REALTYTRAC: Emerging Foreclosure Trends in 2012

REALTYTRAC:  Emerging Foreclosure Trends in 2012
According to Irvine, CA-based RealtyTrac, there was an abundance of good news on the foreclosure front in 2011 that might portend a rosy outlook for 2012 — at least at first blush.

U.S. foreclosure activity was down on an annual basis in every month during the year through November, according to RealtyTrac’s monthly foreclosure market reports. These annual decreases put the nation on pace to have fewer than 2 million properties with foreclosure filings for the year, down more than 30 percent from the nearly 2.9 million properties with foreclosure filings in 2010. See our year-end 2011 foreclosure report being issued Thursday, Jan. 12.

Foreclosure activity in 2011 is on track to be down more than 50 percent in several states, including New Jersey, Maryland and Florida.

In addition, the much-feared shadow inventory of foreclosures has declined dramatically over the course of the year. Inventory of properties in some stage of foreclosure or bank-owned (REO) has shrunk from a record high of more than 2.2 million in December 2010 to just under 1.5 million in September, according to RealtyTrac data. That’s a 32 percent drop in just nine months, and puts the estimated months’ supply of foreclosure inventory at just over one year.

Despite this seeming good news, the housing market has not completely escaped the clutches of this foreclosure crisis. Instead foreclosure processing delays in 2011 have artificially exaggerated what would have been a slow, natural decrease in foreclosure activity off the foreclosure peak of 2010. This artificial trough in foreclosure activity in 2011 will result in a corresponding double-peak in 2012.

Although this double-peak will most likely not be as severe as the previous peak of 2010 (or 2009 in some local markets), buyers, investors and real estate agents should brace themselves for a resurgent short sale and REO market this year — and look for the opportunities that more foreclosure activity may represent for them.

RealtyTrac previously projected that close to 1.2 million properties would be foreclosed in 2011, based on foreclosure start activity in 2010. But REO activity through November puts the nation on pace to reach only about 800,000 properties foreclosed for the year. See our year-end report for the final number.

So what happened to the 400,000 difference in REOs? Many of them will likely be pushed into 2012.

Evidence of this coming wave of deferred bank repossessions in 2012 is a recent surge in the earlier foreclosure filings that start the foreclosure process. These default filings spiked 33 percent back in August and have remained elevated since then. Scheduled foreclosure auctions, the second stage of the foreclosure process in most states, reached a nine-month high in November, indicating this wave of delayed foreclosures is gradually making its way through the foreclosure process.

On top of the foreclosures deferred from 2011 to 2012, RealtyTrac expects an additional 600,000-plus REOs as the result of foreclosures that started the process in 2011. That will add up to close to a million REOs in 2012, provided that the foreclosure industry begins to function more normally and the rules of the foreclosure game don’t change once again.

Lastly, RealtyTrac expects to see more batches of properties beginning the foreclosure process in 2012 as lenders process more of the delayed delinquencies — not to mention brand-new foreclosures caused by the twin threats of high unemployment and severely underwater homeowners.

 Resurging foreclosure activity in 2012 will look less like a tsunami and more like a series of smaller waves rolling into shore over the course of the year — which should allow the market to absorb this inventory without another 20 or 30 percent hit to home prices. Still, the steady influx of foreclosure activity will also keep home prices from appreciating substantially during the year.

Increasing foreclosure activity will slowly push the shadow foreclosure inventory higher, and that could be good news for buyers, investors and real estate agents in markets with a scarcity of inventory. In select markets hard-hit by the foreclosure crisis, local real estate professionals have been telling RealtyTrac for several months now about a shortage of inventory and bidding wars on foreclosure properties. This is happening in places like Stockton, Calif., and Detroit, where a member of theRealtyTrac Agent Network recently said he believes there is a “backlog of buyers” in his market just waiting on more properties to become available.

Legal issues, property maintenance costs and other issues complicating the foreclosure process will lead lenders to more likely approve short sales in 2012. Many of the properties that started the foreclosure process in the third and fourth quarters of 2011 will end up as bank-owned properties in 2012, but many will also end up as short sales.

This all spells opportunity for buyers, investors and real estate agents in 2012. Prices and affordability will stay low, allowing buyers and investors to still find good bargains. Available inventory of pre-foreclosure and bank-owned property will increase, providing more options for those buyers to find the bargain they’re looking for. And lenders will continue to slowly streamline the process of selling both short sales and REO properties — making life easier for everyone involved.