Sales of repossessed properties probably will rise 25 percent this year from 1 million in 2011, according to Moody’s Analytics Inc. Prices for the homes could drop as much as 10 percent because they deteriorated as they were held in reserve during investigations by state officials resolved in February, according to RealtyTrac Inc. That month, 43 percent of foreclosures were delinquent for two or more years, from a 21 percent share in 2010, according to Lender Processing Services Inc. in Jacksonville, Florida.
“The longer a foreclosed home is in the mill, the bigger the losses,” said Todd Sherer, who manages distressed mortgage investments for Dalton Investments LLC, a Los Angeles-based hedge fund that oversees $1.5 billion. “We have a bulge of these properties coming through the system.”
Homes stockpiled less than a year sell for about 35 percent below the value set by lenders, according to a March 15 report by the Federal Reserve Bank of Cleveland. At two years, the loss is close to 60 percent. A surge of cheap foreclosures may erode prices in the broader real estate market, even as the economy expands and residential building increases, said Karl Case, one of the creators of the S&P/Case-Shiller home-price index.
‘Complete Losses’
“The question on these aging foreclosures is how many are going to be sold and affect prices and how many will be complete losses,” said Case, professor emeritus at Wellesley College in Wellesley, Massachusetts. “Depending on their condition, they could have a big impact on home prices.”
The best measure of the influence foreclosures have on the broader market is the 20-city S&P/Case-Shiller home-price index that tracks deeds, including homes sold directly by banks and deals that don’t use mortgages, said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. The index probably will fall 5 percent to 10 percent this year, a range that depends on the condition of the mothballed homes, he said.
That compares with a forecast for a 2.9 percent decline by Celia Chen, a housing economist at Moody’s Analytics in West Chester, Pennsylvania, and a prediction of a 3.9 percent decline by Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago.
Building Permits
While foreclosures slowed, the wider real estate market improved. As banks held onto properties, the supply of homes for sale dropped to 2.3 million in December, the lowest since 2005, before rising 4.7 percent the following two months, according to the National Association of Realtors. Spurred by low inventory, building permits that signal future housing demand rose 4.8 percent in February, from the prior month, to the highest level since 2008, according to the Commerce Department.
The Standard & Poor’s 1500 Homebuilding Index rose 0.4 percent today and has gained 23 percent this year.
The S&P/Case-Shiller index fell 3.8 percent in January from a year earlier, slowing from December’s decline of 4.1 percent, a sign of stabilization. The measure has dropped 34 percent from its 2006 peak to the lowest level in almost a decade.
“A lot of people look at bumps in the monthly data and say we’re reaching a bottom,” saidJoshua Shapiro, chief U.S. economist at MFR Inc. in New York. “We won’t be there until this supply of foreclosures clears.”
The National Association of Realtors predicts a 0.01 percent gain in prices for homes sold through multiple listing services, which includes some though not all foreclosures.
Need to be Bulldozed
The Federal Housing Finance Agency’s price index measures sales of homes with loans backed by Fannie Mae or Freddie Mac. That gauge likely will rise 0.7 percent, according to a forecast by the Mortgage Bankers Association in Washington.
A quarter of homes in long-term foreclosure may need to be bulldozed, according to theCleveland Fed’s report. About 500,000 foreclosures in the U.S. are vacant, according to ahousing study Fed Chairman Ben Bernanke sent to Congress in January. Many of them are “badly damaged,” he said.
Gloria Washington, 80, knows about dilapidated foreclosures first-hand. There are four of them on her block on the south side of Chicago. When she applied for a home equity loan last year to fix up her front walkway, she was turned down because her home’s value had plummeted.
“This used to be a good neighborhood, but now all our homes are almost worthless,” she said.
‘They Lack Money’
Whether a foreclosed property is occupied or not, its value is deteriorating, said Tom Popik, research director for Campbell Surveys, a real estate data firm in Washington. The mortgage servicers that oversee the homes aren’t likely to do major repairs, he said. Residents probably would solve a problem like a leaky roof by nailing a sheet of plywood over it, Popik said.
“They lack money -- that’s why they’re in foreclosure --so maintenance isn’t going to get done, and that’s going to hurt the value of the house,” Popik said. “Some of them feel abused by the system and are going to strip the fixtures, the hot water heater and even the kitchen cabinets when they go.”
Aging foreclosures also erode values in higher-priced neighborhoods, such as a community in Tampa, Florida, where properties sell for up to $500,000. A three-bedroom house with a double garage and a pool came on the market in January for $139,900 after being in foreclosure for almost three years, according to court records. When the case was finalized in December, the unpaid amount owed on the mortgage was $403,000, the records show.
Preserving Value
In 2008 the same owner, a real estate investor, went through a foreclosure on a similar home located less than a mile away. In that situation, the foreclosure lasted six months, helping to preserve the value of the property. The house sold for $305,000 that same year and now is worth about $429,000, according to an estimate by Zillow Inc. (Z), a real estate data company inSeattle.
“You can easily strip $100,000 or more off the value of a property by letting it sit in foreclosure for an extended period of time,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “You’ve got to fill that home as quickly as possible.”
In Ohio, $75 million of an estimated $335 million it received from the Feb. 9 settlement between state attorneys general and servicers will be used to tear down vacant foreclosures, the state’s Attorney General Mike DeWine announced the same day. Banks held back on processing home seizures during the probe to avoid potential liabilities. U.S. Representatives Marcia Fudge and Steve LaTourette, both from Ohio, last month said they would introduce a bill to provide $4 billion to issue 30-year bonds to demolish foreclosures.
‘Have to be Dumped’
“Any homeowner knows that housing depreciates pretty rapidly if you don’t take care of it,” said Case, who created the index with Yale University professor Robert Shiller. “Some of the supply in the bin is going to have to be dumped.”
The average price of a repossessed property has dropped 22 percent to $146,285 since 2008, according to RealtyTrac, a foreclosure data firm in Irvine, California.
The age of the foreclosure backlog complicates 2012 price- forecasting, said Newport at IHS Global. The share of homes in the legal process of being seized was 3.5 percent in 2011 compared with 3.2 percent in 2010, according to CoreLogic Inc. in Santa Ana, California. Completed foreclosures fell to 870,000 in 2011 from 1.1 million a year earlier, the firm’s data shows.
“We don’t know how much damage has happened to these homes,” Newport said. The properties “are going to have a lot of wear and tear in an already weak housing market.”
Even if the sale prices of long-term foreclosures affect the value of homes in the wider market, it’s still better to get rid of the properties as quickly as possible, said Stan Humphries, Zillow’s chief economist.
“We deferred a lot of the pain of foreclosure during the post-robo-signing period,” Humphries said, referring to the fraudulent signing of affidavits that sparked the servicer probe. “Getting those homes onto the market and getting them sold is the only way through it.”
To contact the reporter on this story: Kathleen M. Howley in Boston atkmhowley@bloomberg.net.
To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net.
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