Home prices are rising and foreclosures have gone down but several risk factors still face the 2014 housing market recovery. Daren Blomquist, Vice President of RealtyTrac, shared these four trends for the 2014 housing market recovery.

RealtyTrac is a company that collects and analyzes real estate data and is one of the only major real estate websites to feature foreclosure properties.

1. 19 percent of all homeowners are still underwater

While the number of underwater homes has gone down, there are still more than 9 million homeowners nationwide that have mortgages totaling at least 25 percent more than what their property is worth.

“So we’re not talking about people who are just barely underwater, these people are deeply underwater,” Blomquist says.

Even though some parts of the country have seen housing market recovery, other areas are still hurting. Homeowners in Atlanta, Phoenix, Las Vegas and Michigan still have mortgages of 40 to 50 percent more than what their properties are worth. Markets that have a larger housing bubble are where you will see the highest percentage of homeowners underwater.

“It’s going to take a long time for these homeowners to get out of that negative equity position, and I really think that’s the biggest risk to the housing market recovery right now,” Blomquist says.

The good news is that the vast majority of underwater homeowners are making their mortgage payments and not falling into foreclosure. At least for now.

“The problem is if there is some other trigger, then these folks are at a much higher risk to fall into foreclosure,” Blomquist says.

2. More than 5 million homeowners are paying 1.5 times what their home is worth

Loan-to-value (LTV) ratio is a comparison between the value of your loan and the value of your home. A higher LTV ratio means a higher risk for the lender. Some lenders offer a high-LTV loan, which allows you to borrow more than your home is worth. However, most high-LTV loans are worth 125 percent of equity, and currently over 5 million homeowners have an LTV ratio of 150 percent.

“I think we may see some changes with the new head of Federal Housing Finance Agency coming in and being open to principal balance reductions to Fannie and Freddie loans which may be a game changer in 2014,” Blomquist says.

While balance reductions have been on the administrations to-do list for a long time, the lenders have to agree to it because they take the hit from the unpaid balance.

3. There were more short sales and fewer foreclosures in 2013

We are on a trajectory to get back to normal foreclosure levels by the beginning of 2015. Last year, 1.4 million homes fell into foreclosure, which is the lowest level since 2007. So the housing market is very much on the way to normal levels of foreclosure activity, Blomquist says.

2013 saw more than 250,000 short sales, which is more than in 2012. Blomquist found it surprising that there were more short sales on homes that were not in foreclosure than those in the process. Banks sold off homes that were in danger of foreclosure but not there yet.

I always say banks don’t like foreclosures any more than borrowers because it’s an expensive process. Short sales are typically an alternative to foreclosures where the bank can get rid of the house by selling it outright.

“It was interesting to see that in some cases the banks are willing to cut their losses and not have to deal with the bad PR and the cost of foreclosures,” Blomquist says.

4. All cash purchases made up 42 percent of December sales in 2013

In December of 2013, almost half of the buyers didn’t have a mortgage and bought properties outright.

“We honestly hardly believed it but we dug into the data and verified it,” Blomquist says.

This means that a lot of buyers were willing to use their own cash to invest in a property. It shows that investors have confidence in the housing market and believe the real estate is underpriced enough to buy it outright, Blomquist says. But it’s not good news for first-time buyers who need a mortgage.

“I don’t think it’s healthy for the long-term because we don’t want the market to be founded on cash buyers,” Blomquist says.

The high amount of cash purchases is a sign of a sicker housing market. The best growth for the housing market recovery includes a lot of first-time buyers, a lot of trade-up buyers and only a tiny slice of cash buyers, around 6 or 7 percent.

Overall, the housing market is still recovering but it may take two years before these four risky trends improve.

WSB Radio’s Ilyce Glink Show – February 9, 2014

To find out more about the housing market, click the audio link below to listen to the full Ilyce Glink Show on WSB Radio, or go to iTunes and download the show to your handheld device. You can also find more information on Daren Blomquist, Jay Dobyns, Adam Bryant and Anthony Sprauve by clicking here.

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