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Why Drop in Foreclosures Is Bad for Housing Market

In a normal housing market, lack of supply is generally considered a good thing. When demand outweighs supply, home prices rise and homeowners gain equity. Like so many things in this historic economic recovery, that premise doesn’t exactly apply.

Now that supply of distressed properties is drying up, and pulling overall home sales down with it. Sales of existing homes dropped unexpectedly in June, down 5.4 percent from the previous month...

“More than 50 percent of all existing home sales have been to "investors" and "first timers" ...

The distressed share of home sales fell to 25 percent, while it had been running at a third for much of the past year. The first-time home buyer share also fell to 32 percent, down from 34 percent the previous month and from a normal range of 40-45 percent...

So why is the supply of foreclosures so low when there are so many hungry investors waiting to pounce? There should be plenty to go around, given that the total U.S. delinquency rate is at 7.2 percent, representing 5.57 million loans either delinquent or in the foreclosure process, according to Lender Processing Service’s June Mortgage Monitor.

The answer is the process.

This from Fannie Mae’s most recent quarterly report:
“Our foreclosure rates remain high: however, foreclosure levels were lower than they would have been during the first quarter of 2012 due to delays in the processing of foreclosures caused by continuing foreclosure process issues encountered by our servicers and changing legislative, regulatory and judicial requirements.”

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