Thanks primarily to the Lesser Depression of California’s jobless recovery which continues to drive foreclosures, 34% of all California home resale activity in the third quarter of 2011 can be attributed to real estate owned property (REO) inventory — down a scant 1% from the second quarter but nearly the same as one year earlier.

71,275 Notices of Default (NODs) were recorded in California in the third quarter of 2011, down from 83,261 one year earlier. The largest numerical drops in NODs issued took place in Riverside (-2,059), San Bernardino (-1,925), Los Angeles (-1,822) and San Diego (-821) counties.

NOD volume peaked in the first quarter of 2009 with 135,431 NODs recorded.

Also in the third quarter of 2011, 38,895 homes were taken by trustee’s foreclosure sale. This is down from 42,465 in the second quarter, and noticeably lower than the 45,377 homes foreclosed on one year earlier.

Statewide, high-tier regions (zip codes with median home prices higher than $800,000) saw a 12% increase in NODs from the first quarter of 2011, a likely result of increased strategic defaults. Low-tier neighborhoods continue to see the highest concentration of both NODs and foreclosure sales, with 11 NODs filed for every 1,000 homes in zip codes with prices lower than $200,000. In zip codes with prices above $800,000, only 3 NODs were filed per 1,000 homes, evidence of significant inequality between income tiers.

It now takes an average of ten months following the recording of the NOD to complete a trustee’s foreclosure sale in California. One year earlier, foreclosure proceedings averaged nine months in duration. The extended processing time is seen as a product of notice complications, lender backlogs and the pursuit of loan modifications and shortsales to circumvent foreclosure, as reported by MDA Dataquick.

An estimated 30% of homes sold at trustee’s sales were bought by individuals other than the lender or government groups — up from 23% last year. This third-party high-bidder situation indicates speculators remain optimistic about future resale pricing. [For more information and trends on NODs and Notices of Trustee’s Sale (NOTS) in California, see the first tuesday Market Chart, NODs and Trustee’s Deeds: Grim signs of real estate’s present condition.]

first tuesday take: Last quarter’s drop in foreclosures would ordinarily be a good sign for a recovery, but one quarter does not make a trend in the bumpy plateau recovery California is experiencing in this Lesser Depression. The quarterly increase in NODs is evidence of more foreclosures to come (about 60% will go to trustee’s sale), as lenders make good on their promise earlier this year to increase foreclosure efficiency and clear out some of the backlog of serious delinquencies.

Foreclosures are sure to continue at or near their current high rate until employment returns to California in annual amounts of around 400,000 additional jobs for two consecutive years. Negative equity properties are damaging to society and must be promptly cleared out by lenders or owners — a process not likely to be concluded until roughly 2015-2016 at the current pace. In the meantime, lenders will work through the obscure shadow inventory of homes backlogged as delinquent and ready for foreclosure. [For more on the shadow inventory, and the conditions necessary for economic recovery, see the June 2011 first tuesday article, Wobbling housing market reflects wobbling economy.]

To get the California economy recovering and restore strength and stability to the real estate market, it is imperative lenders quickly clear out the delinquencies on their books, either by repairing those defective loans with cramdowns for employed owners or, more brutally, by foreclosing.

On a related point, the destruction of creditworthiness caused to homeowners who participate in a shortsale is often as dramatic as that wreaked by foreclosures, since homeowners generally must default before the lender will even consider a shortsale. This destruction of credit is counterproductive, and helps nobody except the lender and buy-to-let investor. [For more on shortsales, see the September 2011 first tuesday article, How to facilitate a shortsale transaction.]

Re. “California foreclosure activity back up,” from MDA Dataquick