Home Price Discounts Disappearing with Shrinking Foreclosure Supply

Expect to dig a lot deeper to unearth previously abundant and steep foreclosure discounts, and forget waiting around for that shadow inventory to suddenly flood the market and put the rising home price trend in a tailspin.

Revealing two more indicators that support continued rising prices, the foreclosures for sale inventory has dropped 29 percent over the past year, ending in May 2013 and the shadow inventory is down 18 percent over the past year ending in April, according to CoreLogic's May National Foreclosure Report.

"We continue to see a sharp drop in foreclosures around the country and with it a decrease in the size of the shadow inventory. Affordability, despite the rise in home prices over the past year, and consumer confidence, are big contributors to these positive trends,” said Anand Nallathambi, president and CEO of CoreLogic.

CoreLogic defines the shadow inventory as properties that are more than 90 days delinquent, in foreclosure and held as real estate owned (REO) by mortgage servicers, but not currently on multiple listing services.

"The stock of seriously delinquent homes, which is the main driver of shadow inventory, is at the lowest level since December 2008," said Dr. Mark Fleming, chief economist for CoreLogic.

"Over the last year it has decreased in 42 states by double-digit figures, resulting in rapid declines in shadow inventory for the first quarter of 2013," Fleming added.

They're Up!

As home prices nationwide stabilize, "equity sales" or traditional home sales have become more competitive. That pushes prices up overall. In addition, the discount for foreclosure properties has dropped.

In March 2013, Capital Economics reported the discount on foreclosed properties had declined to an average of 12 percent, a level not seen since before the housing crash. That 12 percent average is far off the average 30 percent discount just a year ago.

Discounts have been as high as 50 percent in some hardest-hit markets. Foreclosure discounts varied widely earlier this year, according to RealtyTrac. RealtyTrac also reported that in June, foreclosure filings were down 35 percent from a year ago and at the lowest monthly level since December 2006.

They're Down!

So where can you still find deep foreclosure discounts? States with still-high foreclosure market shares. CoreLogic said the five states with the highest foreclosure inventory as a percentage of all mortgaged homes were: Florida (8.8 percent), New Jersey (6.0 percent), New York (4.8 percent), Maine (4.1 percent) and Connecticut (4.1 percent).

Discounts will be harder to come by in states with the lowest foreclosure inventory percentages including Wyoming (0.5 percent), Alaska (0.6 percent), North Dakota (0.6 percent), Nebraska (0.8 percent) and Virginia (0.8 percent).

Nationwide, the foreclosure inventory represented 2.6 percent of all homes with a mortgage compared to 3.5 percent a year ago.CoreLogic reports approximately 1.4 million homes in the U.S. were in some stage of foreclosure in May 2012, falling to 1.0 million as of May 2013.

The shadow inventory dropped from 2.4 million units in April 2012 to slightly below 2 million in April 2013.

Lower Prices Overall?

CoreLogic's shadow inventory comprises properties held by mortgage servicers but not the federal government's holdings of more than 1.7 million shadow inventory properties.

The "Joint Report on Federally Owned or Overseen Real Estate Owned Properties" by the Offices of Inspector General for both the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) says HUD holds more than 741,000 of the properties and FHFA’s Fannie Mae and Freddie Mac together hold about 970,000.

If the government dumps these properties suddenly, it could put the brakes on rising home prices and even cause a home price decline, as online real estate brokerage Movoto.com has forecast in its recent "State of the Real Estate Market July 2013" report.

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