Christine Chorney

Edmonton Realty Expertise

Weekly Market Update North America

Weekly Market Insight

October 29, 2010


Foreclosing Foreclosures—The Impact

By Benjamin Tal

The foreclosure fiasco that has seen paperwork errors paralyze the process in the US is another symptom of thedisease that has crippled the US housing market. While both the Administration and commercial banks fully realize that a complete moratorium on foreclosures will devastate the housing market, the inevitable delay in the process will add another roadblock on the way to recovery to a market that is already suffocating under the weight of an unprecedented amount of negative equity and a mounting stock of shadow inventories.
At this point, it is difficult to see what will prevent prices from heading lower again in the coming months.
Negative Equity
A real estate market cannot even remotely function in a normal way when no less than one in four mortgages are under water. Close to eleven million households owe more on their loan than their homes are worth at current market prices, and close to five million are in negative equity positions of more than 20%. Nevada leads the upside-down parade with a crushing 68% of mortgages under water, followed by Arizona, Florida, Michigan and California.
Negative equity is the main catalyst of distressed sales, which now account for one-quarter of all sales in the US housing market—five times the share seen before the crisis. Roughly one-third of distressed sales are in the form of short sales (in which sale proceeds fall short of the balance owed)—and these sales are now rising at year-over-year rates of more than 20%—the fastest pace on record. It’s no surprise then that short sales have doubled their share in total distressed sales in the past 18 months. With an average discount of close to 15% on each short sale, the acceleration in that process does not bode well for the trajectory of real estate prices in the near-term.
But even more damaging to near-term housing prospects is the high and rising correlation between negative equity and foreclosures. Greater negative equity increases the risk that a household will be in serious delinquency and a later default, and decreases the likelihood that a loan will be successfully modified. In fact, despite the high publicity regarding the Home Affordable Modification Program (HAMP) the reality is that to date, this program was ineffective in improving the situation materially. As of the second quarter of the year, the number of new foreclosures rose by just over 500,000, while the number of permanent modifications hasrisen by only 160,000. Note, however, that more than 50% of these modified mortgages end up defaulting after all, which means that at this point, the HAMP was able to deal with less than 15% of new foreclosures—not even close to the target for this program.
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