Distressed Property Recap – Light at the End of the Tunnel
Distressed property is the total of bank owned property (homes that have gone through the foreclosure process and are now owned by the lien holder) and short sales. Short sales are homes that are still owned by the borrower but are listed at a price that will not cover all mortgages and other liens. Presumably this is because the borrower/owner can’t meet the monthly mortgage obligations and doesn’t have the cash on hand to fund the difference between the mortgage amount and the market value of the home.
Distressed property inventory is dropping disproportionately more than total inventory. Most pundits think that changes in the foreclosure process have slowed down the rate of foreclosures and that there is a big chunk of bank owned listings about to hit the market. That could be true. However, it is definitely true that short sale inventory is also waning as are new short sale listings.
The life cycle of a distressed property usually starts as an over-priced listing where the seller is trying to at least break even on the sale. When that looks futile, he shifts to a short sale attempt. Short sales either end in a lender approved sale (lender accepts less than the amount owed to avoid foreclosure costs) or no sale and a subsequent foreclosure. So in essence, a subset of today’s short sales become tomorrow’s foreclosures.
There is nothing about the reported backlog in foreclosures that should also mean a reduction in short sale inventory or listings. If anything, the slowdown in foreclosures should keep short sale inventory on the market longer and increase the supply.
However, short sale inventory is down 38% over last year. Additionally, new short sale listings are down 23% compared with the previous year’s 12 month period. This can only mean that there is a slowdown in the number of new delinquencies.
The Standard and Poors Experian Consumer Default Indices supports this. The indices measure new defaults (ie the percentage of borrowers that default for the first time during the month). At the end of June 2011, the First Mortgage Index stood at 2.02 and the Second Mortgage Index was 1.40. The First Mortgage Index peaked in May 2009 at 5.67. The Second Mortgage Index peaked in January 2009 at 4.56. The low points this century were .79 for the First Mortgage Index (May 2006) and .76 for the Second Mortgage Index (December 2004).
This has all got to mean that we are getting close to the end on foreclosures.