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Have We Reached the Floor in Housing?

The recent uptick in real estate activity has really started to bring out the optimists.  I follow CNBC, the NY Times, and the FOX news organizations fairly regularly.  It hasn’t been until recently that I started to see stories with a positive tone regarding the housing market or the economy.  Who knows, maybe it’s that spring is here and flowers are blooming outside and better weather is upon us.  Needless to say, the recent rash of positive stories started to get me thinking of whether we actually might be at or approaching the bottom of the market. 

As I thought more about this possibility, I jotted down reasons for why people are considering this to be the bottom.  Here is what I came up with:

• Inventory numbers are decreasing
• Open houses are bustling with more potential buyers
• Properties are spending less time on the market
• Interest rates are at historical lows

These are all good signs.  Unfortunately, there are two things that are holding us back from becoming a true believer – foreclosures and short sales.  There appears to be some misleading information out there that the number of short sales and foreclosures coming on the market have slowed considerably.

One site, Trulia offers to explain this information. Trulia recently reported that despite the large volume of foreclosures (see the list below), there has been a significant drop in the number of foreclosure properties coming on the market in some states.

1.  Las Vegas, NV (31,983)
2. Phoenix, AZ (19,075)
3. Chicago, IL (16,038)
4. Los Angeles, CA (9,913)
5. Sacramento, CA (9,346)
6. San Diego, CA (7,668)
7. North Las Vegas, NV (6,852)
8. Bakersfield, CA (6,744)
9. Miami, FL (6,699)
10. Tampa, FL (6,487)
11. Indianapolis, IN (6,377)
12. Stockton, CA (5,924)
13. Atlanta, GA (5,859)
14. Orlando, FL (5,855)
15. San Jose, CA (5,802)

 What is the central cause of the drop?

According to the Trulia article, a number of states are in the process of or have already implemented a change that impacts the length of time to complete the foreclosure process.

Previously, states had an established time period for the foreclosure process.  Now, some states are setting a minimum number of days before a foreclosure sale can occur.  In fact, according to the Trulia article, the state of Maryland includes a mandated time period after default before a lender can file a foreclosure action and also a set amount of time is required to pass after notifying the homeowner about impending foreclosure actions prior to filing the action.  These changed state rules allow more people to “buy time” to save their homes whether it is through refinancing, loan modification, or some other means.

Even though foreclosure filings have reduced in many states across the nation, the news seems more misleading than a clear sign of justified optimism or sustained recovery.  The foreclosure process has been delayed; however without meaningful reductions in loan payments via loan modifications or other means and/or without a persistent increase in home sales, nasty results for affected homeowners and lenders could be inevitable down the road.

This reminds me of a time when I was a kid growing up in Phoenix, Arizona. I had my fair share of dry, disgusting heat.  During one of those pounding hot days, I remember playing outside my house and looking down the street.  It appeared that there was a huge wet pool of water right in the middle of the street.  As I walked closer and closer, the water seemed to disappear.  It was my first time experiencing a mirage. 

So it seems, many years later, there’s another kind of mirage in the midst.  And this mirage is taking place in our housing market.  Not down the street, but at the front door.

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