage) last month.

Metros with greatest year-over-year inventory reductions (July 2011 to July 2012)

Oakland, CA -59.3%
Fresno, CA -47.8%
Bakersfield, CA -44.7%
Seattle-Bellevue-Everett, WA -42.2%
San Jose, CA -41.8%
San Francisco, CA -40.3%
Stockton-Lodi, CA -40.2%
Riverside-San Bernardino, CA -40%
Atlanta, GA -38.3%
Sacramento, CA -36.4%


Oakland, Calif., for the fifth month in a row, has the lowest for-sale inventory of any of the 146 metros tracks with 3,280 listings and a minuscule median age of inventory of 22.

Oakland’s big Bay Area cousin, San Francisco (along with San Jose, Calif., and Seattle-Bellevue-Everett, Wash., metros), scored a housing recovery trifecta in July, climbing to No. 6 on the list of metros with the greatest year-over-year drop (-40.3 percent) in inventory, No. 5 among the metros with the greatest year-over-year median list price increases (15 percent) and No. 6 among metros with properties with the shortest median age of inventory (46 days) on the market.

Metros with greatest year-over-year list price increases (July 2011 to July 2012)

Percent change

Santa Barbara-Santa Maria-Lompoc, CA  31.5%
Phoenix-Mesa, AZ  27.7%
Boise City, ID  16.8%
San Francisco, CA  15%
San Jose, CA  13.8%
Seattle-Bellevue-Everett, WA  13.5%
Reno, NV  13.1%
West Palm Beach-Boca Raton, FL  12.6%
Washington, D.C.-Md.-Va.-WV (D.C.)  12.2%
Fresno, CA  10.9%


Oakland, San Jose, Seattle-Bellevue-Everett, and San Francisco were also named Top 10 Turnaround Towns in’s second-quarter report at No. 2, No. 5, No. 6 and No. 8, respectively.

Metros with shortest median age of inventory (July 2012) Days

Oakland, CA  22
Denver, CO  36
Fresno, CA  42
Bakersfield, CA  43
Seattle-Bellevue-Everett, WA  45
San Francisco, CA  46
San Jose, CA  47
Anchorage, AK  48
Phoenix-Mesa, AZ  49
Detroit,MI  50


Rising Home Prices Put a Dent in Housing Affordability

Home buyers are increasingly finding that home prices are on the rise in many markets. A record high in housing affordability was reached in the 1st Quarter 2012 when 77.5% of homes sold were affordable to median-income earners. However, in the 2nd Quarter of 2012, 92% of the metros included in the most recent index saw median home prices rise – dropping affordability by 3.7% to 73.8  for families with the national median income of $65,000 or less.

While interest rates and overall housing affordability remain very favorable on a historic basis, the decline in the latest HOI is a positive development because it is another signal that the housing recovery is starting to take root.

Most, Least Affordable Markets

Overall, the top five most affordable housing markets for the second quarter were:

  1. Youngstown-Warren-Boardsman, Ohio, Pa. (where 93.4% of the homes sold were affordable to the area’s median-income earners)
  2. Dayton, Ohio
  3. Buffalo-Niagara Falls, N.Y.
  4. Indianapolis-Carmel, Ind.
  5. Modesto, Calif.

The least affordable major housing markets in the second quarter were:

  1. New York- White Plains-Wayne, N.Y.-N.J. (29.4% of the homes sold there were affordable to the area’s median income family earners)
  2. San Francisco-San Mateo-Redwood City, Calif.
  3. Bridgeport-Stamford-Norwalk, Conn.
  4. Santa Ana-Anaheim-Irvine, Calif.
  5. Los Angeles-Long Beach-Glendale, Calif.

Source: National Association of Home Builders

16 Hot Home Markets This Summer

ERA’s “Hot Home Markets” list, based on local MLS data, shows the highest year-over-year average sales price and transaction increases in the following markets:

  • Albuquerque, N.M.
  • Atlanta, Ga.
  • Central Massachusetts
  • Colorado Springs, Colo.
  • Fernandina Beach, Fla.
  • Florence, S.C.
  • Houston, Texas
  • Kent County, Del.
  • Lake Charles, La.
  • Leesburg, Fla.
  • Los Angeles County, Calif.
  • Medford, Mass.
  • Mercer County, N.J.
  • New Orleans, La.
  • Orange County, N.Y.
  • Sheridan, Wyo.

