Foreclosures Continue To Dog Residential Real Estate Market
It’s the new normal in the real estate market, or at least that’s how Erika Hall, an agent with Keller Williams’ Hall Team Realtors in Worcester, describes it.
Foreclosures have plagued the residential real estate market for most of the last five years, becoming so common that they’re just part of a new market reality, Hall said. Buyers and sellers accept that there are, and will continue to be, foreclosures.
“We’ve had three or four years of getting used to this idea that foreclosures are going to be in the market,” Hall said. “It’s just a fact of life.”
But the foreclosure “crisis” is not as bad as it has been: Massachusetts saw 30 percent fewer foreclosures in 2011 compared to 2010, according to figures from Boston real estate tracking firm The Warren Group. Despite the drop, Massachusetts still ranks 27th in the nation in foreclosures, according to national tracking firm RealtyTrac.
In another sign of potentially positive news, the number of foreclosures initiated in the Bay State trended downward in 2011.
But Tim Warren, president of the Warren Group, which compiled the figures, remains skeptical.
“I don’t think we’re out of the woods yet,” he said.
Most of the slowdown in activity, he and other real estate experts believe, is due to legal challenges and changes in state and federal laws that have slowed the foreclosure process.
For example, in late 2010, the state extended the time a bank must give a delinquent mortgage holder to resolve back payments from 90 to 150 days. After some major banks were accused of misfiling foreclosure paperwork, some banks slowed or even stopped foreclosures for a while in 2011.
But fundamental problems in the market remain, meaning foreclosures will continue into the foreseeable future, Warren predicted.
The foreclosure crisis can be broken down into multiple waves, said Tim Davis, an independent research analyst who tracks foreclosures for the Boston-based Massachusetts Housing Partnership.
Wave 1: Sub-Prime Fallout
The first wave, before the recession and after the housing bubble, was caused mainly by sub-prime mortgages that homeowners simply couldn’t afford. The ensuing recession and financial crisis then caused unemployment to spike, causing millions of Americans to lose their jobs and sparking the next wave of foreclosures.
In 2011, the job market improved. For example, the nation added 200,000 jobs in December and the unemployment rate fell from 8.7 to 8.5 percent. The Bay State’s unemployment rate was slightly better, at 6.8 percent. But, the employment gains haven’t been enough to prevent a third wave of foreclosures, Davis said.
A large number of foreclosures must still work their way through the economy. There are just too many people underemployed, working lower-salary jobs than they did before the recession or working fewer hours, hence earning less, Davis said. Federal figures back that up: While more than 13.1 million Americans are out of work, there are another 8.1 million underemployed, or working only part-time for economic reasons, according to government data.
“There are not as many new owners that are going into default, but we still have so many still in default that there is a huge backlog of foreclosures that we still have to get through,” Davis said.
Complicating efforts is the fact that home values have not recovered from their recessionary fall. Before the economic slowdown, someone who was under water on their mortgage could simply sell his or her house. Today, home prices have dropped so far that even if a house is sold, it may not sell for as much as what the owner owes on the mortgage, meaning the delinquent mortgage holder will still be in default on the loan.
Meanwhile, banks and mortgage holders seem to be slowly but surely picking up the foreclosure pace again, according to Central Massachusetts realtors.
“There are just as many out there as there have been, and there are more on the horizon,” said Dave Stead, a RE/MAX realtor in Worcester.
In particular, Stead has seen foreclosures on homes valued at north of $200,000 whereas, previously, they were mostly seen on homes valued at less than $200,000, he said. “I think they’re definitely going to be around for a while,” he said.
Less Of A Stigma
On the bright side, Hall, of Keller Williams, said that because there have been so many foreclosures, there isn’t as much of a stigma against them anymore.
“It seems that everyone knows someone who’s had a success story buying a foreclosed property,” she said. “People are generally open to the idea (of) buying a foreclosed home.”
External factors could be quelling the negative associations involved in foreclosures as well. For example, new programs from lenders and the federal government allow buyers to include required and desired repair and renovation work in a home loan. So, for example, a lender may give 110 percent of the value of the home to account for a new roof, heating system or copper pipes that must be installed in a foreclosed home someone wants to buy.
Still, foreclosed homes are not healthy for the market.
For example, Stead said many homebuyers want to look at foreclosed properties. But many times, when he shows some of them, buyers are turned off, given the conditions of the homes, some of which have been abandoned for an extended period of time.
So, what’s the end game for foreclosures?
Macroeconomic conditions are trending upward; for instance, the national jobless rate is falling and businesses are adding workers. If that continues, it could help stem the systemic causes of foreclosures, Warren said.
But until then, foreclosures are here to stay.
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