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REO Saturation Remains A Key Factor For Market Stabilization

Real estate owned properties are on everybody’s mind, and this book of business is raising concerns about how long it will take for the REO inventory to be absorbed by the marketplace.

The volume of properties going through the foreclosure process is staggering. As more foreclosures continue to add to the existing inventory it seems to be no end in sight to the crisis in the near future.

Recent findings from Clear Capital’s yearend Home Data Index Market Report show the uncertainty that characterized home prices in 2010 will continue into 2011.

In 2010 prices declined in 70% of the country’s major markets in part due to the downward pressure of REO inventory as saturation remained at above 22%.

According to Allex Villacorta, senior statistician at Clear Capital, while some housing markets are on their way to recovery this year, some of the country’s most problematic markets are experiencing “a renewed downturn reminiscent of the housing crash only two years ago.”

Various factors fuel that trend, yet the two key economic developments that have the most significant impact on the overall housing market performance remain unemployment and foreclosures.

Industry data show 1.5 million properties routinely labeled as “shadow inventory” are in some phase of distress. Up to 7 million, about 14% of all loans outstanding, are delinquent, with 4.9 million loans classified as seriously delinquent or more than two payments past due, and 600,000 new loans are seriously delinquent since the beginning of 2010.

Including short sales and REO transactions the peak-to-current change in the national CoreLogic Home Price Index based on data from April 2006 to November 2010 was -30%, or -21.7% when distressed transactions are excluded.

The CoreLogic HPI shows national home prices--including distressed sales--declined by 5.07% in November 2010 compared to November 2009 and by 3.35% in October 2010 compared to October 2009.

Excluding distressed sales year-over-year prices declined by 2.21% in November 2010 and by 2.24% in October 2010 compared to October 2009.

CoreLogic’s chief economist Mark Fleming blamed the unusual influence of seasonal declines, which as a rule depress home prices during the latter part of the year. It reaffirms that it will continue to be an “uphill battle” for the housing recovery, he said.

And recovery will come first in smaller areas of the market.

In addition to volume, local singularities of both geographic and economic characteristics are equally important. Villacorta says the path a given market is likely to follow depends on several key factors,” and two clear drivers, unemployment “and the prevalence of distressed homes.”

Servicing priorities include creative marketing that facilitates REO sales, cost effective winterization measures that aim to protect vacated homes from drastic deterioration and loss of physical value, and partnerships that facilitate affordable financing for interested buyers.

So in 2011 markets will be consistent both for better and for worse.

According to Clear Capital the top 50 major markets will shed “the artificial effects of 2010’s tax credit and return to a non-incentivized market environment with average price changes of -3.6%, while markets with high unemployment and REO saturation will experience higher declines.
Arizona is one example. HDI forecasts price declines throughout the year in Phoenix and Tucson at -9.4% and 11.9%, respectively.

The REO saturation—or the number of homes sold as a bank-owned property—is at over 12 percentage points above the national level for Tucson and more than 19 percentage points for Phoenix. It shows that “as more distressed inventory is released into the markets” the supply of discounted properties will bring new downward price pressure in the future.

Similarly, “great examples” of price volatility are expected in Columbus and other Ohio markets. For example, Columbus is expected to reduce the price losses by 2.1% in 2011, compared to the -17% yearly price change in 2010.