For the past few years, the housing market has been hit hard by foreclosures, causing damage to home values and home buyer confidence. A foreclosure delivers a double whammy—it subtracts from demand, reducing the number of homeowning households, and it adds to supply. Getting foreclosed homes resold into the marketplace and back to a stable ownership situation is an important step toward recovery, but the sheer number of foreclosed homes that have been repossessed yet remain on the sidelines is a huge obstacle. This shadow inventory must ease before we start to see improvement.
Nationwide, foreclosure activity began to pick up steam in 2006 and rose unabated through late 2008. The number of foreclosures peaked in late 2010 and has since slowed, as a result of a procedural slowdown by the banks and some local market stabilization. Over 70 percent of foreclosed homes have been sold back into the marketplace, but a large number remain. Most markets still have a substantial foreclosure supply, but the healthiest markets have less than six months of distressed inventory. Not surprisingly, many of these markets also are seeing home prices stabilize as a result.