US housing market sees increase in foreclosed properties

Banks have resumed dealing with distressed properties

The number of properties starting the foreclosure process in the United States increased year on year in May for the first time in more than two years as banks resumed dealing with distressed properties.

The latest report from Data firm RealtyTrac shows that foreclosure starts increased 12% from April to 109,051 homes in May, up 16% from a year ago, breaking a string of 27 straight months of annual declines.

It comes as a result on a $25 billion settlement between major banks and states, formally approved in April, which had been expected to jump start foreclosure proceedings that were previously stalled by uncertainty about the liability of banks.

But with more foreclosed properties coming onto the market the fragile recovery in the country’s real estate market could be stalled, some experts believe, while others say it is a sign that banks are more confident about lending.

‘That the May numbers were up the month after that settlement was completed is an indication that lenders are more confident that there are clear ground rules to foreclose now,’ said Daren Blomquist, RealtyTrac’s vice president.

‘The banks are getting to a place where they consider their foreclosure processing issues resolved, so they’re confident enough to go ahead and push through more foreclosures,’ he added.

Blomquist said he expected that many of properties entering foreclosure to result in short sales, which can put downward pressure on prices. In a short sale, a home is sold for less than the value of the mortgage and the lender agrees to release the borrower from further obligation. In the first quarter, short sales rose 25% to a three year high.

RealtyTrac also said that bank repossessions increased 7% after falling to a 49 month low in April, with 54,844 homes repossessed in May. Overall foreclosure activity, which includes default notices, scheduled auctions and bank repossessions, affected 205,990 properties in May, a 9.1% increase from April, but 4.2% lower than in May 2011.

However, Paul Diggle, a property economist with Capital Economics, said that with inventories lean and signs growing of a pick up in demand, it was a good time for some of the backlog of foreclosures to come onto the market.

‘The market actually needs to stop tightening and hover around current levels of supply,’ he said.

Meanwhile, a new report from the Harvard Joint Center for Housing Studies says that the US housing market is showing signs of a turnaround, but warned that a recovery hinges on continued job creation.

‘While still in the early innings of a housing recovery, rental markets have turned the corner, home sales are strengthening, and a floor is beginning to form under home prices,’ said Eric Belsky, managing director of the center.

The report warned that the large backlog of around two million homes in foreclosure and the more than 11 million home owners who are under water, or owing more on their mortgages than their homes are worth, would hinder a full recovery.

Dean Baker, co-director of the Center for Economic Policy and Research said the rise in foreclosures was a reflection of the improving market.

‘I don’t think this is either surprising or a disaster from the economy’s standpoint. Banks have more reason to think that they can sell foreclosed properties at a reasonable price,’ he explained.

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