What Do These Foreclosure Numbers Mean for Economic Recovery?

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Foreclosure filings in the U.S. last month fell to a five-year low, according to a RealtyTrac report, but some states are still seeing their foreclosures rise. The overall decrease put the combined number of reported default notices, scheduled auctions, and bank repossessions in September at 180,427, the lowest total since July 2007, and 7 percent less than August’s foreclosure rate.

“The five-year low, combined with the fact that the year-over-year decrease in foreclosures was in its twenty-fourth straight month, is evidence that we’re past the worst of foreclosure crisis,” said Daren Blomquist, vice president of RealtyTrac. Last month’s foreclosure rate was down 16 percent from September 2011.

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Foreclosures for the third quarter were also at the lowest level since the fourth quarter of 2007, according to RealtyTrac.

Foreclosure starts — that is, initial default notices or scheduled auctions — fell 12 percent nationwide from August to September, and decreased in 31 states. But Blomquist notes that fewer foreclosure starts could mean an increase in short sales, which take place before a home is formally repossessed. Short sales can drag down housing prices by increasing the supply of homes on the market. Still, short sales are “the lesser evil,” said Blomquist, as “foreclosures tend to sell at even lower prices.”

Unfortunately, in some states, foreclosures are still rising, but that may largely be due to the foreclosure process. Those states that require lenders to go through the courts to foreclose on properties tend to get backlogged — that means, though quite a few states registered a year-over-year increase in the number of foreclosures in the third quarter, many of those foreclosures may have been underway over a year ago, when the national unemployment rate was much higher and the economy in much more turmoil than now. Last month, the average number of days it took lenders to foreclose did hit a record of 382 days.

“Much of the downward trend is good news, but part of it is exaggerated by the fact that it’s taking longer to foreclose, which automatically reduces the foreclosure numbers,” said Blomquist. “A longer process means a bit less pain in the short-term, but it means it takes longer for the housing market to fully rid itself of the foreclosure albatross.”

Only four states with non-judicial foreclosure rules, which allow foreclosures to go through more quickly, registered an increase in activity in the third quarter.

Despite some negative aspects to the report, the iShares Dow Jones U.S. Real Estate ETF (NYSE:IYR) is trading slightly higher this morning.

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