J.P. Morgan: Foreclosure Sales Could Be Higher in Three Years

Efforts to modify loans and delay foreclosures may have helped hold down the stock of foreclosures for sale in the second half of 2009, fostering home-price stabilization. But that cure could require different medicine: an elevated level of foreclosures for sale over the next three years.

Analysts from J.P. Morgan Chase & Co. are forecasting that bank-owned sales as a share of total home sales will remain at current or even higher levels three years from now in more than half of the nation’s 10 largest housing markets, according to a recent investor presentation. (The slides for the presentation are available as a PDF.)

Bank-owned sales–or “REO,” real-estate owned, in industry parlance—are expected to account for between 39% and 50% of home sales in Phoenix in the fourth quarter of 2012, up from 37% at the end of last year. The REO share of sales in San Diego, where one-quarter of sales at the end of last year were REO, is projected between 24% and 31% three years out.

	2Q 2009	4Q 2009	4Q 2012
Los Angeles	52%	39%	22-28%
New York	11%	12%	12-16%
Santa Ana, Calif.	30%	16%	18-23%
Long Island, N.Y.	8%	8%	5-7%
Chicago	33%	28%	21-28%
San Diego	38%	25%	24-31%
San Francisco	14%	10%	9-12%
Oakland, Calif.	47%	20%	18-23%
Phoenix	57%	37%	39-50%
San Jose, Calif.	43%	22%	14-18%
Source: J.P. Morgan Chase & Co.

New York City could also see a slight increase in the REO share of sales, with a projection that 12% -16% of sales coming from foreclosures at the end of 2012, compared to a 12% REO share at the end of last year. Foreclosures could stay the same or rise in Santa Ana, Calif.; San Francisco and Oakland, while they’re projected to be lower in three years in Los Angeles, Chicago, Long Island, N.Y., and San Jose, Calif.

With the exception of New York, foreclosures began to heavily flood housing markets in the first and second quarters of 2009. Because foreclosures sell at a discount, that generated big price declines that have since moderated as the REO share of the market has eased.

J.P. Morgan says that spring 2009 will likely mark the peak of foreclosure sales as a share of total home sales, but that REO sales will grow and remain high in most markets through 2012. Even if REO sales account for 50% of all home sales three years from now in Phoenix, for example, that will still be below the 57% foreclosure share from last spring.

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