A recent video report on the CDPE network interviewing RealtyTrac executive Rick Sharga identified several key factors driving the current foreclosure and distressed property market:

Since 2006, the defaults greater than 90 days have occurred faster than the rate that foreclosures have been initiated, the result being that the number of foreclosures in the pipeline has been building for a long time. It is estimated that more than 7 million properties are in default or foreclosure.

State’s attorneys general, the state courts and federal regulators have pushed to delay foreclosures until documentation problems can be resolved. The number of completed foreclosures has fallen as a result of documentation problems, but this is not a sign that the backlog is clearing.

In 2010, 2.9 million foreclosures were processed and the total foreclosures are likely to exceed 3 million this year. The peak should occur this year, with 2012 looking more like 2010; however, legal delays could push the peak into next year. Seven of 10 foreclosures occur without the property ever having been listed for sale. Many homeowners assume they have no further options once they receive notice of default from their lender.

Unemployment is the biggest factor contributing to current mortgage defaults. More than 50 percent of owners foreclosed upon still have equity in their homes, despite the high percentages of homeowners under water reported below. Rather than lose this equity in a foreclosure, these homeowners might be better served by getting their lenders to allow a short sale or by negotiating to modify the loan with new terms once homeowners find new employment. Later this year another wave of foreclosures is predicted, as a large number of option ARM loans are scheduled to reset, causing large increases in borrower payments that may drive more homeowners into default.

The number of distressed properties coming on the market has driven home prices down to levels of the early 2000s. Low interest rates and falling prices mean that affordability is the best it has been many years. Even though it is a great time to buy, demand is weak because buyers are uncertain about the job market and economy. Many borrowers cannot get access to credit. Rental demand has risen.

About 96 percent of borrowers are getting conforming government backed loans. Most homes are being sold to first-time homebuyers and investors.

Move-up buyers, who normally dominate our housing market, are in many cases frozen out because of negative equity. Zillow reports that 28.4 percent of single-family homes with a mortgage owe more than the home is worth. According to housing analyst Mark Hanson, Zillow bases its calculation on the original purchase price of the house and rarely takes into account second mortgages or refinanced first mortgages. Additionally, the analysis fails to consider that move-up buyers need additional equity to pay closing costs (8 percent or so in Washington) and may need a 20 percent down payment on their next home.

The percentage of move up buyers without enough equity to purchase another home is much higher than the 28.4 percent reported. Hanson notes that by his calculation for jumbo mortgage purchasers and conventional conforming buyers who need additional equity to pay closing costs and the down payment of a move up purchase, 64 percent of mortgages do not have sufficient equity. This coupled with tighter credit standards, unemployment, and other economic uncertainties has suppressed the move-up buyer market and continues to starve a real estate recovery.