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Close The Books On Foreclosure Crisis

After years of dragging down home values and casting a blight on the housing market, foreclosures are at death's door and a funeral is in the works.

A number of trends signal that the foreclosure crisis that began in 2007 is well behind and that the number of foreclosures hitting the market has just about bottomed out, real estate experts say.

New data show that foreclosure starts have fallen to close to a 10-year low, while the share of in-foreclosure property sales has plummeted to a 15-year low.

The declines come as banks have cleared out old distressed properties, while tighter lending standards have led to better performing new loans and have helped curb the number of new distressed properties coming on the market.

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The pipeline of foreclosures is dwindling and most of the properties in the pipeline remain from the last housing bubble.

As foreclosures die off, the decrease should help raise home values, a trend that may prompt owners to sell and buy new ones. This should also help builders and lenders.

But as foreclosures fade, so too will the number of bargains.

"I see the light at the end of the tunnel and we can start planning the funeral," Daren Blomquist, vice president at housing data and analytics provider RealtyTrac, told IBD. "Foreclosure starts, the leading indicator of the foreclosure market, are below pre-crisis levels and have been consistently for most of this year.

A total of 45,381 U.S. properties started the foreclosure process for the first time in July, down 8% from the previous month and 9% from a year ago, according to RealtyTrac. That marks the lowest level since November 2005. Foreclosure starts in July were less than one-fourth of their peak of 203,948 in April 2009 and below their precrisis average of 52,279 a month in 2005 and 2006.

The fall-off in foreclosures signals that the housing market is strengthening, experts say.

"Foreclosures are finding a new floor that is below pre-crisis levels," said Blomquist, "and that is good news for the market overall because it indicates not only have we put most of the bad loans from the last housing crisis behind us, but also that housing is operating on a much more solid lending foundation going forward.

"The loans being originated now are at much less risk for future foreclosure because of tighter lending standards that help ensure buyers are only purchasing what they can actually afford.

Blomquist says the "only remaining loose end" is the fact that the market is seeing increases in bank repossessions as the banks "clear out some of the lingering inventory" from the foreclosure crisis.

A Crisis 'Well Behind Us'

In July, bank repossessions reached the highest level since January 2013, according to RealtyTrac.

"It's the final cleanup stage," Blomquist said.

Blomquist says the foreclosure crisis was called a "crisis" because the market saw seven years of foreclosure rates above historical norms and 7.3 million homeowners lose their homes to foreclosure or short sale.

In July, the share of properties sold while in the foreclosure process (not including bank-owned properties) accounted for 6.4% of all single-family and condo sales, down from 8% a year earlier to the lowest monthly share since January 2000, according to RealtyTrac.

What's the significance of the decline to a 15-year low

"The crisis is well behind us, and the overall housing market is now strong enough that banks are not having to resort to short sales during the foreclosure process but can go ahead and foreclose and recoup much if not all of their losses thanks to rapidly rising prices," Blomquist said.

Rick Sharga, executive vice president of Auction.com, says the foreclosure process is "well past the peak" in terms of the number of loans that are either delinquent or in default.

"In the next 12 to 18 months, foreclosure activity will be back to more normal historical levels," Sharga told IBD. "What that suggests is that the housing market will have one less hurdle to clear in order to reach a full recovery.

'Clarity' For Builders

How will the return of foreclosure activity to normal levels impact homebuilders such as LGI Homes (LGIH), Lennar (LEN) and Toll Bros. (TOL)

"When the last of the foreclosure homes enter the market," said Sharga, "it gives (builders) clarity as to what's needed for their inventory. And it should also remove barriers for home prices appreciating in those markets, which is good for builders.

Sharga adds that, more recently, loans are performing better than they had performed historically because credit has been "so tight over the last two years" and only the most highly qualified borrowers have have been able to get loans.

He says the "overwhelming majority" of loans in foreclosure were issued around 2010 or earlier.

According to RealtyTrac, 61% of loans still in the foreclosure process were originated during the housing bubble years of 2004 to 2008, down from 68% last year and 75% two years ago.

Blomquist says there were 515,264 loans in the foreclosure process in the pipeline at the end of July, down from 536,242 the month before and from 656,475 in July 2014.

Pockets Of Activity

While the foreclosure crisis has ended, there are still pockets in the country that will continue to see above-average foreclosure activity for the next couple of years, says Sharga.

They include states such as New York, New Jersey and Massachusetts, all of which have large backlogs of "seriously distressed" loans that have been slow to work through the process. Sharga estimates that it's going to take another two to three years for those loans to be "flushed out of the pipeline.

Even in those states, "we're dealing with very old loans," Sharga said.

"Once we work through the backlog the market will clear itself very quickly," he added.

What does the end to foreclosures mean to investors

"For real estate investors during the housing crisis in a sense it was a feast," said Blomquist. "Now we're in a period of famine. Most smart investors will realize there will be another feast coming and bide their time until that happens, and not get caught up overpaying for properties in this market.

Sharga adds that investors are going to get more "creative" in how they do real estate investing and be more focused on specific geographies if they're looking for bargain opportunities.

Markets Ripe For Investors

Some markets still have above-average foreclosure rates and are ripe for investment opportunities. They include Jacksonville, Fla., where foreclosure starts were up 303% in July, the second straight month with a year-over-year increase, and foreclosure properties sold 52% below the price of non-foreclosures, says Blomquist.

In New York, foreclosure starts were up 2% in July, the fifth consecutive month with a year-over-year increase, and foreclosure properties sold at 38% below the price of non-foreclosures. In Philadelphia, foreclosure starts were up 12 percent in July, the third straight month with a year-over-year increase, and foreclosure properties sold at a 71% discount to non-foreclosures.

In St. Louis, foreclosure starts were up 121% in July, the fourth straight month with a year-over-year increase, and foreclosure properties sold at 44% below the price of non-foreclosures.