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Foreclosures Are Impacting Real Estate Values

The most recent housing and mortgage data indicate that foreclosure rates are declining nationwide with the exception of certain markets. This is welcome news even as those rates are expected to rise slightly in another year or two. Although home price appreciation remains strong, foreclosures and other factors are putting some constraints on the current housing market.

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The Current Rate of Foreclosures in the U.S.

Nationwide, foreclosures are down 19 percent for the first quarter of this year. Data released by ATTOM Data Solutions confirms that there were 189,870 foreclosure properties listed during Q1 2018, which is up 4 percent from the prior quarter but 19 percent less year-over-year.

There are still 53 U.S. metropolitan areas that registered year-over-year increases in foreclosures. Indianapolis, IN was the leader with a 148 percent increase, followed by Minneapolis-St. Paul and Louisville, KY, up 64 percent and 36 percent respectively. Close to half (45 percent) of the properties that were listed in foreclosure in Q1 were related to mortgages with origination dates from 2004 to 2008.

How Foreclosures Affect Real Estate Values

Some of the nation's largest banks referred to 2010 as "foreclosuregate" when the rate of delinquencies hit an all-time high. When this happens on either a grand or smaller scale, what sort of impact does it have on real estate values?

The truth is that foreclosures can depress overall real estate values because it affects the "comps" and can adjust the total property tax base. Homeowners who once had a healthy level of equity in their homes could see that erode as foreclosure rates climb.

According to data from RealtyTrac, for every seven percent in lost value of a foreclosed home, there is a corresponding one percent loss in value of neighboring homes. On the other hand, a lack of foreclosures in a market or neighborhood can allow homes to keep their value and experience swifter price appreciation.

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The Outlook for Foreclosures Going Forward

Will foreclosures continue to affect real estate values? Since home prices are already skyrocketing, foreclosures will have an impact either way, but it could be positive in some areas. While we certainly don't want to see a housing market collapse on the scale experienced just a decade ago, pulling the price of homes back into the affordable region in certain markets wouldn't be an unwelcome event.

Some of the factors that could impact foreclosure rates going forward are higher interest rates, inflation, and employment figures. Interest rates are continuing to rise, which could affect some homeowner's ability to afford payments on ARMs. Inflation, employment, and wage growth are in healthy ranges now, but any changes in these areas could also have an effect on delinquency rates.

Home prices in the U.S. are soaring, which could prompt some homebuyers to finance more than they can afford. According to Black Knight's Mortgage Monitor Report, median home prices have risen 1.24 percent so far in 2018, and some markets have experienced growth rates of 10 percent or more. Carrington Mortgage Holdings doesn't believe that we'll see an uptick in foreclosure rates until 2019 or into 2020.

Even with foreclosures down, the lack of supply in the current real market is creating challenges for both borrowers and lenders. Banks can maximize the performance of a loan portfolio and mitigate risk by partnering with an asset management company with access to a variety of note buyers.