Foreclosure home sales dropped significantly in the third quarter of 2012 (3Q 2012). The number of real estate owned property (REO) resales experienced an equally dramatic drop from the first quarter. Notice of default (NOD) filings decreased as well.

REO resales are down

23,000 REO resales took place in the 3Q 2012.  That is:

  • one-fifth of all California resales;
  • down 32% from the prior quarter; and
  • down 38% from one year earlier.

Individuals, rather than the lender or the government, bought 39% of homes sold at trustee’s sales. This is an increase of 31% from last year. This third-party high-bidder situation indicates speculators remain strangely optimistic about a future rise in resale pricing.

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REO resales in CA

NODs decrease

49,026 NODs were recorded in California in 3Q 2012. That is:

  • down 7% from the prior quarter; and
  • down 31% from one year earlier.

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

An average of eight months passes between an NOD recording to trustee’s foreclosure sale in California. This is up very slightly from the prior quarter and down from one year earlier.

Foreclosures ride the bumpy plateau

22,949 trustee’s deeds were recorded in the third quarter of 2012. That is:

  • up 5% from the prior quarter; and
  • down 41% from one year earlier.

Until September’s uptick, California had experienced 18 months of continuous decline in foreclosure sales.

Foreclosure sales occur most often among low-tier homes. Zip codes with median sale prices below $200,000 saw 4.8 homes foreclosed per 1,000. Zip codes with median prices between $200,000 and $800,000 saw only 2 foreclosures per 1,000. Foreclosures were less than one per thousand in areas with average prices over $800,000.

The overall trends still favor a gradual decrease in foreclosures until interest rates begin to move up, probably in 2015. However, foreclosures won’t return to pre-recession levels without increased employment and home prices. If it happens, reverse eminent domain will help cut the foreclosure rate even more. This will (hopefully) slow the drop in homeownership and stabilize home prices.

Related article:

San Bernardino: an underwater homeowner’s white knight?

Consistently, 41% of all NODs currently go on to trustee’s sale. Projecting this forward, foreclosures will be down in the next 2-3 quarters, as expected. Based on the number of NODs in Q3 2012, around 20,000 foreclosures will occur in Q2 2013. The recent large drop in foreclosure sales reflects a similarly large drop in NODs in 4Q 2011 and1Q 2012. This lag is due to the eight-month foreclosure process.

Among California’s largest counties, the greatest one-year drops in foreclosures took place in Orange (-47%), Sacramento (-46%), Contra Costa (-46%), Los Angeles (-43% )and San Diego (-41%) counties.

Short sales: a new fad?

30,000 short sales closed in 3Q 2012. That is:

  • one-fourth of California resale activity,
  • up 3% from the prior quarter, and
  • up 20% from one year earlier.

Short sales are swiftly eclipsing foreclosures as the main route out of negative equity. Lenders go with this “Plan B” to avoid taking on additional REO property.

What’s in store?

Although steadily decreasing, foreclosures will remain higher than average due to negative equity in around 2 million homes. For most underwater homeowners, future home price increases will not create positive equity soon enough to dismiss the idea of strategic default or a short sale. Eventually, large numbers of these homeowners will default out of frustration, or a simple lack of money.

Re: California Foreclosure Activity Lowest Since Early 2007 from DataQuick