One day, foreclosure activity metrics may again provide some indication of housing market health. Unfortunately, today is not that day. The headline above certainly looks good: foreclosure activity fell by 9% in April to near its December 2007 level, according to RealtyTrac. But this data is it's actually relatively meaningless. It must be interpreted in the context of banks taking much more time to put defaulted properties through the foreclosure process. Since last fall, foreclosure activity has been strongly influenced by this factor, which can be clearly seen in the numbers.
Here's the chart showing foreclosure activity over the past several years:
As you can see, foreclosure activity was quite low in April on a relative basis. It was down 34% year-over-year and 40% from its March 2010 high. This chart shows how each stage of foreclosure activity has shifted:
You can see that the really big movers have been auctions and defaults. Bank repossessions haven't fallen quite as far compared to their high. This phenomenon is summed up nicely by RealtyTrac CEO James J. Saccacio:
The first delay occurs between delinquency and foreclosure, when lenders and services are no longer automatically pushing loans that are more than 90 days delinquent into foreclosure but are waiting longer to allow for loan modifications, short sales and possibly other disposition alternatives. Data from the Mortgage Bankers Association shows that about 3.7 million properties are in this seriously delinquent stage. The second delay occurs after foreclosure has started, when lenders are taking much longer than they were just a few years ago to complete the foreclosure process.
Accordingly, we see reduced activity throughout all stages of foreclosure. But delinquencies are still very high. This implies that the foreclosure pipeline is actually getting fuller and fuller, which means that foreclosure activity will be high for longer. Banks are pulling off the band-aid slowly, so to speak.
You see declines in foreclosure activity throughout the hardest hit states as well. Here are the 10 with the highest concentration of foreclosure activity:
On a year-over-year basis, the biggest decline was in Florida. Most estimates consider its real estate market to still be in very bad shape, so this must be almost entirely due to banks processing defaults slower. They may be overwhelmed by default volume in that state, in particular.
It has now been about six months since foreclosure-gate hit, which caused banks to slow their processes. We're still seeing foreclosure activity slowing further because of it, however. This means that there's no clear end in sight for when foreclosures will again begin to better match defaults. And the more bloated the pipeline gets, the longer it will take.
It's hard to see how this is good news for the housing market. Prices are likely falling more slowly since the foreclosures aren't hitting the market as quickly as they should be. But they cannot be held up artificially -- the decline will just happen over a longer period of time instead of quickly and steeply. That means it will take longer for the housing market to hit its true bottom. Only when that occurs can a recovery begin. In other words, banks' failure to process foreclosures in a timely manner will prolong the housing market's struggles.