Source: “Hot Home Markets: Summer Real Estate Heating Up Across Middle America,” RISMedia (Aug. 13, 2012)

Foreclosure Starts Rise Again


RealtyTrac reports that new foreclosure proceedings increased 6 percent last month compared to one year earlier; however, total volume was down 10 percent.

Separately, second-quarter data from the Mortgage Bankers Association reflects the first gain in mortgage delinquencies in a year.

Source: “Foreclosure Starts Rise Again,” Investor’s Business Daily (Aug. 10, 2012)

Top 10 metros for median price gains & losses

NAR: Prices up from a year ago in 110 of 147 metros.

Top 10 markets for median price declines:

Metropolitan area Median price, Q2 2011 Median price, Q2 2012 Change from year ago
Bridgeport-Stamford-Norwalk, Conn.
Edison, N.J.
Gulfport-Biloxi, Miss.
Elmira, N.Y.
Atlantic City, N.J.
Pittsfield, Mass.
Charleston, W.Va.
Green Bay, Wis.
Manchester-Nashua, N.H.
Hartford-West Hartford-East Hartford, Conn.

Top 10 markets for median price gains:

Metropolitan area Median price, Q2 2011 Median price, Q2 2012 Change from year ago
Detroit-Warren-Livonia, Mich
Phoenix-Mesa-Scottsdale, Ariz.
Boise City-Nampa, Idaho
Florence, S.C.
Akron, Ohio
Buffalo-Niagara Falls, N.Y.
Bismarck, N.D.
Cumberland, Md.-W.Va.
Cape Coral-Fort Myers, Fla.
Peoria, Ill.

Source: National Association of Realtors

The 6 ‘Emptiest’ Housing Markets

Empty homes still plague a lot of cities across the country. In fact, since 2000, vacant properties have risen by about 43 percent nationwide, according to Census Bureau data. (Homes are defined as vacant by “unoccupied rental inventory” or homes unoccupied that are for-sale.) Vacant properties can affect home values nearby.

The following are the six cities with the largest home owner and rental vacancies based on the last 12 months:

1. Orlando, Fla.
Home owner vacancy rate: 2.2%
Rental vacancy rate: 18.8%

2. Dayton, Ohio
Home owner vacancy rate: 5.4%
Rental vacancy rate: 11.3%

3. Memphis, Tenn.
Home owner vacancy rate: 3.1%
Rental vacancy rate: 15%

4. Detroit
Home owner vacancy rate: 1.7%
Rental vacancy rate: 16.9%

5. Richmond, Va.
Home owner vacancy rate: 2.4%
Rental vacancy rate: 15.1%

6. Las Vegas
Home owner vacancy rate: 3.9%
Rental vacancy rate: 11.9%

See what other cities made the “emptiest” list at

Source: “Anybody Home? These Are America’s Emptiest Cities,” (Aug. 2, 2012)

Short Sale Rush Is On

Housing experts are predicting a drastic rise in short sales, with an all-time high expected to be reached this year. The number of short sales has already risen 25 percent during the first quarter year-over-year, according to RealtyTrac data.

Banks are realizing that short sales can be more profitable than letting homes slip into foreclosure, so they are becoming more willing to do them. Some banks are reportedly offering home owners up to $45,000 to agree to do a short sale.

“We’re seeing a rush already,” Daren Blomquist of RealtyTrac told Reuters. “There was a big increase in the first quarter and we’re expecting that to continue.”

U.S. Home Values Post First Annual Increase In Nearly Five Years
Forbes | July 24, 2012

Notably, home value appreciation in the second quarter was the highest since the fourth quarter of 2005. Nationally, home values reached their bottom in February of 2012 and have since appreciated at very robust monthly growth rates. Despite encouraging monthly growth, we do not believe that this monthly rate is sustainable and expect it to taper off towards the end of the year. The Zillow Home Value Forecast expects national home values to appreciate by 1.1% over the next year (June 2012 to June 2013). Home, James! ® believes much of the rise in real estate values is merely a reflection of the diminished value of the US dollar – a consequence of inflation.

