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Shadow Inventory Keeping a Lid on DC Area Home Prices

May 7, 2012  |  by RealtyTrac

Although we’ve yet to see a massive wave of bank-owned homes hit the market in DC, the threat of such a massive wave continues to haunt home prices in the region.

A look at the S&P Case-Shiller home price index charted against foreclosure activity in the Washington DC metro region clearly shows that even small increases in the flow of foreclosure activity correlate quite closely to corresponding ebbs in home prices.

The DC home price index in February decreased 0.8 percent from the previous month, the fifth straight month-over-month decrease for the index after hitting a 17-month high in September 2011. Meanwhile Washington area foreclosure activity in February increased 2 percent from the previous month, the third straight monthly increase in overall foreclosure activity.

Looking back further a similar pattern has repeated itself over the past couple years since the home price index for DC hit bottom in March 2009. Since then home prices have slowly trended higher, but it’s been a bit of a roller coaster ride, with a few months of increasing prices followed by a few months of decreasing prices.

One big reason that home prices can’t just slowly and steadily climb higher is that, although foreclosure activity is dramatically down from the high levels we saw in 2010 and 2009, much distress and risk remains baked into the market, causing buyers to be skittish and home prices to be slippery.

The three primary ways that distress and risk remains baked into the Washington area housing market:

  • Excess unsold REO inventory: although the pace of new foreclosures has slowed, there is still a substantial excess supply of bank-owned inventory that needs to be absorbed by the market. Nationwide, RealtyTrac estimates a 16-month supply at the current sales pace, and we estimate that same 16-month supply of Maryland REOs. In Virginia, the excess supply of unsold REO inventory is less, at an 11-month supply.

In many cases lenders may not list their REO properties right away, but today’s buyers are usually savvy enough to figure out that the vacant home with the broken windows and high grass down the street from the property they’re purchasing is a bank-owned home and will eventually pull down the value of their new home when it sells — even if it hasn’t been listed for sale yet.

  • Logjam of seriously delinquent homes not yet in foreclosure: According to the most recent National Delinquency Survey from the Mortgage Bankers Association, 4.64 percent of all outstanding mortgages in Maryland were seriously delinquent in the fourth quarter of 2011, meaning that the owner is 90 days or more late on mortgage payments. That was the third highest percentage in the country, behind Nevada (6.33 percent) and Mississippi (4.65 percent). Once again, the seriously delinquent rate in Virginia is in much better shape, at 2.35 percent — ranking No. 37 among all states.
  • Large pools of underwater homeowners: RealtyTrac data shows that 12.5 million homeowners nationwide representing 28 percent of all outstanding mortgage loans are seriously underwater, meaning the amount of the loan is at least 25 percent higher than the estimated market value of the property securing that loan. The underwater percentage is slightly below the national average in Maryland, where it is 26 percent, and well below the national average in Virginia, where it is 17 percent, but the numbers are still substantial. These underwater homes are at higher risk for so-called strategic default and foreclosure, particularly the longer housing prices continue to bump along the bottom.

Short sales could be the silver bullet that helps to reduce the risk represented in the second two bullet points with less impact on home prices than foreclosures. I promised to talk more about short sales last month, but we still haven’t seen short sales pick up in the DC region as we have in some other parts of the country. But if and when they do I’ve already got a headline in mind: Salvation by Short Sale.

Posted in Featured, RealtyTrac

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4 responses to “Shadow Inventory Keeping a Lid on DC Area Home Prices”

  1. It's an interesting article about the "DC Area" with no statistics about DC in them. It's all about Maryland and Virginia. Where is the DC information?

  2. Joseph: you make a good point. I'll make sure to include DC-specific stats in a future blog post. I can tell you the DC foreclosure numbers have been extremely low since the city council there passed an ordinance requiring lenders to get a mediation certificate before proceeding with foreclosure. There have been only three foreclosure starts in the district so far this year, and 57 bank repossessions (REOs). In 2011 there were a total of 53 foreclosure starts and 196 bank repossessions. That compares to 1,883 foreclosure starts and 568 bank repossessions in 2010. The city ordinance requiring mediation was passed in late 2010.

  3. I was looking for the numbers for the Bethesda area. i am not seeing foreclosures and Short sales there hardly at all.

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