Data in ""Barclays'"":http://group.barclays.com/home newest _Securitization Products Weekly_ suggests that distressed markets are outperforming others in home appreciation and paving the way for a broad-based housing recovery.
[IMAGE]Barclays waved off concerns about shadow inventory, saying it is ""more of a symptom than a cause of depreciation"" and speculated that the share of distressed homes is a more significant factor keeping home prices down.
The report cites a working paper from the Atlanta Federal Reserve that shows that foreclosure tends to have a direct effect on surrounding non-distressed prices only before the property enters REO. Rather, prices fall as neighborhoods develop vacancies that lead to crime and disrepair. An increased REO stock should actually be taken as a positive sign for non-distressed prices, Barclays said.
""An important implication is that the large shadow inventory may not be a sword of Damocles hanging over the housing market. As foreclosure processing rates increase, resulting in more REO stock, there is little reason to believe non-distressed home prices will suffer. In fact, we should expect the opposite. Blighted neighborhoods should improve as property ownership returns to those with an incentive to maintain and improve its value,"" the report read.
Over the past year, Arizona has led the way in home price appreciation, showing 12 percent year-over-year gains. Other sensitive metropolitan statistical areas (MSAs) also posted price increases, with Barclays examining certain MSAs in the Sun Belt as bellwethers for recovery.
As migration patterns bring homebuyers back to Sun Belt MSAs (such as California's Inland Empire, Las Vegas, Arizona's Phoenix-Mesa-Glendale, and others), analysts are seeing an increase in housing demand, resulting in the absorption of oversupply and a turnaround in home prices.
In addition, Barclays' data shows that Florida's housing recovery (previously anticipation in 2013-2015) has arrived early as the state's home price index soars 10.3 percent over expectations.
""While we had expected long-term outperformance in these markets, the exact timing of recovery was less clear. Now that these markets have exhibited strong [home price appreciation] for the past several quarters, the momentum term in our forecast has switched from negative to positive, and the near-term outlook for Sun Belt MSAs has become significantly more bullish,"" said Barclays.
Meanwhile, distressed share is still low, owing largely to elevated foreclosure timelines. The level of REO has declined from 600,000 in September 2010 to 407,000 in May 2012, keeping distressed supply off the market despite the end of foreclosure moratoria following this year's national mortgage settlement.
Barclays revised its distressed share forecast to a relatively flat 35 percent through 2014, at which point distressed share is expected to gradually return to historic levels.