As Foreclosures Rise, Worst Markets Remain Badly Damaged

All real estate problems are local. RealtyTrac reported that foreclosure starts in May rose for the first time since January 2010. What the report mentioned, but did not highlight, is that states with massive foreclosure rates are barely recovering, if they are at all. It is hard to imagine a turnaround in national real estate numbers if these sinkholes cannot be filled in.

“U.S. foreclosure activity has now decreased on a year-over-basis for 20 straight months including May, but the jump in May foreclosure starts shows that it’s going to be a bumpy ride down to the bottom of this foreclosure cycle,” said Brandon Moore, CEO of RealtyTrac. Since foreclosures bring down home prices in the neighborhoods where they occur, price recovery in many areas will not begin for some time.

Georgia, California, Nevada, Florida and Arizona still have especially high rates of foreclosures. In Georgia, one in every 300 housing units was hit with a foreclosure filing in May. In Arizona, the rate was one in every 305 housing units. Nevada’s number was one in every 313 housing units. The inventory of foreclosed homes in these states is so high that it may take years for all of these homes to be sold. As they are, at a discount to the market for normal sales, overall home prices will be pressed downward. This pressure tends to increase the number of mortgages underwater. Underwater homes are more likely to go into foreclose than those with positive equity. The cycle will get worse and worse within these regions.

There are signs that the housing market has begun to recover in small pockets around the country. But those are only pockets, and they will not affect the states that are worst off. And there is no government policy to pull those states out of their real estate trouble. That means the recovery in those states cannot begin.

Douglas A. McIntyre