Connecticut banks and mortgage lenders don’t like to be in the homeownership business, but the after effects of The Great Recession are leaving them little choice.
As a result of the high number of foreclosures in the state in recent years, lenders have amassed a surplus of real estate, a situation that threatens to slow Connecticut’s housing recovery by putting downward pressure on home prices.
In all, banks and mortgage lenders own 4,725 homes in Connecticut, according to the foreclosure listings firm RealtyTrac Inc. And while that number is down slightly compared to a year ago, it is more than three times the number of bank-owned properties that existed in the state before the recession hit in 2008.
“Bank-held properties continue to exert downward pressure on housing prices,” said Steven Lanza, an economist and executive editor of The Connecticut Economy. Lanza said a build-up of bank-owned homes leads to higher inventory levels, which increases competition among sellers and creates downward price pressures.
In addition, when banks take ownership of a home, they don’t like to hold it for a long period because they have to pay maintenance, insurance and other costs. That encourages some banks to sell homes more quickly and at a cheaper price, which negatively impacts the market since the price of any one home is linked closely to the price of a comparable, nearby property.
“It’s a buyer’s market and that kind of dynamic continues to work against sellers,” Lanza said.
A key factor that determines the impact of bank-owned real estate on the market, is how lenders manage the liquidation of their properties, Lanza said.
Lenders that have a large portfolio of real estate-owned properties, or REOs, don’t want to dump them on the market all at once because that could send housing prices into a tailspin.
As a result, banks will often take a measured approach in how they liquidate the properties, or may even choose to sell them in bulk to investors.
Terence Beaty, director of the new homes and land division at Prudential Connecticut Realty in Wallingford, said he has seen a fair amount of REOs that have been taken off the Connecticut market in recent months.
And indeed, REO sales are down significantly so far this year. Nationally, buyers purchased only 158,434 bank-owned homes or those in some stage of foreclosure during the first quarter, a 36 percent drop from the year-ago period, according to RealtyTrac.
One of the reasons for the decline, Beaty said, is likely related to the fallout from last fall’s “robo-signing” scandal, in which banks came under scrutiny for processing foreclosure documents too quickly and without verifying their accuracy.
That scandal led to delays in foreclosure proceedings, and caused some lenders to pull REO properties off the market, including some already under contract.
Eventually, however, those properties will likely be put up for sale, and add to the glut of inventory in the state, which could impact home prices long term, Beaty said.
West Hartford Town Manager Ron Van Winkle, who also is an economist, said Connecticut’s real estate market still remains healthier than most other states, largely because there wasn’t as large of a boom and bust here.
In West Hartford, Van Winkle said, housing prices have remained relatively stable recently. And he says banks haven’t substantially discounted properties they own in town, which has curbed downward pressure on home prices.
But he said that is not the case in every community, particularly in areas where there is a large inventory of bank-owned properties.
Overall, Greater Hartford’s housing market is showing mixed signals.
While housing prices have remained flat — a relatively positive sign — demand for housing has dropped off dramatically and inventory continues to pile up.
April Hartford area home sales fell 34 percent from a year ago, with 518 single-family homes changing hands, compared to 783 units in April 2010, according to the Greater Hartford Association of Realtors (GHAR).
Sales did increase slightly by 3 percent compared to March, but year-to-date statistics show a nearly 20 percent drop in closed sales (from 2,236 to 1,792) and a 31 percent drop in pending sales (from 3,816 to 2,618), GHAR data shows.
House prices were flat at a median $220,000 in April compared to a year ago.
But unsold inventory also swelled in the period as new units came up for sale faster than the market could absorb them. Inventory rose 9 percent (from 6,179 to 6,758) and the average days a house spent on the market increased 28 percent (from 76 to 97), from April of 2010.
The glut of bank-owned properties contributed to the inventory buildup, industry experts said.
“The statistics tell an unusual story,” said Jeff Arakelian, president and CEO of the Greater Hartford Association of Realtors. “Everything seems to be negative except prices are stabilizing.”
Arakelian said demand for housing remains weak, even though it continues to be a buyer’s market and interest rates remain near historic lows.
But consumer confidence is still lacking because people are not feeling secure about their jobs, which means they are postponing major purchasing decisions.
“Job security leads to consumer confidence and consumer confidence leads to big ticket purchases like homes,” Arakelian said. “But that certainty is still not there yet.”
In terms of the outlook for bank-owned real estate in Connecticut, things look cloudy at best.
Jon Carusone, president of the Bank Analysis Center in Hartford, said one out of every 277 Connecticut households was experiencing foreclosure activity as of April, and even though that rate is lower than the national average, it’s still a problem. That’s because Connecticut has seen a sharper percentage increase than the U.S. average and a slower rate of working off the foreclosure backlog.
Between December and April, for example, Connecticut foreclosure inventory declined by only 7 percent whereas the national total declined by 11 percent.
“With roughly 4,700 Connecticut housing units in foreclosure, the backlog represents a distraction to bankers, has a negative impact on bank earnings and is a drag on the rate of housing sales and prices,” Carusone said.
Â
