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Feature feature some neighborhoods and towns, we see values increasing. Frank Pallotta, Managing Partner of Loan Value Group in Rumson, New Jersey, also noted the role of banks but said the recent increase in home prices might be reversed. "Starting nearly two years ago, banks began to pull back on the number of home seizures and foreclosures in an effort to deal with the ramifications of the robo-signing fallout. Banks were ordered to review their processes and operational flows to ensure that the consumers were offered every opportunity to cure their financial situation before the bank foreclosed," Pallotta recalled. "That 'slowing' of the foreclose process led to a dwindling of the existing supply of homes on the market. Builders then stepped up their efforts to attempt to satisfy the demand for homes. Adding historically low interest rates to this supply/demand imbalance has created a temporary increase in home prices." Affects Vary by ZIP Code T he impact of foreclosures on the market is—like the value of real estate—dependent on location, location, location, according to Philip D. Georgiades II, chief loan steward for VA Home Loan Centers, a specialist in government mortgage products. "The impact of foreclosures on housing starts varies by market area," he said. "Foreclosures in high-cost areas are more common and are now driving down new development demand and impacting housing starts. In many high-cost area housing tracts, foreclosures and pre-foreclosure short sales are saturating the market. The volume of distressed property is creating additional competition for builders, thus limiting the desire for new inventory. In low-cost areas, demand for new property is greater than the demand for 32 | The M Report foreclosures. A foreclosure that is only a few thousand dollars less is simply not as desirable as new construction and the impact foreclosures have on starts in these areas is less severe." According NAR data, distressed homes—foreclosures and short sales—sold at deep discounts represented almost 30 percent of existing-home sales last year, giving homebuyers a less expensive alternative to new homes. of demand while supply remains fixed. If that displaced household goes on to rent, rental units are typically different in physical and other characteristics from owner-occupied units, so the overall supply-demand balance may seem to be unchanged but the submarket balances have changed. Similarly, the regional balance of supply and demand may change as the displaced household looks for employment in other areas." "The volume of distressed property is creating additional competition for builders, thus limiting the desire for new inventory. In low-cost areas, demand for new property is greater than the demand for foreclosures." —Philip D. Georgiades II, VA Home Loan Centers "A foreclosure sale obviously adds a new unit to the market supply of housing, but it also displaces a household," observed Robert Quercia, director of the University of North Carolina Center for Community Capital, "so the effect is an increase in net supply only to the extent that the displaced household moves in with family or friends or is otherwise absorbed by existing demand." "More important," he added, "are changes in the composition More Than Meets the Eye T he impact of foreclosures, he said, is only part of the equation. "Obviously, builders won't build if they can't get credit to finance construction; even if they do, households need to be able to get a mortgage to buy the home when it's built," he said. "It appears that lending remains overcorrected, so appropriate credit easing has the potential to create significant lift for the housing market. It would also enable households to take advantage of improving conditions and good rates, which would strengthen the householdlevel financial outlook." A unique aspect of foreclosures, noted Sharga, is timing. "Ultimately, foreclosures add distressed properties to the housing supply, where they compete with traditional sales of new and existing homes," said Sharga. "Unlike new homes, foreclosure inventory isn't 'scheduled,' so it can unexpectedly upset the balance of housing stock supply and demand and almost always contribute to a decline in home prices. During the recent foreclosure tsunami, distressed inventory essentially overwhelmed the market (at one point accounting for about 40 percent of all home sales), causing home prices to fall dramatically and forcing homebuilders to virtually cease production, as they were unable to compete with relatively new inventory being sold at fire sale prices." Nonetheless, Sharga offered some optimism. "Foreclosure inventory, while still higher than we'd see in a 'healthy' housing market, is finally at levels that can be reasonably absorbed by the housing market—in fact, there's less foreclosure inventory than most industry analysts had expected, leading to inventory shortages in some markets and a subsequent increase in housing starts to meet market needs," he said. "As home prices continue to rise and the cost of capital continues to be extraordinarily low, builders should start to see better availability to finance wellthought-out construction projects. Since certain markets appear to be recovering more rapidly than others, it stands to reason that financing may be more readily available for projects in those markets than in the markets lagging the recovery."