When banks pulled back on foreclosures two years ago following a government investigation into faulty paperwork by lenders, Wall Street analysts, academics, and researchers thought the lull would be followed by a storm. They believed that once banks resolved the claims of delinquent homeowners piling up in courts and worked through their backlog of foreclosures, tens of thousands of houses would hit the market, driving down prices for years to come.
It never happened—even after the five biggest U.S. mortgage servicers reached a $25 billion settlement with federal and state regulators in February. Instead, the number of residential properties for sale in the U.S. shrank to the lowest level in a decade, while prices have appreciated at the fastest pace since 2005. An index of pending home resales compiled by the National Association of Realtors climbed 5.2 percent in October, the most recent month for which data are available. The median price of an existing home sold in October jumped 11 percent from a year earlier, to $178,600, the steepest annual increase since November 2005, according to the group. “Many of us, myself included, feared a wave of foreclosures when the settlement came,” says Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s Wharton School. “I was wrong.”