Shedding a Little Light on Shadow Inventory

Last week, we posted a blog titled: The Impact of Distressed Properties on Neighboring Values. In the article, we said there would be more distressed properties coming to market in the next six months and that these properties would put added downward pressure on prices of other homes in the area. Some questioned our assumption that foreclosures were about to increase and others questioned our assertion that they would have a negative impact on values. We want to qualify both of our statements today.

Distressed properties are about to increase

We have been in the ‘eye of the storm’ regarding the shadow inventory of foreclosure properties for the last several months. Foreclosures have been delayed by court systems mandating that the banks have their paperwork in order. Just last week, Fannie Mae addressed this issue in a report:

“Our foreclosure rates remain high. However, foreclosure levels were lower than what they otherwise would have been in the first quarter of 2011 due to the delays caused by servicer foreclosure process deficiencies and the resulting foreclosure pause.”

In their First Quarter 2011 Financial Results Supplement, Freddie Mac, also addressed this issue last week:

“We expect the pace of our REO acquisitions to increase in the remainder of 2011, in part due to the resumption of foreclosure activity by servicers, as well as the transition of many seriously delinquent loans to REO.”

More foreclosures will be coming to the market throughout 2011.

Distressed properties impact prices of surrounding properties 

Clear Capital discussed this point in their May 2011 Market Report. In the report they used two graphs to emphasize the connection. In the first graph, they charted the national saturation rate of foreclosures (REOs) from 2008 until the present.

 

In the second graph they charted national home prices during the same time period.

 

We can see that as the saturation rate of foreclosures increase, prices decrease.

Bottom Line

More foreclosures will be coming to market and they will have an impact on values. How will your neighborhood be affected? Sit down with a local real estate expert to find out.

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