A Tricky Transition from Housing Stability to Strength in 2013
Some level of certainty and stability returned to the U.S. housing market in 2012, providing a solid foundation for the market to build on in 2013. But there are still significant risks that threaten this hard-won stability and could trip up some local markets trying to make the tricky transition from stability to strength.
U.S. Foreclosures Continue Slow Descent
At a national level and in states with relatively efficient foreclosure processes, foreclosure activity will not pose a significant threat to housing market stability. U.S. foreclosure activity will continue its slow descent off the peak of 2.9 million properties with foreclosure filings in 2010 and back toward a more normal level of around 500,000 properties with foreclosure filings a year – although don’t expect to see a completely normal foreclosure year until 2015.
Rising foreclosure activity in certain markets at the beginning and end of the year could threaten the stability in those markets. RealtyTrac expects 2013 to be bookended by two discrete increases in foreclosure activity: a jump in bank repossessions (REOs) near the beginning of the year and a jump in foreclosure starts near the end of the year.
The jump in REO activity will be centered mostly in judicial states with lengthy foreclosure timelines where lenders are still playing foreclosure catch-up with homeowners who stopped making mortgage payments years ago. These states include Florida, Illinois, Ohio, New York and New Jersey. The jump in foreclosure starts near the end of the year will be centered in the non-judicial states of California, Oregon, Nevada and Georgia, where a recent spate of state legislation and court rulings has changed the ground rules of the foreclosure game. By the end of 2013 lenders will have adjusted to these new ground rules and will start playing catch-up with foreclosure starts.
Price Appreciation Pretenders
Home prices will break through a false bottom in some local markets where deferred foreclosures are listed and sold in greater numbers. But markets without much foreclosure backlog to speak of will see home price appreciation take hold for the long term. The good news: the latter will likely outnumber the former by a fairly wide margin.
Foreclosure Timelines Decrease
As banks work through the foreclosure backlog during the first half of the year – particularly in the judicial foreclosure states – the average time to foreclose will finally turn a corner and start decreasing nationwide. As of the third quarter of 2012, the average time to complete a foreclosure from the first public notice was 382 days nationwide, the highest since RealtyTrac began tracking this metric in the first quarter of 2007. But the timelines have already started to slowly decrease in states like Florida and New Jersey. The shorter timelines will provide a healthy dose of additional certainty and stability for the housing market.
Short Sale Staying Power
Short sales are proving to be the most efficient way to accomplish a smooth transition from a distressed market to a healthy market. This relatively smooth transition should be preserved in 2013 as elevated levels of short sales help the market continue to recalibrate and absorb the still-rampant negative equity hanging over the housing market – in the form of 12 million homeowners who are underwater.
One wildcard here is the possible expiration of the Mortgage Forgiveness Debt Relief Act, which could cause many of those underwater homeowners to either stick it out or walk away and allow their homes to be foreclosed – which then could boost the foreclosure numbers higher for the year.