Drop in Foreclosures May be Deceiving: North Texas

The latest numbers from the Foreclosure Listing Service regarding foreclosures in North Texas would seem to paint a more positive picture of the market here. They show big drops in the number of foreclosure postings, especially for July auctions. Unfortunately, they don’t tell the whole story.

In case you missed the news, the number of homes posted for foreclosure for July is down 28 percent from July 2010, and this is the fifth consecutive month that we have seen declines when comparing this year to 2010. On its face, this is certainly good news, and provides at least a ray of hope.

But even George Roddy Sr., president of Foreclosure Listing Service, was quoted in one area newspaper as saying, “We can’t seem to get our hands around what is driving this decline. There hasn’t been any major development in the economy that would change the posting numbers this much.”

He hints that perhaps lenders are just taking longer to process foreclosure postings, and that is part of it. But with our focus on short sales, we see bigger trends at work here.

For one, lenders are not nearly as quick to foreclose like they have been in the past couple of years. That is partly due to the fallout from the auto-signing embarrassment of 2010, with lenders now being more methodical and careful about their foreclosure processes. But the bigger reason is that lenders already have an excess of houses that have been foreclosed, and they don’t want to add to that REO inventory. So even though the homeowners may not be paying their mortgages, lenders are more inclined to just let those houses sit without taking action on them.

What’s driving that attitude is the low rate of pre-owned home sales, which fell 3.8 percent nationally from April to May, according to the National Association of Realtors. Lenders don’t want more REO houses when they can’t sell what they already have on hand. They just don’t want additional empty houses with more maintenance costs, utility bills, taxes, etc.

Once housing prices start to rise, though, along with home prices, we anticipate another wave of foreclosures.

But it’s not all gloom and doom. There are encouraging signs to suggest that we are moving, slowly, in the right direction. A key indicator is the latest report on houses in North Texas that are under water (negative equity) or just about under water (near negative equity). The numbers for the Dallas-Plano-Irving sector showed 18.2 negative or near negative equity in the first quarter of 2011, a significant decrease from the 21 percent in the third quarter of 2010.

For the Fort Worth-Arlington sector, the newest negative/near-negative equity number was 19.3, compared with 21.2 percent in the third quarter of 2010.

Basically, we still have about one in five North Texas houses under water (we consider near-negative equity as being under water for sales purposes, since if you tried to sell your house, the costs involved would wipe out any marginal equity, although you can see that there has been a pretty good improvement since late 2010.

So if negative/near-negative equity numbers are improving, but home prices are stagnant, that tells us two things. First, these negative equity homes are being sold, either through short sales or foreclosed home sales or auctions. Second, lenders are working with homeowners to modify mortgages and prevent foreclosures, turning negative-equity situations into positive ones.

These are both good things, and that’s the way the market is supposed to work. Once the inventory of distressed homes is reduced, lenders will be freer to make new loans, and the pent-up demand among potential homeowners will start to breathe new life into the housing market. This isn’t going to be a short process, and there is still a fair amount of pain we’ll have to deal with along the way, but we’ll get there.

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