The U.S. housing market has recovered with impressive speed. In just two years, home prices have recovered to their pre-bubble norms, while the number of foreclosure cases working their way through the system has fallen precipitously.
According to data released Thursday by real estate data firm Core Logic, there are approximately 648,000 homes in the United States stuck in some stage of the foreclosure process as of June. This figure is down from 1 million in June 2013, a 35% decrease.
Just because home prices have recovered once again, however, doesn't mean that we have seen the last of the effects of the real estate bubble. According to Core Logic, the foreclosure inventory is now concentrated in a few states, like Nevada, which were hit particularly hard by the real estate bubble, or states like New York and New Jersey, which are "judicial foreclosure" jurisdictions that have laws preventing mortgage lenders from foreclosing without court approval.
While these protections are invaluable for homeowners who would have been wrongly foreclosed upon, the process of contesting these foreclosures in court can slow down the housing market's ability to get these properties back on the market. As Mark Fleming, chief economist for CoreLogic, said in a statement, "There is concern over whether or not we can maintain this pace of improvement as the foreclosure inventory becomes more concentrated in judicial states with lengthier, more complex processes and timelines."
Florida requires judicial review of foreclosures and was one of the hardest hit by the real estate bubble. Not surprisingly, the state has the largest percentage of foreclosure inventory in the country.
Roy Oppenheim, a Florida-based foreclosure defense attorney isn't confident that these cases will make their way through the system quickly. Not only has it been difficult for the judicial system to handle the caseload that the foreclosure crisis dumped on its lap, but banks have also often failed to properly keep track of mortgage documentation, leaving thousands of homes in legal limbo. "These banks never realized they were going to have to process so many cases," Oppenheim says. "And, obviously, many of them didn't have their houses in order when the crisis hit."
Often, when banks realize they don't have the necessary documentation to foreclose on a home, they will walk away from foreclosure proceedings without notifying homeowners that they have decided against repossession. In some cases, homeowners will walk away from their homes thinking that they are no longer liable to make mortgage payments or pay property taxes, rendering these properties into so-called "zombie foreclosures." Real estate data firm Realtytrac recently released a study estimating that 21% of all homes now going through the foreclosure process are zombie foreclosures, and there's no telling when banks and courts in these states will process these properties and get them back into the hands of private homeowners.
The housing crisis also generated a very large class of underwater homeowners (a scenario in which the value of a home is lower than the mortgage debt that homeowners owe). The most recent analysis from Core Logic puts the number of underwater homes at 6.3 million, 12.7% of the homes in the U.S. with a mortgage. Now that home prices have more or less recovered to their pre-bubble peaks, it's unlikely that we'll continue to see the sort of price gains that we've become used to in recent years. That means that, just like with foreclosures, underwater homes will experience a very slow recovery.
All of this will continue to have repercussions on the broader U.S. economy. Homebuilders have so far been reluctant to start new projects, in part out of fear that lingering foreclosure inventory will keep prices down. Furthermore, many underwater homeowners are trapped with the real estate they own now, a dynamic that depresses real estate activity. And the homes that are underwater are disproportionately in the more affordable end of the market, where first-time home buyers often look to buy.
The housing market has come a long way in the past two years, but the remnants of the real estate bubble may be with us for some time to come.