As both jobs and home sales remained scarce, 34% of all California home resale activity in the fourth quarter of 2011 was attributed to real estate owned (REO) inventory — approximately the same as in the prior quarter and down from an even higher 38% one year earlier. [For current REO data and analysis, see the first tuesday Market Chart, REO resales in CA.]
61,517 notices of default (NODs) were recorded in California in the fourth quarter of 2011, down from 69,799 one year earlier. The largest numerical drops in NODs issued took place in the counties of Riverside (-871), San Bernardino (-917), Los Angeles (-1,833) and Alameda (-543). [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.]
NOD volume peaked in the first quarter of 2009 with 135,431 NODs recorded.
Trustee’s sales took 31,260 homes in the fourth quarter of 2011. This is down 20% from 38,895 in the third quarter, and 12% lower than the 35,431 home foreclosure sales one year earlier. The drop is a positive sign for stabilizing the real estate market, although the still-high level of NODs suggests that many more foreclosures are still to come, and will continue for several years.
Low-tier neighborhoods continue to see the highest concentration of both NODs and foreclosure sales, with fourth quarter foreclosures of six homes for every 1,000 in ZIP codes with prices lower than $200,000. In ZIP codes with prices above $800,000, only 0.7 NODs were recorded per 1,000 homes, evidence of significant inequality in debt and employment between income tiers. [For more on the conflict between those who borrow and those who lend, see the first tuesday article, Rentiers and debtors: why can’t they get along?]
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 lender backlogs, the pursuit of loan modifications and shortsale approvals to circumvent foreclosure, as reported by Dataquick.
An estimated 30% of homes sold at trustee’s sales were bought by individuals other than the lender or government groups — up from 22% last year. This third-party high-bidder situation indicates speculators remain optimistic about future resale pricing.
first tuesday take: Two quarters do not a trend make. The fourth quarter of 2011 marked a second three-month drop in foreclosures, but it is still much too early to determine whether these declines will be enough to put a stop to the bumpy plateau California has experienced since 2008 in this jobless Lesser Depression. The still-high number of 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 massive backlog of serious delinquencies.
Foreclosures are sure to continue at or near their current high rate, since home prices will not rise significantly for several years and a large percentage of the 2,500,000 negative equity homeowners in California, both with and without jobs, will eventually become frustrated and default. Negative equity properties are damaging to society and must be promptly cleared out by lenders or owners in order to put an end to the drag they create for the economy— a process not likely to be concluded until roughly 2015-2016. In the meantime, lenders will work through the obscure shadow inventory of mortgaged homes backlogged as delinquent and in need of 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 experienced by a homeowner who participates 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 drops,” from Dataquick