Single-Family Home Foreclosure Data

Financial Advisor magazine has a May 26 article based on a press release from RealtyTrac.  It details the market share of home sales represented by distressed (bank owned, scheduled for auction, or in default) properties during the first quarter of 2011.  Just over a quarter of the properties that were sold to third parties were in a distressed situation, and sold at an average price about a quarter lower than the average non-distressed property.  Distressed sales have slowed since the previous quarter and the year earlier period, while the pricing is stable.  Current inventory of 1.9 million homes represents a three year supply at current sales rates.

Two factors are likely driving the slow liquidation.  First, foreclosure sales are being closed for all cash.  Selling banks are unwilling to close a sale except for all cash, because they are working to improve the asset quality pf their balance sheets.  Second, mortgage money is not scarce, especially for purchases of bank REO.  The dearth of financing reduces the number of potential buyers and the capital available.

The second factor is a regulatory environment that is encouraging the slow liquidation of the distressed properties.  Default periods are extended to allow for investigation of restructuring the mortgage.  Foreclosure periods are extended to ensure the proper procedures are followed.  REO is held on the books long to avoid taking the writedown of capital.  It is an intricate dance of Extend and Pretend, meant to give banks time to work through their asset quality issues that arose in the real estate bubble.

Three years of supply suggests at least two more years of soft home prices.  There is no telling ow much overhang remains just this side of default.  Until this inventory has been paired to something closer to six months, the economic engine of home building will remain moribund.