The impacts of AB284, which took effect on October 1st, 2011 and set strict foreclosure laws for banks, are being felt across Washoe County. The number of issued Notices of Default (NODs) has dropped dramatically in October 2011 as shown below in a report by Ticor Title.
The impact of AB284 was not felt immediately, as the backlog of existing foreclosure properties made their way through the system. However, as existing REO properties are sold and few new properties are forthcoming, the impact will be a significant reduction of available home inventory. According to Guy Johnson’s great real estate blog:
“Whereas REOs typically represented 30 – 40 percent of our market’s inventory, bank-owned properties now account for only 12 percent…The Reno-Sparks’ real estate market now has fewer than 100 bank-owned houses available – 98 to be precise (active, non-pending, site/stickbuilt SFRs). Why is this noteworthy? Because normally many more than that number sell on a monthly basis.”
Given that few new bank-owned houses are in the pipeline, we can expect our inventory to decrease, creating a housing shortage, since short-sales are still a slow process and there is little change in the number of equity sales. It is difficult to predict how home prices will react to this shortage, though some price increase is expected. Median home prices, which have fluctuated since October 2011, increased from $145,000 in February 2012 to $151,000 in March (First Centennial Title Company).
The problem is that AB284 created an artificial housing shortage. While the number of homeowners receiving NODs decreases, it does not mean that the number of distressed properties has decreased. There are many stories of people living in homes without paying mortgages for months at a time without being foreclosed upon.
There are benefits, families are staying in homes, banks are discouraged from participating in fraudulent mortgage practices, and positive economic impacts. Not having to pay mortgage for a longer period and living in a house rent-free leaves more money for families to spend in other areas. There may be some small relationship between this and the 10.7% increase in taxable sales in Washoe County from February 2011 to February 2012, and 6.1% between January 2011 and 2012 and an increase in sales in every month since October 2011. Since most of the mortgage payments go to the companies outside of the region, if any portion of that expenditure gets redirected to local companies, it is a net win for the County.
However, as with all changes, there are negatives. While people are not making mortgage payments, they may also not be making property taxes, HOA fees, and other house-related payments. If the house is foreclosed and resold, new owners are likely to begin making these payments. As the house sits in real estate limbo, local governments and businesses are losing money on these revenues.
Whether the magnitude of these losses is less or equal to the benefits from additional local spending is unknown. What is important, however, is not to see the potential sales price increases and decreased home inventory as a real estate market recovery. This is an artificial shortage, building up shadow inventory that will hit the market as soon as banks figure out a way past the strict requirements. The goal of recovery is to increase demand for housing, by creating jobs and putting money in the hands of potential buyers, not reduce supply. We have postponed the negative impacts of foreclosures, but will have to feel the pain of the shadow inventory at some point in the future, before we can enjoy an actual recovery.
Nevada Economic Insights 