Foreclosure sales dropped significantly in the first quarter of 2013 (Q1 2013). The number of real estate owned property (REO) resales experienced an equally dramatic drop from the prior quarter. Notice of default (NOD) filings decreased as well.

REO resales are down

16,000 REO resales took place in Q1 2013. That is 45% fewer REO resales than one year earlier. REO resales accounted for 17% of all California resale activity in Q1 2013, down from 34% one year ago.

At foreclosure sales, individuals, rather than foreclosing lenders or the government, bought 48% of homes sold. This is up from 34% last year. This third-party high-bidder situation indicates speculators remain peculiarly optimistic about a strong future rise in resale pricing.

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REO resales in CA

NODs decrease

NODs recorded in California during Q1 2013 totaled 18,567. That is:

  • down 51% from the prior quarter; and
  • down 67% from one year earlier.

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

In California, an average of nine months passes between an NOD recording and the trustee’s foreclosure sale.

Foreclosures decline

Trustee’s deeds recorded in Q1 2013 totaled 13,591. That is:

  • down 36% from the prior quarter; and
  • down 55% from one year earlier.

The number of trustee’s sales is still significantly higher than before the recession.

Foreclosure sales occur most often among low-tier homes. Zip codes with median sale prices below $200,000 saw 2.9 homes foreclosed per every 1,000 homes. Zip codes with median prices between $200,000 and $800,000 saw only 1.2 foreclosures per 1,000 homes. Foreclosures were less than 0.5 per 1,000 homes in areas with average prices over $800,000.

The trend favors a gradual decrease in foreclosures until interest rates rise, probably in 2015. However, foreclosures will only return to normal pre-recession levels when employment and home prices both increase, and mortgage rates remain low.

Of all NODs, 28% currently go on to foreclosure sales. Projecting this forward, foreclosures will be down in the next 2-3 quarters. Based on the number of NODs in Q1 2013, around 15,000 foreclosures will occur in Q3 2013.

Among California’s largest counties, the greatest one-year drops in trustee’s deeds took place in Santa Clara (-72%), San Benito (-70%), Alameda (-67%) and Sutter (-66%) counties.

Short sales: the lender’s new Plan B

Roughly 19,000 short sales closed in Q1 2013. Short sales made up 20% of California resale activity, surpassing the number of foreclosure sales during the quarter. The number of short sales was down 4% from the prior quarter and 5% 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 and potential government settlements.

What’s in store?

Although steadily decreasing, foreclosures will remain higher than average due to negative equity in around two million California 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 (if the owner can prove a hardship). Eventually, large numbers of these homeowners will default out of frustration created by their mortgage lender.

Re: California: Foreclosure Starts Lowest Since 2005 from DataQuick