The number of completed foreclosures continues to fall nationwide and in Alabama. There has also been a significant drop in foreclosure inventory.

As of November 2015, the national foreclosure rate stood at 1.1 percent, which is right in line with November 2007 levels, according to CoreLogic’s December 2015 National Foreclosure Report. 

The U.S. housing market also reported its 50th consecutive month of year-over-year declines in foreclosure inventory during December, dropping 2.4 percent from the month of November.

These trends, among others, are having a positive effect on the housing market on a national level and in Alabama, where the inventory of foreclosed homes stood at 0.7 percent during December.

Terry Steelman, Regions Mortgage

Terry Steelman, south region manager for Regions Mortgage and a member of the Alabama Center for Real Estate’s Leadership Council, said the dwindling number of foreclosures is helping the housing market, especially when it comes to pricing.

“One thing that it does, obviously, is that it takes a lot of inventory out of the equation as it relates to oversupply,” Steelman said. “You don’t have a lot of these homes out there dragging the price down, if you will, on comps and other things as it relates to data for that. You still see some out there, obviously, but it’s not near where it was. In a lot of markets, you see inventories where people want to be, there’s just not a lot to choose from.”

According to CoreLogic, Alabama’s foreclosure inventory dropped 15.4 percent from December 2014, with 8,503 completed foreclosures last year.

House of cards

There are a lot of reasons why so many homes went into foreclosure after the housing market crash and the subsequent Great Recession.

While thousands of Americans lost their jobs due to the recession, a sizable portion of the blame lies arguably with relaxed rules within the industry leading up to the crash.

“There were a lot of loan programs out there that don’t exist anymore,” Steelman said. “There were no income verification programs, no asset verification programs, nor programs where they were driven off of credit score. Programs existed where as long as you could come up with a down payment, you had a good credit score, and an acceptable stated income, they were going to approve the loan.”

Steelman said a combination of factors stemming from the investment community to the homeowners themselves contributed to the high number of foreclosures nationwide that are now coming under better control by the industry.

“You had all of these products being securitized and the investment community was hungry for high-yield assets. What you saw was people investing, and the house of cards took place when the market dropped,” Steelman said. “All of the sudden, people couldn’t sustain the payments, the economy turned down, and in a lot of cases, they really didn’t have the income they stated. So they weren’t able to make the payments, lenders took the homes and it was a downward spiral.”

A better foundation

Since the recession, many of the programs that allowed for the subprime mortgages, often cited by industry experts as one of the main impetuses for the housing crash, have been eliminated.

Steelman said the industry is more strict on documentation of assets, income and credit scores than it was just prior to the recession.

“Everything is full documentation,” Steelman said. “It’s gone back to the old standard that you had in the industry. Ratios for qualifications are more realistic. Everything has been reined in from minimum credit scores to asset and income verification.”

With the foreclosure inventory hovering around one percent, Steelman said this is also having a positive affect on price appreciation, as thousands of homes are seeing a return to at least some of the pre-recession values.

“That helps keep prices and values consistent,” Steelman said. “It’s better for existing homeowners. If you live in Tuscaloosa and you have a home in a nice neighborhood that you’d like to sell, and you have three foreclosures in the next neighborhood, then your sale is going to be compared to ones that have sold for a lower value due to the foreclosure. It keeps you from being able to get to where you need to be from a price perspective.”

Challenges Ahead

Price appreciation is certainly a good sign for homeowners and the housing market as a whole.

But Steelman said the one drawback to this could be that some first-time home buyers could be priced out by the return of higher prices.

“Rates are great right now, but when you think about, the more prices increase, the more potentially it would take people out of that ability to buy that first home,” Steelman said. “That’s one thing that would be the downside. When you take inventory out, and prices go up, then fewer people can qualify.”

Steelman also said that while many are gaining back some of the equity lost during the downturn, thousands still have not gained those values in full.

“People who bought a home in 2005, and I’m one of them, at the peak of the market, even as much improvement as we’ve had, I don’t think I could sell my house for what I paid for it in 2005,” he said. “A lot of it is timing. While you may not get everything that you put into it, you’re a lot better off than you were four years ago.”

Meanwhile, Steelman said there are still programs out there, many of them offered by Regions, that offer a 100 percent financing option to lower- and middle-income borrowers who meet income and credit thresholds.

“I think there’s a misconception out there, and it’s amazing to me how many people I run into that still think that you have to have 20 percent down,” Steelman said.

Steelman said that when families are weighing whether they want to rent versus own, renting is often the more expensive road, but it’s chosen because many aren’t aware of their options. Others are hesitant to buy because they were either involved in or close to someone who went through a foreclosure during the downturn.

Another challenge that faces the housing market is the projected rise in interest rates over the next few years. The Federal Open Market Committee raised interest rates slightly during its December meeting, and while the rate is expected to remain stable over the next 12 months, many experts see the Federal Reserve slowly raising rates past 2016.

“I don’t think anybody expected us to be where we are today,  with sub 4 percent on a fixed-rate 30-year mortgage environment,” Steelman said. “If we start seeing positive improvement, if we see the stock market coming back and the economy coming back with stronger signs and we see less issues out there as it relates to terrorism and national defense, then yes, I could see rates starting to gradually go up.”