Home Prices Plummet and Foreclosures Climb at Record Rates

With the rate of foreclosures rapidly rising, the drop in home prices escalating, and the crisis extending to nearly every major city, the most critical real estate recession in decades remains far from over, says an April 29 USA Today article by Stephanie Armour. Investors beware.

Logging the biggest decline since its creation in 2001, the Standard & Poor’s/Case Shiller home composite index covering 20 cities dropped by 12.7 percent in February compared with last year. Every one of the 20 cities (except Charlotte) registered price declines; 17 suffered record drops for the year. According to David Blitzer, chair of S&P’s index committee, “There is no sign of a bottom in the numbers.”

Foreclosure activity rose a shocking 112 percent year-over-year and 23 percent quarter-to-quarter, according to CNBC.com. Foreclosure activity includes auction sale notices, bank repossessions, and default notices.

One significant concern is the unprecedented rise in bank-owned properties. “Typically you’ll see about 20 percent of the foreclosure filings being bank-owned,” said Rick Sharga of RealtyTrac in California. “We’re getting to a point now where it’s well over 1/3 and aiming at 40 percent, so that suggests that a lot of these homes can’t even be sold to investors at auctions—because there’s just no equity in the properties.”

More than a million bank-owned homes may flood the market by the end of the year, Sharga predicts. With approximately four million properties in the Multiple Listing Service (MLS), that means 25% will be owned by banks. Despite lenders’ assertions about offering work-outs or refinancing, as well as programs to assist borrowers in default, the rising number of homes now owned by banks points to significant problems with the effectiveness of these workouts and programs.

According to a RealtyTrac report, Nevada suffered the worst foreclosure rate at 3.6 times the national average, just ahead of California and Arizona. In the first quarter of this year, one in 54 Nevada homeowners received a foreclosure notice.

Through the coming months, analysts predict even more foreclosures, causing greater problems with prices. In order to clear their balance sheets of home inventory, banks continue to slash prices, compelling sellers who owe more than their homes are worth to further cut prices.

According to Mark Zandi, chief economist at Moody’s Economy.com, “There’s no sense of stabilization. The foreclosures are causing a vicious cycle, and the job market is weakening. This doesn’t feel therapeutic anymore. This is undermining the economy.” The results raise a multitude of red flags for investors, who may want to examine their options.

Only when foreclosure filings diminish can the real estate market recover, experts say. Therefore, the faster home prices hit bottom, the quicker buyers can resuscitate home sales, said Naroff Economic Advisors’ Joel Naroff. “We’re beginning to get massive price declines, and we need that to clear this market,” he concluded.

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