Foreclosures distort housing data

Fire-sale pricing, bank-owned 'shadow inventory' add to difficulty of trying to gauge health of market

As if the housing market wasn't scary enough, the record-setting surge in foreclosures could be distorting some of the closely watched housing data used to gauge the market's health.

The foreclosure glut is making listings of homes for sale a less reliable indicator, because much of the distressed inventory might be left out. In addition, fire-sale prices for such properties may be skewing volume figures.

Some real estate analysts say this may indicate that housing conditions are worse than they look, dampening hopes that the troubled market could bottom soon.

The combination of weak housing sales, falling home values, tighter credit and a slowing economy have left financially strapped homeowners in a tough spot. Some borrowers have no choice but to foreclose if they can't find a buyer or pay or refinance their loans.

Nationwide, more than 272,000 homes received at least one foreclosure-related notice in July, up 55 percent from about 175,000 in the same month last year and up 8 percent from June, said RealtyTrac Inc.

Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions. More than 77,000 properties, or 28 percent, were repossessed by lenders nationwide in July, up from 16 percent a year earlier, the company said.

"The wave of foreclosures is unprecedented, making it difficult to analyze, difficult to gauge how large it will get or how bad it will make things," said Deutsche Bank analyst Nishu Sood.

In a recent report, Sood laid out a case for why the surge in foreclosures isn't being fully reflected in the resale inventory levels, as measured by multiple listing services. In nine of the 33 markets Sood examined, distressed inventory is significantly higher than the MLS listings show.

That difference is most pronounced in what have been deemed "bubble" real estate markets, which saw the biggest gains during the home buying boom and are experiencing the largest declines since the pullback began more than two years ago. For instance, in Sacramento, Calif., the foreclosed inventory was 31,219 units, or more than twice the 14,913 units in the MLS listings. San Francisco had foreclosures running at 190 percent of MLS listings, while foreclosures in Phoenix ran at 130 percent of the MLS listings.

Sood attributed that gap largely to bank-owned foreclosed homes that aren't always captured in the MLS listings. He called that the "shadow inventory," and said the behind-the-scenes glut of properties wreaks havoc on housing-related statistics.

Foreclosures also are influencing sales and price data. Transaction volumes are being boosted by the sale of the distressed inventory, which in bubble markets represents 40 percent of sales. But such sales then tend to push prices down, with banks offering steep discounts to move inventory, according to Sood's research.

What seems key to stabilizing the housing market is finding a way to slow the pace of foreclosures. Industry executives are looking for the Housing and Economic Recovery Act of 2008 to provide some help. Starting Oct. 1, as many as 400,000 borrowers on the brink of losing their homes may be eligible for a more affordable loan backed by the Federal Housing Administration.

"Congress and the White House have offered a lifeline to many homeowners facing foreclosure, which could help keep more people in their homes and fewer distressed properties from coming to the market," Toll Brothers Inc. CEO Robert Toll said Aug. 13 after the Horsham, Pa.-based company reported that a steep decline in new home contracts and sales would hurt quarterly results for the three months ended July 31.

The government program will allow those who qualify to cancel their old home loans and replace them with 30-year fixed-rate loans for up to 90 percent of the home's current value.

But that won't necessarily fix the foreclosure problem, because refinancing into the new program requires the lender to agree to the loan change. That means the banks would have to be willing to take a loss on the existing loan in exchange for avoiding an often-costly foreclosure.

Until there is clear evidence that the surge in foreclosures has slowed, it will be harder to call the housing collapse a thing of the past.

Reach Rachel Beck at rbeck@ap.org.