Area home prices may not recover for years

When it comes to foreclosed properties hammering Central Virginia housing prices, the good news is that it could be a whole lot worse.

The bad news: It may be years before it gets much better.

A glut of bank-owned homes and homes being sold for less than loan value — called short sales — are holding down area real estate prices and dropping property values. Real estate experts warn that foreclosures and short sales are likely to be a force in the market for the next few years.

The local situation reflects national trends, but the market here remains more stable than in the country as a whole.

“We’re seeing a steep increase in foreclosures in August, but the metropolitan [Charlottesville] rate is one property in foreclosure for every 751 properties, while the national rate is one in foreclosure for every 381 properties, so [Charlottesville’s] rate of foreclosure is not nearly as bad as other areas in the country,” said Daren Blomquist, marketing director for RealtyTrac, which tracks and markets foreclosures in more than 2,000 counties across the country.

Unfortunately, there is a “but.”

“The number of foreclosures is not good for the local market because foreclosures impact home values by decreasing sale prices,” Blomquist said. “There were 53 foreclosure properties sold in the second quarter — that’s three months — and more than double that number in new foreclosures in one month. We’re not clearing these properties out from the market as fast as they come onto the market and that means we can expect more pain ahead, more properties in foreclosure and harder hits to the market value of properties.”

RealtyTrac figures show 117 homes in Central Virginia received foreclosure notices in August, a 14 percent hike over July and a 225 percent rise compared with August 2009.

Not all of those 117 homes are up for sale, Blomquist noted.

Local real estate officials say the number of homes offered for distressed sale in Charlottesville and Albemarle — homes either in foreclosure or in “short sale” — represented about 6.4 percent of homes listed on the market. They noted that the number has remained between 5 percent and 6 percent since March.

“We’re seeing a lower percentage of bank-owned and short-sale properties than a lot of other areas,” said Greg Slater, president of the Charlottesville Area Association of Realtors. “That doesn’t mean the market has not been impacted, we’ve just had less impact than other places.”

Every silver lining has its dark cloud. In this case, it’s the “shadow inventory” of homes that are likely to show up on the market in distressed sale in the future. Officials expect distressed sales to linger in the market and hold down housing prices down for the next couple of years.

According to CAAR’s second quarter 2010 report on the area housing market, the estimated median sale price for homes was $248,000.

CAAR year-end market reports show Central Virginia’s median price for homes sold in 2009 was $245,000, $265,000 in 2008 and $277,000 in 2007. The local market reached its peak median sale price in the first quarter of 2006, according to CAAR reports, when the median home sale was $289,900.

“The shadow inventory is made of properties in which homeowners cannot afford to pay for the mortgage,” Blomquist said. “Some may end up in short sales, some may end up in foreclosure. Exactly how much inventory is out there isn’t known; it’s in the shadows.”

Red tape

Part of the problem is the banking bureaucracy, Blomquist said.

“Foreclosure is a legal proceeding and it takes time,” he said. “To make it worse, foreclosures went from being a small percentage of properties that a bank handled to a lot. It quadrupled quickly and the banks weren’t prepared for it.”

The red ink tsunami overwhelmed banks and companies that process foreclosure documents, creating “robo-signers,” banking employees who signed off on hundreds, even thousands of foreclosure proceedings a month, often without reviewing the documents themselves.

Bank of America on Friday became the first bank to stop sales of foreclosed homes in all 50 states, while PNC Financial Services Group Inc., of Pittsburgh, halted foreclosures and evictions in 23 states for a month so it can review whether documents it submitted to courts complied with state laws.

In September GMAC Mortgage, part of Ally Financial, put a hold on foreclosures in 23 states, including North Carolina, South Carolina, and Kentucky, noting that the company had doubts as to the integrity of the process. The robo-signing process was uncovered by lawyers for homeowners who were appealing foreclosure proceedings. Later that month J.P. Morgan Chase followed suit.

Virginia was unaffected by the robo-signers because its foreclosure laws do not require the same legal filings and procedures as those states involved. The procedural changes could delay foreclosures and foreclosure sales for some time, officials said, adding to the shadow inventory.

“Because there have been so many foreclosures there is a bottleneck in the process. A lot of homes will be foreclosed on sometime in the future, but just when no one knows,” Blomquist said.

Blomquist said that, nationally, 1 million foreclosed properties are expected to be on the market this year. Buyers, however, are only purchasing about 150,000 sales per quarter.

“That means there will be about 400,000 left-over, foreclosed homes on the market next year,” he said. “Some of the properties are just sitting there, empty. It’s clogged up the normal way of doing things. It’s going to take some time to clear this inventory.”

Local effects

Locally, real estate agents say they have seen plenty of properties lurking in the shadows.

“We’re seeing a lot of people just on the edge in this economy,” said Ray Caddell, of Ray Caddell Century 21 Real Estate in Charlottesville. “You don’t know how many properties are distressed but not in foreclosure or what’s waiting. There are people who aren’t making payments still living in their houses and other people who are foreclosed on and out of there in 90 days.”

Caddell said many of those losing homes to foreclosure are traditional, middle-class Americans now down on their economic luck.

“These are people who went to work every day and did the right thing but because of the state of the economy they’ve lost their job or had their income cut and now they’re living paycheck to paycheck trying to make ends meet. We have people just trying to sell their house and avoid foreclosure, but the market is such that their houses aren’t worth the amount they owe. That’s called a short sale and, depending on the lender, the bank may or may not agree to take less than they’re owed.”

Piedmont Housing Alliance officials say the local agency’s program to help homeowners facing foreclosure has seen large increases in clients. They say the incomes vary from nothing to $120,000 a year, with the average household making $31,878.

“Over the past four years, PHA has experienced a tremendous increase in mortgage default and foreclosure counseling clients,” said Karen Reifenberger, director of fair housing and special projects for the alliance. “From January 2010 through September 2010, PHA has counseled 112 new mortgage default and foreclosure clients.”

Reifenberger said the alliance averaged 12 new clients a month for 2010, with May’s total reaching 22.

Previous figures for the alliance, calculated during the agency’s fiscal year, show large annual increases since the economy began declining in 2008.

The agency had 14 foreclosure and default clients in 2006-07, 74 in 2007-2008, 168 in 2008-09 and 182 in 2009-10.

In fiscal 2010, PHA helped more than 40 clients avoid foreclosure by helping homeowners bring mortgages current, modify their mortgages, file bankruptcy, initiate forbearance agreements and repayment plans, sell properties either at market or short sale or enter debt management plans.

While agents and experts agree that it may take time to return to a normal real estate market, they warn that buyers and sellers need to redefine what normal means.

It does not mean, they say, skyrocketing home values like the regional market that preceded the crash.

“Not too many years ago houses were selling in one day. You put the sign out there and you had three or four offers and the house sold right away. That’s not the case now,” Slater said.

“Where we’re at is not a healthy place, but where we were at was not a healthy place, either,” he said. “Fair market value is what a seller is willing to sell for and what a buyer is willing to pay. What we’re hoping for is a balanced market and that could take awhile.”