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Foreclosures continue to stall housing market's recovery

This article first appeared in the St. Louis Beacon, May 18, 2011 - Four years after the burst of the U.S. housing bubble, Americans remain wary of buying homes, says Realtor Karen Vennard of O'Fallon, Mo.

"People just don't have an incentive to buy," she said. "I think they're still afraid."

The housing market's recovery remains uneven, at best, analysts say. The tax credit for first-time homebuyers that expired one year ago -- a plan designed to jumpstart the market -- increased sales only temporarily.

Vennard says many factors are at play, despite optimal conditions: continued low mortgage interest rates and an abundance of good affordable homes on the market. Buyers face tight credit, and rising gas and food prices aren't helping.

Recovery could be further hampered if regulators make lending requirements too stringent and if Congress eliminates the mortgage interest tax deduction, said Vennard, who is just back from a mid-year meeting of the National Association of Realtors in Washington.

"There are a lot of threats on the horizon to real estate," she said.

Americans See Long Haul Ahead

More than half of American adults -- 54 percent -- now believe the housing market recovery is at least three years away, according to a survey released today by Trulia and RealtyTrac, companies that offer online resources for real estate and foreclosure properties.

Views have dimmed from six months ago when 42 percent of American adults said the market had either already turned around or would do so by 2012; only 23 percent now believe that, according to the survey.

"Even with mortgage rates still below 5 percent -- against the backdrop of joblessness -- today's market conditions actually make consumers more skeptical about when the housing market will improve rather than sparking a sense of urgency or interest in buying a home," said Pete Flint, co-founder and CEO of Trulia, during a conference call announcing the survey results.

"We still have a long way to go before consumers feel secure in their jobs, secure in the economy and are willing to make major purchases, which is a home," he said.

That hesitancy comes despite the fact that it is now more affordable to buy than rent a two-bedroom home in many major U.S. cities, Flint said.

"I'd love to say we've taken a few steps forward, but the reality is that we're actually backtracking," he said. "Foreclosures still continue to be a major part of the housing market, and as a direct result, home prices across America continue to drop."

Flint forecasts a volatile market throughout 2011. He predicted that home prices will continue to drop for another 18 months before stabilizing, prodding more homeowners who are upside down on their mortgages to walk away rather than stay aboard a sinking ship.

Rick Sharga, senior vice president of RealtyTrac, said the number of homes that are in some stage of foreclosure distress is mindboggling and continues to grow.

"At the moment there are over 900,000 bank-owned properties currently on the banks' books. Of those, less than 30 percent are actively being listed for sale," he said. "So we have a backlog of over 600,000 bank properties yet to reach the market."

Another 1.2 million properties are in some stage of foreclosure; about 20 percent of those are listed for sale, Sharga said. Waiting in the pipeline are another 4 million properties in some stage of delinquency.

"There is plenty of distressed inventory already on the market, with a boatload yet to come," he said.

It's Still About Foreclosures

In recent months, any small dose of good housing news is tempered by bad news, usually related to the nation's foreclosure hangover:

  • Sales of existing homes in the U.S. increased 3.7 percent between March and February of this year, but prices continued to drop, reported the National Association of Realtors.
  • Distressed home sales -- think foreclosure -- accounted for 40 percent of existing home sales in March, the highest in two years, according to the Realtors association. Distressed sales include short sales and REOs (bank-owned) transactions.

Home prices declined nationally in March for the eighth straight month, according to the Home Price Index released last week by CoreLogic, an analytics company.
When distressed sales are included in the data, national home prices declined by 7.5 percent in March compared to March 2010. But if distressed sales are excluded, the year-over-year decline in national home prices was just 0.96 percent. (Home prices, including distressed sales, declined by 5.8 percent for February 2011 compared to 2010.)

In the St. Louis region, March home prices showed a greater decline: 9.73 percent from one year ago, when distressed sales are included. Excluding distressed sales, the decline was 3.39 percent. (In February, year-over-year home prices in St. Louis were down by 7.24 percent. Excluding distressed sales, the decline was 2.72 percent.)

Until foreclosures go away, housing prices will continue to suffer, analysts say.

Foreclosures in the St. Louis region have been declining -- by about 11 percent in the first quarter of 2011 when compared to last year, according to the April report by Realtytrac -- but the problem is far from over. Sharga says the delay in processing foreclosures by banks is basically putting off the inevitable.

He adds that buyer interest remains strong in buying distressed properties -- which accounted for 26 percent of all single-family residential sales last year -- but there is, even now, a two-year inventory of foreclosures at current sales rates.

According to the Trulia/RealtyTrac survey, more than half of U.S. renters (56 percent) and 47 percent of current homeowners said they are at least somewhat likely to purchase a foreclosed home, despite concerns over hidden costs, the buying process and loss in home value. They expected to pay 38 percent less for a foreclosed home than a similar home not in foreclosure.

The majority of buyers interested in purchasing foreclosures are either investors paying cash or first-time homebuyers who qualify for loans from the Federal Housing Administration (FHA), Sharga said. He added that the continuing inability of average homebuyers to qualify for loans is hampering overall market recovery.

"There has to be credit available for homebuyers who are looking to finance these properties, " Sharga said.

Sharga said the fate of government-sponsored enterprises Fannie Mae and Freddie Mac is vital because, together with the FHA, they account for 96 percent of all mortgages being issued.

"Absent those government entities, there is no mortgage market and there is no housing market. The private mortgage market has not yet come back at all," he said.

'Skin in the Game'

Vennard said that buyers who are initially interested in buying foreclosures think they will get a deal, but those properties often require major repairs and the buying process can be long and cumbersome.

"The biggest pool of buyers right now are investors who are taking advantage of the low prices," she said.

Vennard, a former president of the St. Charles County Association of Realtors, is now an alderwoman in Lake St. Louis. She says the decline in home prices -- and property assessments -- is having a serious impact on area communities.

She believes that it is important to correct the mistakes that drove the housing market's collapse, but she fears the pendulum could swing too far. Debate over Fannie and Freddie needs to take into account their role in providing market liquidity that helps average homebuyers, she said.

And while it is important to require homebuyers to have "skin in the game," she fears that overly stringent regulatory reforms could make it difficult for an average American family ever to buy a home. One such proposal would require a 20 percent down payment for a conventional mortgage -- and would remove seller concessions, such as negotiated closing costs.

Despite the drawbacks, homeownership remains the best investment most Americans can make, she said.

"I don't care what anybody says, you have to live somewhere," she said. "And buying a home, over time, remains a good investment."

Mary Delach Leonard is a veteran journalist who joined the St. Louis Beacon staff in April 2008 after a 17-year career at the St. Louis Post-Dispatch, where she was a reporter and an editor in the features section. Her work has been cited for awards by the Missouri Associated Press Managing Editors, the Missouri Press Association and the Illinois Press Association. In 2010, the Bar Association of Metropolitan St. Louis honored her with a Spirit of Justice Award in recognition of her work on the housing crisis. Leonard began her newspaper career at the Belleville News-Democrat after earning a degree in mass communications from Southern Illinois University-Edwardsville, where she now serves as an adjunct faculty member. She is partial to pomeranians and Cardinals.