Fewer Foreclosures Means Healthier Market, for Both Owners and Sellers

It's taken a solid half-decade, but through the combination of an improving labor sector, new regulations and a revised approach to homeowning, the sector has recovered. The process is incomplete, as evidenced by the number of Americans who remained underwater on their mortgages through the second quarter of 2014. But home retention and property value appreciation rates have improved dramatically over the past two years, signaling a return to sustainability, if not complete health.

Shifting dynamics

As retention numbers continue to improve, the inventory of foreclosed and otherwise distressed homes has naturally been reduced. That's a positive sign for the market as a whole, even if it means local inventory is somewhat constrained, at least temporarily. HousingWire reported that, according to the latest data from real estate analysis service CoreLogic, there were approximately 640,000 homes in the foreclosure inventory during July, compared with 976,000 a year earlier, and the supply of distressed properties only figures to further dwindle, Furthermore, a significant portion of the remaining inventory exists in judicial states, where the foreclosure proceedings go through the courts and are subject to a much lengthier timeline.

"Based on current trends, the overall foreclosure inventory could trend down to as low as 500,000 homes by year-end, which is very positive news for the housing market," said Anand Nalathambi, CoreLogic's president and CEO. "The picture is considerably brighter in the non-judicial states, which maintain consistently lower foreclosure stocks and, in general, lower levels of serious delinquency. In total, there are now 36 states with an inventory of foreclosed homes lower than the national rate of 1.7 percent."

Why fewer foreclosures can actually favor buyers 

On the surface, having a smaller overall supply would seem to complicate the prospects for buyers, particularly first-timers who may be shopping in lower-priced neighborhoods. But a deeper dive into foreclosure data reveals many of the purchases of distressed properties have been made by cash buyers - a large proportion of whom represent the interests of larger-scale investors buying groups of homes en masse for the sake of rehabilitation and resale. In foreclosure-heavy housing markets like Southern California and the Phoenix metro area, for example, the investor presence was especially heavy and traditional buyers stood little chance competing with cash-in-hand offers.

For most prospective buyers, purchasing a distressed home is a dicey proposition. The condition of the home and its structural integrity are often in question, making for a potentially tumultuous transition that first-time homeowners, especially, want to avoid. That's why the improving national mortgage fulfillment rates are encouraging - not only because they're indicative of broader economic stabilization, but since homes with built-up equity make for better purchases and more sound investments.