Foreclosure Report Tells Only Part Of The Story

You may see a headline that says foreclosure filings dropped significantly in the first half of 2011. It would be wrong to think this means the housing crisis is behind us. In fact, another wave of the tsunami could be just ahead.

RealtyTrac, a marketer of foreclosed properties, reports a total of 1,170,402 U.S.  properties received foreclosure filings — default notices, auction sale notices  and bank  repossessions — in the first six months of 2011. That down 25 percent from the previous six months and a 29 percent decrease from the first half of 2010.

It all sounds like good news, but it isn't necessarily.

“It would be nice to  report that foreclosure activity is dropping as a result of improvements in the  economy or the housing market,” said James J. Saccacio, chief executive officer  of RealtyTrac. “Unfortunately, with unemployment rates inching back up,  consumer confidence weak and home sales and prices continuing to languish, this  doesn’t appear to be the case.

Instead, processing and  procedural delays are pushing foreclosures further and further out, RealtyTrac estimate that as many as 1 million foreclosure actions that should have taken  place in 2011 will now happen in 2012, or perhaps even later.

“This casts an  ominous shadow over the housing market, where recovery is unlikely to happen  until the current and forthcoming inventory of distressed properties can be  whittled down to a manageable number,” Saccacio said.

Strategic default

Among the next wave of foreclosures, say housing experts, could be thousands of homeowners who have good jobs and who can afford their monthly payments. But with home prices expected to fall further with additional foreclosures, affluent homeowners who are upside down on their mortgages may choose “strategic default.”

Strategic default is when the homeowner simply chooses to default and walk away, rather than continue making payments on a home they paid $650,000 for but is now worth only $300,000. Their equity is already gone and they know the price will never recover to what they paid. They figure, what's the point of continuing to make payments?

There is anecdotal evidence that some affluent homeowners have purchased a second home at a bargain price before defaulting and walking away from their first home. If this should become a trend, it will present banks with increasing losses and add to the huge inventory of homes on the market.

Economist Gary Shilling, author of “Age of Deleveraging,” predicts real estate values will fall another 20 percent, and will drag the economy back into recession next year. In an interview with the Daily Ticker, Shilling said his research indicates the housing inventory is between two and two and a half million homes. It will take nearly five years, he said, to work through that supply.