Nearly Two Years To Clear Shadow Inventory Could Impact Prices

Standard & Poor’s Rating Service issued a report that it may take 46 months to clear the nation’s backlog of distressed homes which include REOs and foreclosures. A time frame of that size could cause prices to decline in the short-term as properties remain on the market longer than expected. And while each state’s ability to clear their shadow housing inventory will depend on how many foreclosures they have and their number of mortgage defaults, how they handle foreclosures will also impact how long they struggle with a backlog of distressed properties.

Regional variations in how quickly servicers can clear the backlog of nonperforming loans are primarily due to differences in foreclosure procedures, judicial vs. non-judicial.

As of first-quarter 2012, S&P says its months-to-clear estimate in judicial states was almost 2.5x as long as non-judicial states.

We might even see a double dip in housing prices in states where officials fail to speed up their foreclosure process. Desperate to shed excess housing inventory, banks might begin offering REOs at deeper discount thus creating a domino effect. In communities where there is a large quantity of REOs, foreclosures and distressed homeowners, we could see downward price trending. That’s good news for some long-term buyers but could be bad news for investors in troubled communities who want to sell their properties at a profit within the next two years.