Friday, October 25, 2013

The Monsters of the American Housing Market

Updated February 2014

Just as it looks like the American housing market is finally turning a corner after years of dropping values, another "monster" lurks just around the corner according to statistics from Realtytrac.

Let's start by looking at a few statistics to help set the stage.  In the U.S. housing market, there are currently a huge number of bank-owned homes on the market as shown here (in red) (current to early 2013, the latest data available from RealtyTrac):

The estimated cumulative value of all bank-owned and homes in foreclosure was $200 billion in the first quarter of 2013, up 14 percent on a year-over-year basis.

Full year 2013 (REOs) dropped 26 percent from 2012 to 1,361,795, however, they were up 7 percent and were down 53 percent from the peak of 2.9 million foreclosure filings in 2010.  Data shows that 1.04 percent of U.S. housing units had at least one foreclosure filing during the year; this is down from 1.39 percent in 2012 and 2.23 percent in 2010.  Some states are bucking the national average with 3.01 percent of all housing in Florida with a foreclosure filing, 2.16 percent in Nevada and 1.89 percent in Illinois.  Some states are also bucking the national drop in filings as shown on this graphic which shows the states with the largest year-over-year increases in filings:

It is rather shocking to see that some states are still seeing very substantial year-over-year increases in the volume of foreclosure filings, including Maine, up 123 percent, Maryland, up 117 percent and Arkansas, up 69 percent.

As I noted at the beginning of this posting, there is a "monster" lurking in the housing market.  By cross-referencing foreclosure data with data from the U.S. Postal Service, Realtytrac was able to analyze the number of foreclosed properties that have been abandoned by their owners.  These properties are termed "zombies" because many of them are in less than ideal condition since there is no one around to perform routine maintenance as shown in this example:  

As a result of their appearance, these "zombies" drag down home values for surrounding homes.

Nationwide, Realtytrac found that 35 percent of properties that were actively in the foreclosure process were "zombies".  Certain states have far higher numbers of "zombie" homes than others as shown on this bar graph:

As a percentage of foreclosures, the following states have the worst "zombie" rates:

Kentucky - 54 percent
Indiana - 53 percent
Maine - 53 percent
Oregon - 52 percent
Washington - 50 percent
Nevada - 50 percent
Georgia - 48 percent

Cities with the worst "zombie" rates are Miami, New York, Chicago, Tampa, Orlando, Philadelphia, Los Angeles and Jacksonville, Florida as shown on this unique graphic:

While the looming spectre of a growing number of vacant REOs is of concern to the overall health of the American real estate market, what is of even greater concern is the fact that 10.7 million residential homeowners still owe at least 25 percent more than what their properties are worth even as real estate values have seen gains in some markets.  This represents 23 percent of all U.S. residential properties with a mortgage in May 2013.  An additional 8.3 million homeowners find themselves in the range of having between 10 percent positive and 10 percent negative equity, representing another 28 percent of all residential properties with a mortgage in September 2012.

The greatest danger to the recovery of the U.S. housing market is a rise in mortgage rates.  As shown on this graph from FRED, while mortgage rates have dropped slightly over the past month, they are still between three-quarters and a full percentage point higher than they were throughly most of 2012 and early 2013:

Apparently, the health of yet another sector of the American economy is in the hands of the Federal Reserve and their plans to end their zero interest rate program sometime down the road.  That is far from reassuring.


  1. Calling the home buying we have seen in both the new and existing markets "pent up demand" may be a stretch, many houses still remain empty or under leased, this means the occupants are not fulfilling their obligations. With population growth slowing, values changing, and slightly more occupants per home, less houses will be needed. Some of what we are currently witnessing is a repositioning and refinancing at historically low rates. The demographics of the baby boomers cutting back on spending and downsizing will also effect the number of new units going forward. This will extend into the size of new homes being built, expect smaller to become the norm. In coming quarters do not expect housing to lift the GDP as much as it has recently in coming quarters. More on why housing is not going to soar in the post below,

  2. I question the Philadelphia data I am certain the "Zombies" you speak of are a large % owned by city agencies which is a separate discussion and pertains to the loss of population in industrial areas from the 70's thru 2000 due the manufacturing decline.

    The other areas discussed seem valid to a degree but from experience realty track is not always up to date in their data and often disclose a 15-20% +/- variation. Lastly, Blackstone has acquired volumes of these zombie homes in Ca, Illinois, and Nevada for reit purposes.

    there are signs of a bubble in places but I do not think the doom and gloom portrayed here is accurate.