A Delicate Balance: Banks 'Acting Rationally' with Home Backlog

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Banks are doing what they can to avoid depressing home prices, by focusing on reducing foreclosures rather than flooding the market with their backlog of properties, according to CoreLogic chief economist Mark Fleming.

"Are they sitting on homes? Yes," says Fleming. "Banks are acting rationally in a market with such little demand."

The supply of homes for sale has shrunk by more than 20% in the past year, helping some markets reach an "equilibrium," Fleming says. Those markets have a six-month supply of homes on the market for sale, which represents a healthy housing market, he says.

"We've reached a healthy balance, because even though there's not a lot of demand, there's also not a lot of supply, because so many current homeowners don't want to put their homes up for sale," says Fleming. "You can have healthy real estate markets without a lot of demand."

There were 2.4 million existing homes for sale at the end of the first quarter, representing a six month supply of homes for sale, according to the National Association of Realtors. Nearly one-third of all existing homes sold recently were either short sales or foreclosures.

The decline in inventory has helped stabilize home prices for now. But major headwinds are still holding back a full-blown housing recovery.

Many experts warn that the shadow inventory of homes in the process of foreclosure could result in further price declines. Currently, there are 2.2 million mortgages in the foreclosure process, and another 1.7 million loans are three or more payments behind, according to Lender Processing Services.

The national $25 billion settlement with mortgage servicers mandates principal reductions and short sales, so banks are also working on types of resolution outside the foreclosure process.

"We're resolving a lot of properties through some means other than foreclosure, primarily short sales or loan modifications," Fleming says.

Another factor holding back a recovery is that nearly 23% of all homeowners are underwater and owe more on their mortgage than their home is worth. Those homeowners are stuck, unable to sell their or home or buy another one, which is suppressing demand, Fleming says.

Tight credit standards also have made it harder for potential homebuyers to get approved for a loan. Banks and mortgage lenders are fearful they will be forced to absorb losses for any borrower who ultimately ends up in foreclosure.

Employment and income growth are the primary factors driving the housing market. Unemployment remains above 8% and wages have remained stagnant for years.

"House prices ultimately grow in line with income growth," says Fleming.

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