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Foreclosure rates improved in the first half of the year in most large American cities. It is hardly a headline worth writing as the situation is about to take a sharp turn for the worse.

Real estate research company RealtyTrac reports that “foreclosure activity decreased on a year-over-year basis in 178 out of the nation’s 211 metropolitan areas with a population of 200,000 or more. The report also shows that all top 10 metro areas with the highest foreclosure rates in the first half of the year posted decreasing foreclosure activity compared to the first half of 2010.”

The most notable improvement was in the markets in which prices have dropped most rapidly such as Nevada, California, Arizona, and Florida. RealtyTrac attributes some of the improvement to the rules and regulations of foreclosures. Areas where actions are based on “judicial foreclosure” have dropped, but this is often because the court systems are clogged by the number of filings.

RealtyTrac is quick to point out the irregularities in the foreclosure process, which have resulted from improper actions by many banks, will be resolved soon. That will open the floodgates as procedural delays disappear. But the situation is actually much more troubled than that.

The number of foreclosures is bound to rise for another two or three years once the current backlog has been cleared. Virtually every measurement of the housing market shows an ongoing drop in building, sales, and, in many cases, prices. The inventory of homes on the market nationwide would take a year of buying activity to clear out at current sales rates. In some areas, it would take as long as five years. Unfortunately, as some homes are sold, more come onto the market. The unsold inventory figure for the entire country could actually rise this year and next as banks put more foreclosed inventory on the market.

The botched paperwork at banks and the overburdened court systems are not the main reasons foreclosures will move up for years. Americans still cannot afford their homes in many cases. An ongoing drop in real estate prices will make that worse. In addition, there is no sign that buyers have pushed back into the market, despite access to historically low interest rates.

The headlines about real estate will soon read “Foreclosures Hit All-Times Highs”

Chart source: RealtyTrac

Douglas A. McIntyre