There has been an influx of good news from the housing industry lately, most of it stemming from the recently released data from October on home sales and construction spending. Many important indicators suggest that the national housing market is returning to its pre-recession levels for the first time since 2007 or 2008. Of course, this is good news, for the economy, for home owners, and for mortgage lenders. However, there is still one lingering worry in the housing market, as reported by Fannie Mae: the Single-Family Serious Delinquency rate.
Serious delinquency occurs when a single-family mortgage is past due by 90 days (three months) or more. At this point, the bank considers the mortgage in default, which prompts the mortgage lender to initiate foreclosure proceedings. The normal serious delinquency rate should fall under 1%.
The recent Fannie Mae report shows serious delinquency continuing to decline as the rate dropped from 1.59% in September to 1.58% in October, down from the February 2010 peak at 5.59%. Though the serious delinquency rate continues to fall, the Fannie Mae rate has only dropped 0.34 percentage points over the past year. At the current pace, the rate will not return to “normal” levels until 2017.
The slowly-declining serious delinquency rate is largely tied to old loans, and mortgage lenders are working through these old loans to revise and update them. However, these lingering foreclosures can still have a large, and negative impact on the housing market, particularly home prices.
According to the Federal Reserve Bank of Cleveland, foreclosed homes tend to lower the prices of nearby homes. The impact of the foreclosure will vary based on the type of neighborhood in which they occur, but foreclosed homes can depress the value of nearby homes by up to one percent. This happens in two ways.
First, foreclosed homes add to the supply of homes currently on the market, but because lending practices generally avoid lending to a foreclosed-upon borrower within three years of the foreclosure, many homeowners will move into rentals or with family. As a result, the foreclosure adds a home to the market while also reducing the pool of potential buyers. In many hot markets, this may not be as much of an issue, but in slower-growing housing markets, this could cumulatively reduce the demand for homes and slow growth.
Second, foreclosed homes can also negatively impact nearby property values by reducing the desirability of a neighborhood. Foreclosed homes may often be neglected or in worse shape than neighboring houses, which reduces the overall appeal of a neighborhood. Additionally, foreclosed homes can be a haven for unsavory or criminal activity.
As the serious delinquency rate has fallen over the past 5 years, many of these impacts have been greatly reduced as foreclosed homes have been bought and restored. Yet, as long as the serious delinquency rate remains above normal, the problem of foreclosure will continue to weigh down the growth of the housing market, particularly in slower markets.