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| Are We Nearing a Top in Foreclosure Activity? |
| Written by Jonathan Smoke | |
| 07.10.2008 | |
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Discuss this article on the forums. (0 posts) The ForeclosurePulse blog from the folks at RealtyTrac has a great post today about the release of their June data. The June data showed that U.S. foreclosure activity in June decreased 3 percent from May but was still up 53 percent from the prior year. The blog post nicely raised the question if this is a sign of a top or not. The argument against this being a top is that the year-over-year comparison still shows foreclosures much higher. Moreover, there have been several months during the last two years that month-over-month activity registered declines. Despite the logic of this argument, I’m inclined to favor the argument that this may be a top (or near it) based on changes in year-over-year trends by foreclosure type. Rather than re-state the case, here’s what the blog post said: “What may be a better argument -- although certainly not an ironclad case -- that the foreclosure surge is starting to run out of steam is the trend over the past 18 months in YOY percentage changes, broken down by type of foreclosure filing. As can be seen in the chart below, the default and auction categories experienced double- and triple-digit YOY percentage increases for much of 2007. But the increases in those categories started to slow down in 2008. Meanwhile, REO (bank repossession) activity actually decreased on a YOY basis in January and February of 2007 but gradually started to gain momentum in the second half of 2007, and increases in REOs have far outpaced the increases in defaults and auctions in all six months of 2008.
[See Chart below] One could argue that this chart shows that the bulk of the properties that were at risk for foreclosure have migrated through the process and are now being repossessed by the foreclosing lenders. There is not a continued massive surge in defaults and auction notices, so once the lenders have disposed of their REO inventory, the real estate market can start to return to normal.” While there is significant variation state-by-state in how foreclosures are processed, the declining trend in the year-over-year difference in default notices has to be a positive sign that conditions are improving. Without further state-by-state evidence that local efforts to forestall foreclosure proceedings are causing this decline, I don’t buy the counter argument that the default notices against at-risk properties may have been delayed by artificial means. RealtyTrac’s Rick Sharga did allude to an observation that default notices had declined in some states like Maryland and Massachusetts with new laws that slowed down initial foreclosure proceedings in an interview he recorded on MarketWatch’s Real Estate Round Up available here. The Market Watch text summarizing the interview puzzled me because it seemed to indicate that Sharga thinks home prices falling will slow down foreclosures when in fact the opposite is true. The Market Watch article said: “If home prices don’t come down more, Sharga tells John Wordock 2009 could prove to be ‘a pretty devastating year.’”
What Sharga actually said makes far more sense: “We are still anticipating that we are going to set a new historically level of foreclosure activity late this year and going into next year. And, unless something dramatic happens—if the housing market pricing continues to go down, 2009 could be a pretty devastating year as well… Left to its own devices we are going to continue to see pretty significant fall-out.”
Of course we are dealing with a connected dilemma here. Foreclosures are high because home prices have fallen, and foreclosures are causing home prices and appraised values to fall. The downward cycle won’t stop until prices stabilize, so maybe even if state legislation is slowing down initial foreclosure proceedings, that’s a good thing, as perception of likely further steep price declines will diminish. 
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