Foreclosure Liquidations Abate in the Fourth Quarter But At the Expense of Number of Homes Underwater

Posted by: Stan Humphries    Tags:      Posted date:  February 8, 2011  

In December, monthly depreciation in home values notched up again to -0.9% from November and home values fell 5.9% from levels in December 2009 (see Figure 2). The median home value nationally in December was $175,215, down 27% from its peak in June 2006 (see Figure 1). Monthly home value depreciation was at its highest level since January 2009.

Negative equity rates, or the percentage of single-family homes with a mortgage for which the mortgage balance is estimated to exceed the current value of the home, jumped to 27% in the fourth quarter from 23.2% in the third quarter. The increase in negative equity is attributable to a substantial slowdown in foreclosure liquidations coupled with the increase in monthly depreciation of home values. The rate of foreclosure liquidations dropped to 0.091% in December, indicating that 9.1 homes out of every 10,000 were liquidated in the month (see Figure 3). The foreclosure liquidation metric peaked in October at 0.12% and the recent declines are attributable to delays and lengthened processing times resulting from the fall 2010 “robo-signing” controversies.

Relative stability in the negative equity metric over the past year has been due to moderating monthly home value depreciation and increasing volumes of foreclosure liquidations. The former exerts less upward pressure on the negative rate while the latter pushes the rate down as homes in negative equity are converted into positive equity after foreclosure. Unfortunately, in the fourth quarter, both of these forces—home value depreciation and fewer foreclosure liquidations—were both pushing strongly in the same direction, resulting in sharply higher negative equity.

Of the 132 metropolitan regions tracked in the fourth quarter Real Estate Market Report, 123 metros experienced monthly declines in home values (93%), 8 metros saw monthly increases (6%), and one metro was flat from the prior month. On a year-over-year basis, 115 metros were down, 9 regions were flat, and 8 regions were up. See the interactive chart below for data on each of these metro areas.

While it’s never good to see monthly depreciation rates this high, we have been saying that the 54-month long housing recession would strongly reassert itself in the post tax credit period. And it has. I suspect that this is near the peak monthly depreciation rates that we’ll see and I expect depreciation to start to improve in early 2011. January may stay the same (-0.9% monthly change), but I think we’ll start to see decreases in this rate in February and March. In that sense, the period from September 2010 to February 2011 will prove to have been the death throes of the housing recession as the market sharply realigned its equilibrium after the tax credits but then started to recover naturally. We expect this recovery to see further home value declines through at least the first half of this year but with monthly depreciation slowly receding to zero by the second half of the year (zero monthly depreciation indicating a definitive bottom in home values). As we’ve said amply before, unfortunately we expect home values to bounce around the bottom and not see appreciation that outpaces inflation for at least three years after the bottom.

Finally, a noteworthy trend that continues to be quite prominent in most markets is the pronounced differences in home value depreciation between the three home value tiers. This is likely a distortion caused by the tax credits. While we’ve always shown home value tier performance in the overall interactive widget below, this month I’ve included a separate chart widget just for the value tiers so you can see it a bit larger.

Photo: John Shanlaub, Flickr


About the author
Stan Humphries
Stan is Zillow's Chief Economist. To learn more about Stan, click here.