As a processing moratorium ends, fresh supply of distressed properties likely to flatten prices.
Foreclosures across the country and the Twin Cities are likely to increase in the coming months, dashing hopes that the new year will deliver a rebound in housing prices, despite record-low mortgage rates and dwindling inventory.
While the number of homes lost to foreclosure fell last year, a moratorium for processing new foreclosures has ended, and lenders are stepping up their efforts to deal with a backlog of delinquent mortgages.
In the third quarter of 2011 alone, foreclosure actions across the country increased almost 21 percent from the previous quarter, according to a federal survey of lenders. The trend is a clear indication that the market will see more sales of distressed properties during much of 2012.
That isn't a good omen for home- owners looking to sell. Foreclosures are usually sold at below-average prices, meaning that more foreclosed homes on the market will be a drag on home prices. Foreclosures also suppress home values, which hasn't helped the estimated 10 million homeowners who are "under water," owing more for their home than it's worth.
Ultimately, experts say, the recovery of the housing market will depend on how quickly the cycle of bank foreclosures plays out.
"Absorption [of bank-owned listings] is a necessary step that the market will need to go through before it can stage a robust recovery," said Daren Blomquist, RealtyTrac's director of marketing and communications.
The worst may be over
Despite the expected uptick in foreclosures, most agree that the worst of the foreclosure mess from the Great Recession has passed. Since December 2007, more than 3.6 million properties have gone through foreclosure, according to RealtyTrac. In Minnesota, 66,600 properties have gone back to the bank.
Overall, the U.S. housing market must sort through roughly 5 million distressed properties that are either in the foreclosure process (1.5 million) or delinquent with mortgage payments (3.5 million), according to RealtyTrac.
Lenders had agreed to a moratorium on new foreclosures, triggered by revelations that thousands weren't processed properly by major banks, including Bank of America, Wells Fargo and J.P. Morgan Chase. Now, banks are managing the backlog of delinquencies.
The renewed foreclosure activity comes at a time of relative promise for the housing market. Home sales in the Twin Cities were up 7 percent last year compared to 2010.
But the weight of foreclosures continues to hamper prices.
Distressed home sales in the metro area represented more than 40 percent of all home purchases during November, a steep increase from earlier in the year when such sales averaged about 30 percent, according to the University of St. Thomas. As a result, the median price of November home sales fell 10 percent -- despite an increase (18 percent) in the number of closed deals and a decline (24 percent) in the number of listings.
"This [stalled recovery] is a function of having more foreclosures go through the market," said Herb Tousley, the director of the real estate program at St. Thomas.
But the local housing market, separate from foreclosure listings, shows strength, said Tousley, who said he expects home prices and values to rebound as foreclosures dissipate. "There's not anything fundamentally wrong with the Twin Cities housing market," he said.
Over the next year, there's little doubt that recent increases in foreclosure activity will slow the housing recovery, according to the Office of the Comptroller of the Currency, the federal agency that regulates national banks.
The effect of foreclosures depends largely on where you live. Nine of the top 10 metro areas with the highest foreclosure rate in the nation were in California. Foreclosures were more prevalent in Georgia, Michigan and Arizona than in many other states as well.
Across the metro area, the concentration of foreclosures is uneven, too. When the foreclosure crisis first struck, inner-city neighborhoods where mortgage fraud was prevalent took the hardest blow. Nowadays, the foreclosure problem is worsening in outer-ring suburbs, where homeowners are more likely to fall into foreclosure because their income has dropped and their mortgage is under water.
And while the foreclosure rate in Minnesota has always been near the national average, the state might feel the burden of more foreclosures before other parts of the country. The average foreclosure takes 200 days in Minnesota to play out compared to 336 days nationwide, which means the state's housing prices may feel the effects sooner than elsewhere.
The upside is that the state could get to a meaningful recovery quicker than other states.
Aaron Dickinson, a sales agent for Edina Realty, sees positive signs for the metro area. As of November, the number of foreclosures on the market was at the lowest level since July 2007, according to Dickinson, who monitors foreclosure trends for the Minneapolis Area Association of Realtors. And demand remains strong for properties sold at discounted prices, especially among investors who are eager to make a profit when the market recovers.
Noting that demand, Dick-inson said he doesn't fret much about the possibility of an uptick in foreclosures entering in the market. While the recovery remains uncertain, there's one thing Dickinson says is clear: "The future looks a lot less scary than it did a couple years ago."
Jim Buchta • 612-673-7376