Is the Home Foreclosure Crisis Ending?

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Foreclosures have been holding back the housing market for some time. It’s one of the reasons housing prices have continued to sag, long after many predicted a rebound. But recently there has been some news that seems to suggest a light at the end of the housing bust tunnel. The number of completed foreclosures has been dropping recently. More importantly, the number of home owners who are newly having problems paying their mortgage has fallen as well. Does that mean the drag that foreclosures have had on the housing market will be easing as well?

Not so fast, says the New York Times. The NYT has a story on Monday tallying up the number of foreclosed homes that have been repossessed and are now owned by banks. The paper puts the number at 872,000. And the article says as long as banks own homes, the foreclosure crisis will be with us. In fact, the bank owned homes might not only be a drag on the housing market, it could be a lead weight. When banks dump homes on the market, it causes prices to fall, which causes more foreclosures and more bank repossessions. Cycle repeats.  It’s another grim scenario for the housing market. But one that is very unlikely. I don’t know when home prices will rebound. But I can say for sure that bank sales will not be the drag on the housing market the NYT suggest they will. Here’s why:

It’s a bad thing for home values when banks own a lot of homes. That’s because banks are typically willing to take less. A bank won’t hold out for $10,000 more because they know their kitchen has a smarter layout than the house that recently sold down the street. The manager who is in charge of real estate at the bank will get the best price she can and move on. And that can cause housing prices to fall faster than they normally do.

Banks do seem to own a lot of homes. As the NYT points out, banks own twice as many homes as they did at the beginning of the financial crisis. But that really isn’t the relevant number. Yes, foreclosures are up in since the beginning of the financial crisis. But home prices are way down, too. So much of that run up in bank owned homes has already been reflected in the drop in housing prices. The relevant number is what are foreclosure sales doing now. And in the past six months, as Calculated Risk points out, the inventory of bank-owned homes has been dropping. That’s important. Yes, foreclosure sales are high. But if they are lower than they were six months ago, that will actually cause a boost to housing values, rather than depress them further. It’s the relatively level of foreclosure sales that are important when it comes to how they will affect the market.

Second, even at 872,000, bank-owned houses still only make up about 20% of the number of homes on the market. At last count, there were 3.87 million homes up for sale in the U.S. So while what banks do and the prices they settle for matter, it doesn’t matter as much as what prices the three million other individual home sellers are willing to accept for their homes.

Lastly, it appears that the NYT’s 872,000 figure might be a little high. Top housing economist Thomas Lawler puts the total number of homes owned by banks and other financial institutions at just under 600,000. And that includes Fannie Mae and Freddie Mac. The two mortgage insurance companies alone own about 250,000 homes. So if the NYT was just looking at bank-owned homes, which isn’t clear, the paper’s number should be significantly lower.

What’s more, the NYT says it will take banks three years to sell off all of the homes they currently own. But Fannie and Frannie sold 90,000 homes in the last quarter. And that pace should increase as the economy continues to improve. At 100,000 homes per quarter, the bank owned backlog could be gone in half the time the NYT suggests, by the end of next year.

There has been a recent rash of housing market bearishness. And that’s to be understandable after four years of falling housing prices. But it’s exactly when people are the most bearish that markets tend to rebound.


As Lenders Hold Homes in Foreclosure, Sales are Hurt (NYT)