Bank-owned Homes Could Hinder Housing Recovery

In the Phoenix neighborhoods close to White Tank Mountain, almost every home you see has undergone a short sale or foreclosure in recent months. But, there is hope as bargain hunters move in to snatch up good deals. And, in addition to the scores of short sales and foreclosures there is also a massive Shadow market of homes not yet placed on the market; many because banks are attempting to minimize losses on bad investments, and others that homeowners are holding until prices climb back up.

Dubbed by some “The Foreclosure Capital”, Phoenix’s real estate market has 75% of homes on the market owned by the banks. This buildup of lender owned homes could affect the local market for years to come, not to mention affect the rate of any recovery. Foreclosing on a home and not selling is a common practice right now. While a good move at the moment, when the housing market does recover all those homes will flood the market causing another wide scale price drop.

Currently, droves of investors are diving in to the Phoenix real estate market. Foreclosures are dipping, 5 to 10 bids are coming in for homes on the market, and there are more home sales than at any time since 2006. Prices have fallen in the Phoenix area by almost 35% since the peak of 2006 and continue to fall at about 3% per month.During the first quarter, more than half of all home sales were to first time buyers, reflecting the 20 year high affordability in the area.

The rising sales and leveling off of prices in Phoenix, just like in Florida and California, the other areas hit hardest by the housing crash, are indicators that the market may be on the mend. One homebuyer recently bid on 15 homes unsuccessfully before finally landing one.

Despite the positive signs, many experts predict the crisis will continue. Just 30% of foreclosed properties are on the market right now. Some 500,000 are sitting vacant nationwide, and the market will have to react when those homes flood the market.

Why these homes have not been put up for sale vary. Many mortgage providers are backlogged as 6 times last year’s average of complex foreclosure proceedings have been executed. Also, many banks gain an accounting advantage in putting off the loss they’ll take when they sell properties for less than the principal of the original loan. Experts also say that banks could be trying to manipulate the market to prevent another massive drop in values.

It is also widely thought that the Obama Administration has encouraged banks to hold inventory to protect values. Some analysts wonder if buyers will be able to absorb this shadow inventory smoothly or if something else will occur to affect the market balance again.

Also contributing to the shadow inventory likely to hit the market in coming months are homeowners who say they’d likely sell if the market improves. According to Zillow, at least a third of the 55 million homeowners in the US fall into this category. Most of those are probably the close to 15 million who owe more on their mortgages than their home is worth.

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