There is undoubtedly a foreclosure wave ahead, but the question is “how many homes will be foreclosed on and how fast?”
CoreLogic estimates 22.8% (11.1 million) of all mortgages on residential properties are underwater. The figures are higher – 27.8%; 13.6 million – if you include borrowers with near-negative equity.
Home Foreclosures won’t stop until these numbers come down.
A paper we dug up from early 2008 shows the Federal Reserve Bank of Boston was concernrned when 10% of mortgages in Massachusetts were underwater in 2007. The proportion of underwater mortgages nationwide is now more than double this figure.
We don’t know the “acceptable” level of negative equity share, but we estimate it must drop below 10% before home foreclosures bottom out.
To get below this 10% threshold, another 6.2 million homes could go through the foreclosure process. 8.7 million home foreclosures would be needed to bring the negative equity share to 5% of all mortgages outstanding.
This, of course, assumes negative equity will be resolved by eliminating underwater mortgages. A 25% increase in home prices could also decrease the percentage of underwater mortgages (to a still high 20%). But how likely is that in the near future!?
We’ll remember 2011 as the year when “robosigning,” the practice of a bank employee signing thousands of documents and affidavits without verifying the information contained within, put the brakes on the foreclosure process.
Many expected the backlog of home foreclosures to be released in 2012. And while there have been a couple brief upticks, banks are still holding back. They’ve yet to unleash the majority of their holdings.
Any meaningful jump in home prices could entice them, which would only put further downside pressure on prices as the supply is released. Any way you look at it, we still have a long way to go before we have anything resembling a normal housing market.
If you haven’t done so already read the Survive & Prosper issue on “Warnrning: 9 Places Where A Second Property Market Bust is Brewing.”