South Orange County Blog from Bob Phillips

What’s in Store for Housing in 2014, Part 1

From Orange County’s Rick Sharga, of Auction.com

Many economists and market observers have suggested the market is poised for continued growth as the recovery enters its third year, and there are positive elements in play that provide some reasons for optimism.

Recent loan vintages continue to perform at levels better than historical norms—the default rates on loans from 2011-2013 are virtually non-existent. This has essentially shut off the pipeline of distressed assets, finally allowing the industry to work through the backlog of seriously delinquent loans and loans already in the foreclosure process.

States with non-judicial foreclosure processes have had remarkable success in clearing out the inventory of distressed properties, which is one of the factors driving the housing rebound in states like California and Arizona.

Not coincidentally, foreclosure activity has been declining as well, and this is likely to continue throughout 2014. Unprecedented levels of short sales have been one of the reasons for the decline in foreclosures—every short sale represents one less REO coming to market. And the billions

of dollars of non-performing loan sales have connected distressed borrowers with special servicers, who have managed to modify tens of thousands of loans, preventing more foreclosures.

Investor activity at the low end of the market has had two significant effects: first, investors have gobbled up virtually all available REO homes, and begun to purchase rental properties via short sales and trustee sales.

Second, they’ve helped accelerate home price appreciation, particularly in many of the markets that were hardest hit during the downturn. This, in turn, has dramatically reduced the number of homeowners in a negative equity position, dropping the number of homes in the so-called “shadow inventory” to much more manageable levels.

As home prices have risen, more non-distressed properties have begun to enter the market, helping to ease the inventory shortage of existing homes, and dropping the extremely high percentage of distressed home sales to more reasonable levels than we’ve seen in the past seven or eight years.

Builders have noticed the drop-off in distressed property sales and limited inventory, and housing starts for single-family homes have risen dramatically in the last months of 2013.

So…home sales are up, prices are up, inventory is improving, foreclosures are dropping, and homebuilding is awakening from its long hibernation. What’s there to be bearish about?

For those of you looking for cautionary notes going into 2014, I offer two items: jobs and loans.

Rick Sharga is EVP for Auction.com. Look for the second part of his 2014 commentary on Monday.

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