Excess Inventory Of Homes Will Keep A Lid On Home Prices In 2011

With a record one in 45 homes receiving a foreclosure notice during 2010, experts believed that number could have been much higher if not for the robosigning fiasco …

With a record one in 45 homes receiving a foreclosure notice during 2010, experts believed that number could have been much higher if not for the robosigning fiasco that led many banks to slow down processing in the fourth quarter. Still, the inventory of distressed properties remains high and experts believe that home prices could drop another 5 percent in 2011. See the following article from The Street for more on this.

The glut of foreclosed housing inventory kept home prices in check during 2010 and may force prices another 5% lower this year, according to RealtyTrac.

The real-estate data tracking firm said Thursday that foreclosure levels hit new highs last year, with 3.8 million foreclosure filings on 2.9 million properties, a 2% increase from the previous year. Rick Sharga, a senior vice president at the firm, said the number could have been much higher but for the legal issues that held back progress at large mortgage servicers.

“As bad as the numbers were, they actually could have been much worse,” says Sharga. “We probably saw as many as a quarter million fewer foreclosure transactions than we might have seen just due to the robosigning issues.”

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Now that big banks like Bank of America (BAC_), Wells Fargo (WFC_), JPMorgan Chase (JPM_) and Citigroup (C_) have worked through many of the processing flaws, Sharga expects those distressed properties to hit the market as soon as this quarter. The additional inventory will almost certainly keep a lid on prices, he adds.

“We wouldn’t be shocked to see home prices drop another 5% this year before starting to rebound,” says Sharga. “Really, until you start to see the inventory levels start to become more manageable, it’s going to be difficult to see the housing market come back appreciably.”

The S&P/Case-Shiller Home Price Index shows that home prices have been caught in a tight range since the start of 2009, roughly around where they were in mid-2003. According to the National Association of Realtors, the median sales price of existing homes was $177,900 in the third quarter, vs. $217,900 at the height of the market in 2007; Commerce Department data show the average price of a new home declined 2% in November to $268,700, vs. year-ago prices of $274,700.

RealtyTrac said that in 2010, one in every 45 houses received a foreclosure notice – though the rate slowed considerably during the fourth quarter, as banks faced pushback from regulators and state attorneys general. One in every 501 homes received a filing in December, for instance.

More than half of the foreclosure activity came from a handful of states – California, Florida, Arizona, Illinois and Michigan – which have either seen home prices plunge sharply since the downturn began, have seen unemployment rise sharply, or some combination of the two.

Sharga notes that banks appear to be carefully managing their distressed inventory: Less than one-third of the homes that have been repossessed are being marketed for sale, he says. This may help avoid pushing home prices down significantly, but may also drag out the housing market downturn for a few years.

“That, by the way, isn’t a bad thing,” says Sharga. “It’s probably better to allow the market to absorb those properties gradually over the next few years, than risk flooding the market with them and risk seeing prices fall even further.”

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