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                                                                                                             By Cassandre Juste & Brian Davis

To say the housing market has been on a roller coaster in the past decade is a serious understatement.

But according to the Wall Street Journal, home prices are increasing year-over-year for the first time in seven years.  The Federal Reserve has held interest rates extremely low for the last five years, which combines with low home prices to make for an attractive market for first-time homeowners and investors.  But housing markets would not be turning around at all without the foreclosure crisis subsiding. 

CoreLogic reported that as of November (the most recent month data is available for), 1.2 million homes were in some stage of the foreclosure process – 3% of all U.S. homes with a mortgage.  This figure represents a 20% decline from a year earlier, when a full 1.5 million homes were under foreclosure duress, comprising 3.5% of homes with a mortgage. 

Further, the percentage of bank-owned homes listed on the market for sale have dropped from 19.6% in January 2012 to 11.5% in November.  Fewer foreclosures available on the market means less "wholesale" competition for homeowners trying to sell their homes "retail," which in turn means rising prices.

One reason is unadulterated good news: fewer borrowers are defaulting on their mortgage payments.  Last month, LPS Analytics reported that the mortgage delinquency rate dropped from 7.83% at the end of 2011 to 7.12% at the end of 2012.  Not a massive drop, but signficant nonetheless.

The other reason is that many states intentionally made the foreclosure process extremely slow and arduous for mortgage lenders.  This has a variety of implications: first, it means that many states, especially those in which foreclosures have to go through the court judicial system, simply drew out the pain of the foreclosure crisis, by slowing the foreclosure pipeline.  In many faster, non-judicial states, the foreclosure pipeline has largely cleared, and these markets have passed clear of the foreclosure crisis. 

A second implication is that the foreclosure process is now so slow and expensive for banks that many banks are choosing to simply take a loss on the loan and agree to a short sale or loan modification.  While many borrowers have benefitted from the banks' losses, it means that lending conditions will continue to be tight, as banks will be far more cautious who they lend money to – a condition that will particularly affect lower-income borrowers and make it more difficult to obtain loans in the future.

In 2013, the national foreclosure discussion will be largely one centered around Eastern, slow-moving foreclosure states, who are still processing foreclosures from 2012 and 2011.  In faster states where the foreclosure pipeline has already cleared, the discussion will be more about demand for homes outpacing the available homes on the market (which will boost values), and about borrowers failing to qualify for loans, (which will slow the housing recovery).  After all, what good are low interest rates for would-be borrowers who do not qualify?  But the good news is that the delinquency rate should continue to drop, as tight credit markets continue to deny marginal borrowers and unemployment (hopefully) declines.

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