What’s the Real Deal on Foreclosures?

By Christina Suter on Mar 11, 2013 at 07:00 AM in Real Estate Issues

Foreclosure SignYou may have read these or similar recent articles by Zacks Equity Research or Housing Wire, heralding a slowdown in the foreclosure rate. Don’t let these stories confuse you. The high level of foreclosures is still not over, and it is not yet time for banks to stop controlling the markets. In reality, there is still a large amount of shadow inventory out there.

This rate slowdown is mainly due to regulatory changes, and because banks have realized that it is to their benefit to keep supply off the market, increasing demand. Thus, they are being more aggressive about short sales, as well as some principle reductions, and are focused on selling off their inventory to large funds such as REITs and pension funds, as TIME magazine describes here.

Therefore, the market will remain bottomed out for a while longer, not because foreclosures have decreased, but because banks are intentionally feeding small amounts of inventory to the MLS and trying to move as much of it to new owners as possible, through bulk sales and rent-back. What does that mean to us? In short, this is not a true bottom but an artificial, bank-controlled bottom. That is fine, as the banks will continue to keep the inventory carefully under control; HOWEVER, we will eventually need the economy to come back and support the average Joe/Jill to be a homeowner again. We must watch carefully for this point, since it won’t take much of an increase in the price of real estate to create yet another bubble and keep Joe or Jill out of the market.

The banks are betting that they can keep the real estate market’s status quo until the economy bounces back. So either the bottom will last a long time, or we will see another small downturn in real estate prices, controlled by the banks.