Shadow hangs over housing rebound

COMING HOME: A worker with Stand Corporation finishes a renovation at 61 Camden Ave. in Providence. For the first time in years, renovated homes outnumber newly abandoned ones in the neighborhood thanks in part to efforts to rehab foreclosed properties. / PBN PHOTO/FRANK MULLIN
COMING HOME: A worker with Stand Corporation finishes a renovation at 61 Camden Ave. in Providence. For the first time in years, renovated homes outnumber newly abandoned ones in the neighborhood thanks in part to efforts to rehab foreclosed properties. / PBN PHOTO/FRANK MULLIN

When he drives through his Providence neighborhood checking out buildings, Smith Hill Community Development Corp. Executive Director Francis Smith sees progress.
For the first time in years, freshly renovated homes outnumber newly abandoned ones, Smith said, partly thanks to nonprofits like his that turn foreclosed properties into new rental buildings. “During the height of the foreclosures, we would see four or five foreclosed houses on every block, now maybe there are two,” Smith said. “The foreclosures seem to be slowing.”
Along with a rise in sales starting late last year, anecdotal reports of stabilized neighborhoods like Smith’s represent hope for those waiting for Rhode Island’s beleaguered real estate market to finally turn around. But more than two years after the recession and with the national economy showing signs of life, many expected that by this point things would be better.
In 2011, the median single-family home price in Rhode Island dropped 7 percent and the number of sales dipped 2 percent despite plenty of bargains, low interest rates and new financing options.
Realtors say they see demand picking up, but the steady stream of foreclosures, auctions and short sales clogging the market have kept prices down and potential buyers holding out until they’re confident they’ve found the bottom.
Even when sales pick up, as some suggest they will soon, few can say with confidence how long it will take to make a dent in the inventory of deeply discounted properties on the market with so many mortgages underwater and foreclosures continuing unabated.
“We are working through the foreclosures and short sales we have had in the pipeline and the hope is that once we get [the distressed properties] out, we will start selling the better stuff,” said Rhode Island Association of Realtors President Jamie Moore about the state of the market. “My only concern is we don’t know what the so-called blind inventory is. We can’t see what the banks have. Without knowing what that is, it is tough to know how much we are accomplishing.”
That blind inventory – also referred to as the shadow inventory – represents homes lenders have either repossessed or are likely to repossess in the near future, but haven’t put on the market yet. In a late December report, real estate tracking firm CoreLogic estimated that, nationally, there were 1.6 million distressed housing units that were not listed on the market, representing a shadow inventory equivalent to a five-month supply of sales.
While that supply was down from October of 2010, when there were 1.9 million units of invisible inventory, or a seven-month supply, it means that for every two homes being listed, one is waiting in the shadows, CoreLogic said.
Those 1.6 million units equal what was in the shadow inventory in January 2009, the point at which home prices were declining the fastest since the bubble burst and it is roughly four times the size of the shadow inventory at the height of the boom in 2006.
The report did not break out Rhode Island or Providence-area figures.
If as many homes are sitting on lenders’ books as people think, they could start hitting the market soon, after five of the nation’s largest banks recently reached a $25 billion settlement with 49 states and the federal government over abusive mortgage practices.
The deal is expected to provide certainty to lenders and quicken the pace of processing foreclosures, which slowed dramatically late in 2010 after questions about improper foreclosure procedures were raised.
While getting those properties out of the shadow inventory and in the hands of new owners with plans for them is necessary, some fear it could drive prices even lower, at least in the short term.
Stephen Tetzner, founding partner at Homestar Mortgage in Providence and president of the Rhode Island Mortgage Bankers Association, said that like the exact size of the shadow inventory, it is difficult to predict exactly what impact the settlement will have on the local market without knowing how many Rhode Island mortgages each bank holds and how they have been handling them.
“There is no way to know if the banks are holding out,” Tetzner said.
Tetzner believes the state has reached the bottom of the housing market, but acknowledged that the number of homes available still has to come down before the market can be really considered healthy. “The prime thing for me would be for the inventory to come down and stabilize,” Tezner said. “Now there are 5,000 single-family homes for sale. We need to see that come down to 500 to 1,000 to get into more of a stable position.”
To do that, the market is not only going to have to work through some of those distressed properties sitting on bank balance sheets, but the local economy needs to pick up enough to slow the rate of new defaults feeding foreclosures.
In the Providence-New Bedford-Fall River area, the foreclosure rate in November was 2.50 percent, down 18 percent from November 2010 and the lowest it has been since June 2010, according to CoreLogic.
Less encouraging, the 90-day mortgage-delinquency rate for November was 7.36 percent, down from a post-recession high of 8.44 percent in February of 2010, but still well above the 5.71 percent in January of 2009.
“I think we will see steady improvement, but I don’t think it’s going to end immediately,” Tetzner said about the pace of foreclosures.
Although price declines have been relatively consistent across the state, the communities that have held their real estate values the best over the year have mostly been at the higher end.
Newport County saw two towns with median-price increases – Portsmouth and Little Compton – while Jamestown and Middletown were flat, according to the Rhode Island Association of Realtors.
Providence (excluding the East Side), East Providence, Pawtucket, Johnston, West Warwick and Charlestown all had price declines of greater than 10 percent. New Shoreham’s median price declined by 24 percent for the year, but there were only three sales in 2010.
Statewide, sales did pick up 10 percent in the fourth quarter of 2011 compared with the fourth quarter of 2010, but the average days on the market for properties remained at 98 days in the fourth quarter, the same as the fourth quarter of 2010 and higher than the 88-day average for all of 2010.
Most people connected to the housing market agree that the biggest thing that could happen to turn things around in Rhode Island would be for the economy to pick up and start producing jobs. Bryant University assistant economics professor Edinaldo Tebaldi said Rhode Island’s double-digit unemployment rate and sluggish housing market are directly connected to each other and right now each is helping hold the other down.
“The construction sector has been very important helping us out of previous recessions because it can create many jobs very quickly,” he said. “Now the construction sector is very sluggish.”
Tebaldi said the Rhode Island construction industry had been at around 20,000 people before the recession, but is now about one-quarter of that.
Complicating the affects of the housing-market crash for many Rhode Islanders is the fact that, while home prices have plunged since 2007, rents have slowly but steadily increased over that period, partially because of rental properties abandoned after foreclosure.
As home prices fell, the average monthly rent for a three-bedroom apartment in Rhode Island went from $1,350 a month in 2007 to $1,564 halfway through 2011, according to the nonprofit Rhode Island Housing.
“A constrained supply coupled with a high demand often leads to higher rents,” said Faye Zuckerman, spokeswoman for Rhode Island Housing. “With Rhode Island’s unemployment rate one of the highest in the nation at more than 10 percent, many in this state are struggling to pay their rent and/or make mortgage payments.”
Despite watching the market bounce along the bottom for the past two years, most Realtors, perhaps out of necessity, remain upbeat about 2012.
“I would have to say from a personal perspective, my phones are ringing, we are selling properties consistently,” said Karl Martone of the Martone Group brokerage in Smithfield. “I realize throughout the industry that may not be happening, but it seemed like right after the first of the year things started picking up.”
Martone, for one, said he is not as concerned about “shadow” inventory as some are and said foreclosed properties in 2012 are not playing as large a role in the market as they were a year or two years ago.”
“I have been hearing about the shadow market for years. If a wave of foreclosures do drop all at once it will affect prices – but I still have yet to see it,” Martone said. •

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