Looking for Light at the End of the Foreclosure Tunnel

As part of a whirlwind one-day trip to New York last week I got a chance to stop by the studios for The Daily Ticker show produced for Yahoo! Finance and talk to host Aaron Task about the latest RealtyTrac foreclosure activity report from April.

The report shows foreclosure activity at the national level dropping to a 57-month low, 188,780 properties with foreclosure filings for the month. Task wanted to know if those low foreclosure numbers, along with positive news in housing starts and mortgage delinquencies, indicated that the housing market is finally starting to heal.

While I do believe the housing market is starting to improve in some areas as foreclosure activity gradually fades, we’re also seeing many states and metro areas where foreclosure activity is actually up from artificial lows of a year ago. Those artificial lows were caused by a backed-up foreclosure pipeline in those states, most of which employ the slower judicial foreclosure process. I think we’ll continue to see foreclosure activity increase in those states for the remainder of this year, and I also think we’ll start to see some erratic jumps in foreclosure activity in some non-judicial foreclosure states, where some batches of delayed foreclosures still exist, albeit in smaller numbers.

Task and I also discussed another major reason behind the lower-than-expected foreclosure numbers: rising short sales. These short sales are siphoning off part of the large reservoir of distressed properties sitting out there with delinquent mortgages and underwater borrowers. Data from January this year shows that short sales are track in the first quarter to hit the highest level since the first quarter of 2009.

While short sales are generally better for everyone involved than foreclosure, it’s important to keep in mind that short sales are not a perfect solution and still have a negative impact on home prices. The average price of a short sale in January was 21 percent below the average price of a non-foreclosure property — compared to a 34 percent “discount” on foreclosed (REO) properties that were sold during the month.

And of course with a short sale, the homeowner still loses his or her home and the foreclosing lender still takes a haircut. But if foreclosure is the only alternative then short sale is probably the lesser of two evils.

Related News
U.S. Foreclosure Activity Shifts Eastward in April
A Shift Toward Short Sales in 2012
Video: Foreclosure Activity Hits Record Low, But More Coming

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