REO supply will “challenge” housing markets

By James R. Hagerty

Barclays Capital

The numbers through March 2010 are estimates, the rest are projections.

It’s a bit like guessing how many pennies are in a gallon jug at the state fair, but housing analysts keep trying to count how many foreclosed homes banks and mortgage investors own.

Why should we care? Unlike at the state fair, there is no prize for guessing right. Still, if we can track the number of these REO (“real estate owned”) homes, we can get some sense of how banks and others are doing in their efforts to dispose of the properties and how much longer they will be weighing on the housing market.

The good news is that two of the leading contenders in this guesstimating game–Tom Lawler, an independent housing economist and gentleman farmer in Leesburg, Va., and Robert Tayon, an analyst at Barclays Capital in New York–have been comparing their methods recently and learning from each other. Both are in the same ballpark and both say the REO count is on the rise.

Mr. Lawler estimates there were 574,000 one- to four-family REO homes at the end of the first quarter, up from 518,000 at the end of 2009 but well below a peak of 668,000 in the third quarter of 2008. More modest (honest?) than most economists, Mr. Lawler describes his estimates as “crude” and “a work in progress.” He figures his tally is too low–he can’t find good data on all of the thousands of REO owners– but still “indicative” of the trend.

Mr. Tayon of Barclays estimates that REOs totaled 522,000 in March, up from 479,000 at the end of 2009 but below the peak of 688,000 in September 2008.

After soaring in 2008, the REO total shrank for most of 2009 as foreclosure-prevention efforts slowed the flow of defaulted loans toward resolution and investors rushed to buy what they saw as bargains in hard-hit areas such as Phoenix and Las Vegas. Now, as banks and other loan servicers work their way through the backlog of loan-modification applicants and reject many of them, the REO count is rising again. Mr. Tayon expects it to peak at 538,000 in August 2011 before starting to decline gradually.

Fannie Mae and Freddie Mac, two of the biggest holders of REO, both expect their REO inventories to increase in the next few quarters, Mr. Lawler says.

The expected rise in REO supply will “challenge” housing markets in areas with high concentrations of foreclosures, Mr. Lawler adds. But he doesn’t think the effect on prices will be as severe as it was in late 2008 and early 2009, when loan servicers dumped huge amounts of property on the market.

There are still plenty of struggling borrowers at risk of losing their homes. The Mortgage Bankers Association, a trade group, last week reported that 14% of mortgage loans on one-to-four-unit homes were 30 days or more delinquent or in the foreclosure process as of March 31. That represents about 7.3 million households. The rate was 12% a year earlier. At the same time, fewer people have fallen behind in recent months as the economy has improved.

Those who want to guess how many REOs will be in the jug two years from now will have to take a view on whether the economy is going to produce enough jobs to create demand for all those houses.

Please follow me for housing news on Twitter @jamesrhagerty

9 Responses

  1. One only need’s to look at the silent “toss backs” by F&F to the originating banks/brokers… and the FED”S …..in the TRILLION’S and lets not forget about all those CMBS’s that are defaulting daily…the FED owns most of “Hilton Hotels” defaulted debt!

  2. Lots of vacant homes in southeast Wisconsin. About every 5th house you look closely at is vacant. I, too, haven’t made a payment since July of 08, Wells Fargo just set a date for a sheriff’s sale (July 28). Now I will go do the Bankruptcy Court shuffle and tie them up for another year. By the way, the loan modification I was told I qualified for has yet to be seen. Tried to pay my homeowners insurance, and Allstate said “Your servicer paid a couple days ago.” HAMP me, baby!

  3. Wall Street and Banksters…should read
    Ball Street and Wanksters

    the # of REO properties the Wanks are holding ?
    projected is simple..
    total foreclosures in 2009 & 2010
    subtract modest 3%
    1% for homeowners who challenged cases,
    2% auction purchased properties
    reveals the shadow inventory ..

  4. Wall Street and Banksters deflated my property by 60%. “Why” should I pay for something that does not exist ? If the value was the same as six years ago, then it would be a different story.

    BSE

  5. neidermeyer,

    I am also in the same are as you. A friend of my mother’s is looking for a house, however, there are very few houses on the market. That prompted me to research this a little further. I went to realtor.com and typed in my zip code – only 125 listings (I did not specify any particulars so it would bring up everything on the market). I then went to the Orange County Property Appraiser’s site and did the same type of search – it returned over 1200 properties.

    My conclusion is that there are over 1,000 properties just in my zip code alone that are most likely part of the so called “shadow inventory.” These are homes that have been foreclosed on but are not on the market.

  6. If homes are REO the non paying occupant continues to maintain the home pay homeowners and insurance ect so there’s the advantage to the likes of Fannie and Freddie and whoever

  7. THIS is great information and I think many that are thinking things are doing better are in for surprise. This is right now considered a jobless recovery and inflation will be a challenge soon.

    Having another potential 7 million homes on the market in next year or two does not sound reassuring. I am not hearing about new homes or new construction. yikes.

  8. The NYT had some interesting statistics on the subject. For instance, “More than 650,000 households had not paid in 18 months.”

    I am one of those 650,000 who haven’t paid on my mortgage in over 18 months.

    http://www.nytimes.com/2010/06/01/business/01nopay.html?src=busln

  9. In my part of Florida (orange/seminole/osceola counties , ie. Orlando) the number of 30 day+ lates is 23.9% , Miami and Tampa are similar. Based on the job market here I know the estimates these two have come up with are very very low…. and the job losses just keep growing.

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