The overhang of distressed properties and strength of the regional economy will cause various housing markets over the next few years to look increasingly different.
Analysts at Bank of America (BAC) say it will take more than a year at the current sales pace to clear excess delinquent loans in Miami and Chicago compared to between seven and eight months in Phoenix and San Francisco.
To capture the imbalance in the housing market, they calculated the number of months it takes to clear the distressed inventory in several markets at current sales paces:
Home prices in Miami's nondistressed markets are on the rise, experiencing a rapid price growth rate of 7% in 2011. However, the saturation of REO sales and overhang of distressed properties in the city casts doubtful shadows that a housing recovery is ensuing.
The method by which foreclosures are processed — either judicial or trustee — is an important factor in determining the pace of regional housing recoveries.
States such as California and Arizona that have a trustee process “have been successful at clearing the backlog of delinquent loans and are on a path to recovery,” analysts say. In contrast, those states with a lengthy judicial process, like Florida and Illinois, will remain weaker for longer.
The rebound in home prices, which is restrained by tight credit conditions and the decline in home values, resulting in negative equity, is an important trigger for greater housing turnover.
BofA analysts believe that national home prices will bottom out in the second quarter and expect prices to bounce around at that level through 2013 before accelerating in 2014. Analysts at Barclays Capital say housing could normalize by that time.
The markets with the biggest overhang tend to have the steepest price declines.
A large portion of the delinquent inventory has yet to enter the market in many regions, painting a bleak picture for future price trends. “If the excess inventory is put on the market rapidly, it translates to greater near-term price declines, but also faster recovery," BofA analysts say.
However, if there is a slow liquidation of distressed properties, prices may bounce along the bottom or even start to slowly turn higher. “Hence it is not simply the magnitude of foreclosure inventory that is important; it is also the pace of liquidation,” they conclude.