Alex Nabaum

Last year, banks came under a spotlight for poor paperwork surrounding improper foreclosures. As a result, the short-term freeze in foreclosures stretched out the time frame for some areas to see housing recover.

Before the freeze began in October, foreclosures in September hit the highest level for a single month since our data series began in 2005. With October 2005 being equal to 100, the September figure would be 458, or 458 percent of the 2005 foreclosures. In October 2010, the foreclosure freeze caused that index value to drop 28 percent in a single month, but the reprieve was only temporary. The pending foreclosures didn’t magically disappear—they were only delayed.

Despite a fall foreclosure freeze, supply of distressed properties continued to climb. According to our data, distressed transactions continued to trail foreclosure activity in the fourth quarter, pushing the months of supply upward.

The months of supply of distressed properties has been increasing, despite the foreclosure slowdown in October. After hitting a trough of 15 months in June 2010, our estimate of REO properties increased to 15.9 in October, and 16.1 in November. Preliminary December data suggest it has moved yet higher.

The supply of distressed properties must fall before home building improves because these sales massively undercut the market. In 2010 these properties sold at $49-per-square-foot less on average than typical resales or new homes, translating to a massive discount of nearly $90,000 on an average-sized home. The housing markets that will perform well in 2011 are ahead of this curve, but for all others the housing recovery will be a very gradual process. Next month we’ll look at part 2: jobs.

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