New home sales dropped 8.4 percent in June after two months of gains, according to U.S. Department of Commerce statistics released this week. June’s tumble marks the biggest drop in new home sales in more than a year – a stark contrast to May’s numbers, which marked a two-year high for new home sales.

The National Association of Realtors said Thursday its seasonally adjusted index for pending sales of existing homes decreased 1.4% in June from a month earlier to a reading of 99.3. The results were up 9.5% from the same month last year but came in worse than expected.

For some perspective on all-important long-term interest rates, today’s chart illustrates the 26-year trend of the 10-year Treasury bond yield (thick blue line). Ongoing concerns over Europe in addition to a struggling global economy have encouraged investors to move a portion of their investment dollars to the relative safety of the US. This has resulted in a significant decline of the 10-year Treasury bond yield. In fact, the 10-year yield has declined a fairly dramatic 360 basis points (i.e. 3.6%) since the peak of the credit bubble and has been critical for the restructuring of the debt incurred during the credit bubble. In the end, this decline has brought the 10-year Treasury bond yield right up against resistance of its 26-year downtrend channel.

For some perspective on the all-important US real estate market, today’s chart illustrates the inflation-adjusted median price of a single-family home in the United States over the past 42 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased — increased. All those gains were given back during the following 6.5 years. Over the past five months, however, the median price of a single-family home has surged by over 20% — the biggest five-month gain on record (the data goes back to 1968). The sharp downward trend that began in mid-2005 is now over.

The housing market index rose to a 5-year high of 29 in June from a downwardly revised reading of 28 in May. The present sales conditions index rose 2 points to 32, but the sales expectations index and the index measuring prospective buyer traffic remained unchanged.

Existing-home sales decreased 5.4% from a month earlier to a seasonally adjusted annual rate of 4.37 million, the National Association of Realtors said Thursday. It was the weakest report since October 2011, but sales were still 4.5% above the same month a year earlier. The results were worse than forecast. Economists surveyed by Dow Jones Newswires had expected home sales to rise by 2.0% to an annual rate of 4.64 million. May’s sales pace was revised upward to 4.62 million sales per year. The median sales price was $189,400, up 7.9% from $175,600 a year earlier.

10 states with highest foreclosure rates in 1st half of 2012:

Area Foreclosure rate (Jan. – June 2012)
U.S. 1 in 126 housing units
Nevada 1 in 57
Arizona 1 in 58
Georgia 1 in 63
California 1 in 64
Florida 1 in 65
Illinois 1 in 71
Michigan 1 in 98
Colorado 1 in 103
Ohio 1 in 106
Utah 1 in 108

Source: RealtyTrac

Nationwide, the median price for a home resale rose to $182,600 in May, up 7.9 percent from a year earlier and the highest since June 2010.

Most-Searched Housing Markets in May

Chicago continues to dominate the search traffic on, taking the No. 1 spot for top-searched housing market for the month of May. The top 11 most-searched markets were:

01) Chicago
02) Detroit
03) Los Angeles-Long Beach, Calif.
04) Philadelphia, Pa.-N.J.
05) Dallas
06) Atlanta
07) Tampa-St. Petersburg-Clearwater, Fla.
08) Phoenix-Mesa, Ariz.
09) Orlando
10) Las Vegas, Nev.-Ariz.
11) Riverside-San Bernardino, Calif.

Cities Wrestle With How to Handle Abandoned Homes

Some cities are using their share of the $26 million mortgage settlement between the nation’s five largest banks and state attorneys generals to use for demolishing vacant homes. The money was originally earmarked to help home owners avoid foreclosure. But cities view removing the “blight” as a way to prevent home values from falling further.

