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Shadow Inventory Still Weighing on Ohio Housing Prices

Home prices continue to trend down, both nationally and across Ohio. Indexes produced by the Federal Housing Finance Agency (FHFA) show that prices in both the state and the nation declined by more than 5 percent from the first quarter of 2010 to the first quarter of 2011. As a result, Ohio’s home prices have fallen roughly to the levels that prevailed in 2000. This is unusual relative to the other states in the nation. Only a few have fared worse than Ohio over this 10-year period, when 45 states saw gains of 10 percent or more and the U.S. average gain approached 25 percent.

Figure 1. Home Price Indexes, U.S. and Ohio
Figure 2. Home Price Changes Since 2000

Some of the downward pressure on Ohio’s home prices may be traced to above-average foreclosure activity from early in the last decade. During the 1990s, foreclosures occurred at a somewhat slower pace in Ohio than in the U.S. But by the mid-2000s, foreclosures were occurring at about twice the national average. Ohio’s stock of seriously delinquent mortgages—those in the foreclosure process and more than 90 days delinquent—ballooned. As these properties emerged from foreclosure and appeared on the market again, they likely kept Ohio’s home prices from rising as rapidly as they otherwise might have. They also probably reduced the number of new housing projects. Following the 2001 recession, housing starts stayed relatively flat in Ohio, in contrast to the construction boom seen in some parts of the U.S.

The stock of serious delinquencies—sometimes referred to as a shadow inventory—is even larger today than in the mid-2000s. It remains near record highs, in both absolute and percentage terms, though the proportion of seriously delinquent mortgages has improved in recent quarters. This improvement is related to declining delinquency rates, and consequently, fewer new inflows of properties into foreclosure.

Outflows from foreclosure, however, remain relatively slow. According to LPS Applied Analytics, for every foreclosure sale in Ohio in April, there remained about 70 mortgages in a state of serious delinquency. This means that if the stock of seriously delinquent mortgages were frozen at current levels, it would still take close to six years to work through the backlog at the current foreclosure sales pace. (This calculation assumes that loans that are currently more than 90 days delinquent will ultimately go through the foreclosure process.) The slow foreclosure sales pace is partly related to the documentation problems that several major servicers acknowledged last fall, which cast doubt on their standing to initiate foreclosures. What followed were process reviews by servicers, and a voluntary suspension by some of foreclosure sales. Foreclosure sales have yet to return to the levels that prevailed prior to these revelations.

Again, as before, as these properties emerge from foreclosure, they will keep downward pressure on prices and on the number of new homes under construction. According to RealtyTrac, distressed properties—those that have been through foreclosure or that were sold for less than the owner owed prior to the completion of foreclosure—accounted for about a quarter of all home sales in Ohio in the first quarter of 2011. RealtyTrac also reported that among the states, Ohio registered the largest discount for distressed properties, which sold for about 41 percent less than their nondistressed counterparts. As far as the impact these properties are having on home construction, residential building permits and housing starts in Ohio remain near the lowest levels on record.

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