It’s Time To Get Smarter About Selling Foreclosed Homes

Our guest blogger is Andrew Jakabovics, Associate Director for Housing and Economics at the Center for American Progress Action Fund.

Today’s weak existing home sales data provides yet more evidence that we’re going to have to get a lot smarter about dealing with foreclosed properties. Despite reporting a 19.2 percent increase in existing home sales over May 2009, the seasonally adjusted annual rate of 5.66 million homes sold represents a 2.2 percent decline over April.

The real takeaway from today’s release, however, is that the backlog of unsold homes will continue to be a problem. The National Association of Realtors reports nearly 3.9 million homes in inventory, which is equivalent to 8.3 month’s supply at May’s sales pace. While down slightly from April, May’s inventory is otherwise at its highest level since last August.

With the expiration of the homebuyers’ tax credit, which largely served to steal sales from future months, the expectation is that coming months’ reports will be even weaker than May and June. Moreover, there is growing recognition that inventory levels will rise as more homes move through the foreclosure pipeline. Bank repossessions hit a record high for the second month in a row in May, with over 90,000 properties completing the foreclosure process.

In addition, through the end of April, the eight largest servicers have canceled nearly 200,000 trial modifications under the Home Affordable Modification Program. While nearly half these borrowers have been given alternative modifications, foreclosure has been initiated or completed in seven percent of the cases, and 26 percent remain in limbo.

As more borrowers fall out of the trial modifications or default on their modified loans, the volume of loans in the foreclosure pipeline will inevitably rise. Indeed, in the first quarter of 2010, Fannie Mae and Freddie Mac took over foreclosed properties at a rate of one every 90 seconds.

In short, it is unrealistic to expect to find enough families to buy and live in these houses as owner occupants.

Nationally, almost one in three home sales last month went to investors, and in some markets, the rate is significantly higher. There is real concern in many communities that investors are interested in quick flips of the properties and are not maintaining the homes even when they rent them out. (Foreclosures often create blight and slums, not only through the process of vacancy and abandonment, but from how subsequent buyers treat the homes. Indeed, HUD’s Asset Control Area program was created to address this problem.)

So it is time to get smarter about how foreclosed homes are sold. Instead of selling properties off one at a time without a strategic vision for how the sales price affects neighboring properties (or the seller’s bottom line), where institutions have concentrations of foreclosed properties, they should think of the value of those homes as rental properties. As we have previously argued, in many cases, foreclosed properties are worth more as rental assets than as owner-occupied homes.

Concentrations of foreclosures should be aggregated, rehabilitated as necessary, rented out affordably and then sold as a portfolio to large-scale or institutional investors. (See here for a graphical explanation of the concept.) And by diverting significant numbers of foreclosed properties from the supply of homes for sale, we can reduce the downward pressure that a glut of foreclosures will have on home prices.