When Will The Short Sales and REO Market End?

How long until housing is back to normal? More specifically, when will all the underwater owners (and foreclosures) be behind us?

Years - and here's why: There are still millions of owners — nearly 14 million, according to Zillow — who have negative equity. (Adding in those owners who are near underwater the number explodes to 20,000,000) Most underwater owners fall into 3 categories. They purchased near the peak of the real estate bubble from late 2005 through 2006 — or used mortgages that required little or no down payment to buy bigger houses than they could afford. The last distinct group of underwater owners are those who borrowed heavily against their homes in the form of HELOCs.

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Most major US housing markets are still a long way off from what would be considered a 'normal' market... In Miami and Phoenix, about 40% of owners have mortgage debt in excess of property value. In Tampa, Fla., it's 41.5%; Chicago, 37%; Seattle, 33.5%; Columbus, Ohio, 29%; San Diego and Washington, about 28%; and Los Angeles, 24%. According to CoreLogic, Nevada had the highest percentage of properties with mortgages in negative equity, roughly 52.4% of applicable households. Florida followed with 40.2% in negative equity. Realistically it will take at least another 5 years to work through all the distressed real estate:

Bank of America: "The foreclosure inventory pipeline that must be cleared in the next few years is very large. Our mortgage strategists forecast that another 6.6 million homes will need to be liquidated over the next five years."

The good news is that housing IS on the upswing. There is no question that home values are increasing and buyer demand is out stripping supply in most major housing markets. More reasons to be optimistic: In February 2013, all three measures held steady or improved:

• Construction starts notched up. Starts were at a 917,000 annualized rate, up 0.8% month-over-month and up 28% year-over-year. Aside from a December spike in construction, February starts were at the second-highest level since July 2008. And 31% of February construction starts were in multi-unit buildings–compared with the typical level of 20%. Construction starts are now 43% of the way back to normal.

• Existing home sales also increased. Sales rose slightly to 4.98 million in February from 4.94 million in January. Year-over-year, sales were up 10%. Excluding distressed sales, conventional home sales were up 25% year-over-year in February. Importantly, inventory–which has been very tight and could hold back sales–rose almost 10% in February, which is a bigger jump than the typical seasonal increase. Overall, existing home sales are 70% back to normal.

• The delinquency + foreclosure rate dropped. The share of mortgages in delinquency or foreclosure dropped from 10.44% in January to 10.18% in February, and is now at its lowest level since October 2008. The combined delinquency + foreclosure rate is 46% back to normal.

The reason the housing market FEELS so much better is because homes are regaining value. Of the 30 largest metro areas covered by Zillow, markets where home values increased the most over February 2012 included Phoenix (+22.9 percent), San Francisco (+18.6 percent), Las Vegas (+18.1 percent), San Jose (+17.1 percent) and Sacramento, CA (+15.3 percent). Only 73 of the 352 total metro markets covered by Zillow experienced year-over-year home value declines in February. However, Zillow believes that the rapid re-appreciation will soon come to an end and return to a more historically normal rate. For the 12-month period from February 2013 through February 2014, U.S. home values are expected to rise 3.2 percent to approximately $163,100. A large part of this moderation in home value appreciation is expected to come from more homes entering the market in coming months.

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Trulia reports that housing is 53% back to normal up from 51% in January. One year ago, the market was 33% back to normal. At this rate of recovery, “normal” won’t come until late 2015. Despite sustained improvement on every indicator, the housing market still has a way to go. The trend is up, but the road is long.

Reposted from Real Estate Insider News with permission on behalf of Harris Real Estate University.