The rate of seriously delinquent U.S. mortgages, a proxy for the so-called shadow inventory of homes, fell to the lowest since 2008 as employment improved and recovering housing demand made it easier for homeowners to sell.
The percentage of home loans that were more than 90 days behind or in the foreclosure process fell to 7.03 percent in the third quarter from 7.31 percent in the previous three months, the Mortgage Bankers Association said in a report today. The rate was 7.89 percent a year earlier.
Delinquent homeowners are catching up on payments or finding alternatives to foreclosure as the economy improves. That's helping to reduce shadow inventory — typically defined as homes with seriously delinquent mortgages, in foreclosure or held by banks and not for sale — and limiting the prospect that distressed properties will flood the market and depress prices.
"The drop of the shadow inventory is a real positive for the housing market because it reduces concerns that this backlog will be with us," Michael Fratantoni, the Mortgage Bankers Association's vice president of research and economics. said in a telephone interview today from Washington.
The serious-delinquency rate was the lowest since the fourth quarter of 2008, when it was 6.3 percent. The percentage of loans in the foreclosure process at the end of the third quarter was 4.07 percent, down 20 basis points from June. That was the biggest drop in records dating to 1979, Fratantoni said.
More borrowers were able to make their monthly payments as unemployment rate dropped to 7.8 percent in September, the lowest since January 2009. The federal Home Affordable Refinance Program is enabling Americans with little home equity to refinance, while delinquent homeowners who want to sell are finding it easier to unload properties as the supply of houses for sale remains tight, Fratantoni said.
In some areas, "inventory levels of properties on the market have gotten to such a point that you're seeing buyers snap up anything that comes on the market at a rapid rate," he said.
At the end of September, 2.32 million existing homes were available for sale, 20 percent fewer than a year earlier, according to the National Association of Realtors. That represented a 5.9-month supply, the lowest since March 2006, near the peak of the housing boom.
The decline in inventory is helping to boost home selling prices as buyers compete for properties. U.S. home prices jumped 5 percent in September from a year earlier, the biggest increase since July 2006, data provider CoreLogic Inc. said.
The overall U.S. mortgage delinquency rate — the share of loans at least one month late — fell to 7.4 percent in the third quarter on a seasonally adjusted basis from 7.58 percent in the previous three months, the Mortgage Bankers Association said.
States such as California and Arizona that don't require court approval for foreclosures are seeing the most rapid improvement in delinquencies, while judicial states such as Florida, New Jersey, and New York are falling behind, Fratantoni said. The foreclosure rate for judicial states was 6.6 percent in the third quarter compared with 2.4 percent in non-judicial states, the largest gap going back to at least 2006, he said.
In Florida, 13 percent of loans are in foreclosure, the highest level in the nation, followed by New Jersey with 8.9 percent, Illinois at 6.8 percent and New York at 6.5 percent. The share of loans in foreclosure was 2.6 percent in California and 2.5 percent in Arizona, more than a percentage point below the U.S. average, he said.
Lenders started foreclosure proceedings on 0.9 percent of mortgages in the third quarter, down from 0.96 percent in the previous three months and 1.1 percent a year earlier. That indicates banks are increasingly making use of short sales, when homes are sold for less than their mortgage balance, Paul Diggle, property economist with Capital Economics Ltd. in London, said in a note today.
The U.S. shadow inventory as of the second quarter fell 10 percent from a year earlier to 2.3 million homes, representing a six-month supply, according to a report from CoreLogic. The company includes seriously delinquent loans, homes in foreclosure and bank-owned properties that haven't been listed in its definition of shadow supply.
"The shadow inventory is becoming increasingly less of threat to the housing recovery," Diggle said in a phone interview. "It's been clear for a while now that the shadow inventory is not going to flood onto the market quickly and cause another downturn."