In the post-crash world, swings in the prevalence of repossessed properties in monthly sales appear to have been a key determinant of overall price levels, and the current foreclosure logjam stands to constrict the flow of such transactions and raise home values.
CoreLogic Inc.'s home price index rebounded 6% from March 2009 to July that year as the share of home sales made up of repossessed properties and short sales fell 8.2 percentage points, to 24.5% (see charts). The trends crisscrossed again in late 2009 and the middle of this year.
The mix of distressed and "voluntary" home sales appears to have largely been a consequence of the homebuyer tax credit (and some of the increases in the price index can be traced directly to demand that was pulled forward by federal inducements).
Homes sales shot up in 2009 ahead of the tax credit's original yearend expiration, and again after it was extended ahead of the new June deadline (contracts had to be signed by the end of April), with most of the increase in activity taking place in the voluntary sector. The tax credit was restricted to purchases of primary residences, and the distressed market is largely the province of cash investors.
But foreclosed homes and short sales are substitutes for ordinary resales and new home sales, and besides the bare impact on indexes of a change in the proportion of voluntary transactions, which typically sell dearer, the distressed stock puts pressure on prices in the rest of the market.
Disorder in the foreclosure machinery does pose risks, of course. The enormous "shadow" inventory of homes occupied by troubled borrowers or in some stage of foreclosure is among the uncertainties that are paralyzing decision-making and weighing on demand, according to Mark Fleming, CoreLogic's chief economist. Ultimately it must be cleared.
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But Fleming said that with the weak market fundamentally tied to poor economic conditions, holding supply back "until the demand environment gets stronger" could be beneficial.
Overall, however, the stock of repossessed houses is already very large, and it is unclear whether problems with foreclosures will substantially reduce the flow that is hitting markets, Fleming said. Against a backdrop of slow economic growth and high unemployment, he does not expect home prices to move much, either up or down, through next year.
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