Foreclosure Spike Is Positive Sign For Housing

by Diana Olick

After months of declines, the foreclosure numbers are going up again.

Foreclosure starts, the first phase of the process, rose 9 percent in May month-to-month, the first increase in over two years, according to a new report from RealtyTrac. Bad news, right? Only if you are the one losing your home.

For the overall housing market, this is exactly what needs to happen to return to health. For hungry investors, it means more opportunity.

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There are still millions of delinquent loans which will never "cure," and the sooner they get processed and sold, the better for home prices and home buyer confidence.

As the so-called, "shadow inventory" of distressed properties (seriously delinquent loans and bank owned homes yet unlisted) drops, down to 1.5 million units in the first three months of this year from 1.8 million a year ago, according to a new report from CoreLogic, the real inventory of potential homes for sale can stabilize and become a more dependable reading for buyers.

How do you believe existing supply numbers if you know there is far more lurking in the pipeline, but you have no idea when it will hit the market? (How to sell your house fast?)

"The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices," said CoreLogic's chief economist Mark Fleming.

We're seeing that in Phoenix and parts of California, where home prices are finally beginning to rise again. Much of the new strength is due to heavy investor demand and a lack of distressed supply for them to buy. Given that backdrop, seeing a rise in foreclosure starts now is not so dire.

You don't have to worry about a pile of rotting meat, if there is a hungry pack of wolves waiting in the wings to gobble it up. That's why lenders are trying not to repossess properties, but instead do short sales (where the home is sold for less than the value of the mortgage) or let the homes go at auction. 

"The lenders are pushing those pre-foreclosure sales. They recognize the demand from the investors. I would expect the numbers to continue to increase from a year ago," says Daren Blomquist of RealtyTrac. "We do hear a lot about, not just in terms of the hedge funds, but individual buyers looking for foreclosures in their area are having to compete against many other buyers."

Georgia, which last month gained the dubious distinction of holding the nation’s highest foreclosure rate, leapfrogging the usual suspects (CA, AZ, FL, NV), is a prime example. Investors who are running out of options in the sand states are turning their attention to the Georgia, where overall foreclosure activity and bank repossessions both jumped over 30 percent.

The faster the process, the faster these investors will eat up the inventory, and as in Arizona, the faster overall home prices will recover.

There are now new state laws, government bailouts and a $25 billion national mortgage servicing settlement designed to safeguard consumers and keep as many possible in their homes.

However, a sizeable portion of troubled loans will inevitably have to go to foreclosure, and the sooner the better, especially as investor demand to buy and rent these properties, often back to the original owner, is high.

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