Consumer Confidence Declines

As you can see in the chart below, the Jobs Report wasn’t the only weak economic report last week. Consumer Confidence fell to 64.9 in May from the 68.7 reading in April, the lowest reading since January.

Chart Source: Mortgage Success Source

Goldman On Housing’s False Dawn

Recent housing data have been generally been encouraging. However, the large number of residential properties that are “underwater”—meaning the borrower owes more on the mortgage than the property is worth—casts a long shadow on the sustainability of the housing recovery. Goldman estimates that approximately 10 million properties are currently underwater. Although this number has not changed much during the past three years, there is much divergence across the nation: California, Michigan, and Arizona, for example, experienced significant improvement, while Georgia, Utah, and Missouri saw many more properties falling underwater during this period.

Even though the number of underwater properties stayed roughly unchanged at the national level over the past three years, different states experienced very different developments over this period of time. Exhibit 2 ranks states by the change in the percent of first-lien mortgages with negative equity from April 2009 to April 2012. Among the 31 states that had at least 0.5 million outstanding first-lien mortgages in April 2009, California, Michigan, and Arizona saw the largest improvement. For example, 42% of residential properties with mortgages in California were underwater in 2009, and that number came down to 29% in 2012. This trend likely resulted from both stabilizing house prices and the relatively fast speed at which foreclosed underwater properties are cleared out of the system. On the other end of the spectrum, Georgia, Utah, and Missouri experienced the largest deterioration in their negative equity problem. For example, 24% of residential properties with mortgages in Georgia were underwater in 2009, but that number increased to 42% in April 2012. This trend is largely caused by house prices falling more in these states than other states during the past three years.

What are the potential impacts of negative equity on the macro economy? Broadly speaking, negative equity affects the economy in two ways.

First, negative equity weighs on consumption. As shown in Dynan (2012, see full reference below), highly leveraged homeowners had larger declines in spending between 2007 and 2009 relative to other homeowners, and leverage appeared to weigh on consumption above and beyond what would have been predicted by housing wealth effects alone. The large number of underwater properties that we have estimated above suggests that many homeowners are still highly leveraged today. As a result, the deleveraging process they are going through is likely to drag down consumption and aggregate demand during the recovery.

Second, borrowers with negative equity are more likely to default on their mortgages. Both theoretical research, such as Campbell and Cocco (2011), and empirical research, such as Bhutta, Dokko, and Shan (2010), show that mortgage default rates increase significantly when borrowers become deeply underwater.

Given that there are 3 million first-lien mortgages that have LTVs of 125% or above as of April 2012, whether or not a large fraction of these mortgages will default in the near future has important implications for the housing market recovery.



May 2012 Update 

NAR: Quarterly Housing Affordability Index

NAR: Quarterly Housing Affordability Index

Nationwide Market Index

A national home-price index that captures about 75 percent of U.S. properties in all nine Census divisions showed home prices falling 2 percent during the first quarter to a new post-crisis low.

The housing market index unexpectedly fell 3 points to 25 in April, marking the first drop since September 2011 and the biggest decline since June 2011. The current sales conditions index and the future sales expectations index both declined by 3 points, while the index measuring prospective buyer traffic declined a steeper 4 points.

Housing starts in the U.S. came in well above estimates in the month of April, according to a report released by the Commerce Department, although the report also showed a sharp drop in building permits. The report showed that housing starts rose 2.6 percent to an annual rate of 717,000 in April from the revised March estimate of 699,000. Economists had expected housing starts to increase to 690,000 from the 654,000 originally reported for the previous month.

Demand for new U.S. homes increased more than forecast in April as low mortgage interest rates and an improving economy drew buyers. U.S. home prices are up 2.7 percent in the 12 months through March as values increased in every region, a sign that a housing recovery is gaining traction.

The University of Michigan Consumer Sentiment Index Final number for May came in at 79.3, which is the highest reading since October 2007, two months before the NBER’s date for the onset of the last recession. Added here is a linear regression to help understand the pattern of reversion to the trend. Also highlighted is recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.

Home, James! ® believes much of the rise in real estate values is merely a reflection of the diminished value of the US dollar – a consequence of inflation.