What If Housing Takes a Double-Dip?
The share of mortgages in foreclosure in judicial states averages 6.6% compared to 2.4% in non-judicial states, according to the Mortgage Bankers Association.
According to former Morgan Stanley analyst Oliver Chang, who now runsSylvan Road Capital , the "years supply" of foreclosed homes in New York is 40 years!
Shadow inventory, which refers to the amount of troubled loans still in the foreclosure pipeline that are yet to hit the market, has become less of a concern in the past year.
One major reason has been that the big banks- Bankof America(BAC) , JPMorgan Chase(JPM) , Citigroup(C) and Wells Fargo(WFC) have increasingly opted for short sales and other forms of mortgage relief such as loan modifications instead of foreclosures.
The shift has been good news for the housing market. One, short sales sell at a lower discount to the market than foreclosures, thus easing the pressure on home prices. Secondly, pursuing foreclosure alternatives first ensures that distressed inventory hits the market in a more measured pace rather than all at once.
Yet, no one can be sure that this shift away from foreclosures is permanent. Much of this change of heart has taken place in the wake of the foreclosure robo-signing scandal. First, there was a moratorium on all foreclosures. Now banks are rushing to comply with the terms of the $26 billion mortgage settlement signed earlier this year, which requires them to actively consider foreclosure alternatives.
Once they meet their quota, it is unclear how they will deal with delinquent loans on their books. "The disposition strategy of banks is material to the market," said Eddins. Even if the shift to short sales is permanent, home prices will "go up a step", but not as much as they would do in a healthy market, he says.
"Short sales is a preferred strategy for banks and borrowers," says Eddins. "But you are always going to have REO and a lot of it."
Home prices in cities such as Phoenix have risen more than 20% in the past year, largely on the back of a decline in distressed sales and heavy investor demand.
But Eddins is not convinced that markets in Phoenix and California are out of the woods. According to the analyst, these markets have not risen on the strength of demand from households. They had a good year but it could easily erode.