Foreclosure sales fell in the second quarter of 2013 (Q2 2013). The number of real estate owned property (REO) resales also decreased from the prior quarter. However, notice of default (NOD) filings increased over the prior quarter.

REO resales are down

Roughly 14,000 REO resales took place in Q2 2013. That is 58% fewer REO resales than one year earlier. REO resales accounted for 12% of all California resale activity in Q2 2013, less than half of REA resales one year ago.

At foreclosure sales, individuals (mainly speculators), rather than foreclosing lenders or the government, bought 54% of homes sold. This is up from 39% last year. This third-party high-bidder situation indicates speculators remain peculiarly optimistic about a future rise in real estate resale pricing.

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REO resales in CA

NODs decrease from one year prior

NODs recorded in California during Q2 2013 totaled 25,747. That is:

  • up 39% from the prior quarter; and
  • down 53% from one year earlier.

NOD volume peaked at 135,431 NODs recorded in the Q1 2009.

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

Foreclosures decline

Trustee’s deeds recorded in Q2 2013 totaled 9,840. That is:

  • down 28% 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 2.2 homes foreclosed per 1,000 homes during Q2 2013.
  • Zip codes with median prices between $200,000 and $800,000 saw only 1 foreclosure per 1,000 homes.
  • Foreclosures took place at the rate of 0.3 per 1,000 homes in areas with average prices over $800,000.

The trend favors a gradual decrease in foreclosures until interest rates begin their long-term rise, likely in 2015. However, foreclosures will only return to healthy pre-recession levels when increased mortgage originations can be supported by permanent jobs.

Of all NODs, 26% currently go on to foreclosure sales. Projecting this forward, foreclosures will be down in the next two to three quarters. Based on the number of NODs in Q1 2013, around 10,000 foreclosures will occur in Q3 2013.

Among California’s largest counties, the greatest one-year drops in trustee’s sales took place in Santa Clara (-68%), San Mateo (-66%) and Alameda (-64%) counties.

Short sales: the lender’s new Plan B

Roughly 19,000 short sales closed in Q1 2013. Short sales made up 17% of California home resale activity, surpassing the number of foreclosure sales during the quarter. This was down from 21% during the prior quarter and 24% one year earlier.

Short sales continue to eclipse foreclosures as the main route out of negative equity. Lenders go with this “Plan B” to avoid both 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 still plaguing around two million California homes. Further, as the number of NODs rose in Q2 2013, expect foreclosures and short sales to increase as well by Q1 2014.

For most underwater homeowners, future home price increases will not create positive equity soon enough to dismiss the idea of increased strategic defaults or short sales (if the owner can prove a hardship). Eventually, large numbers of these homeowners will default out of frustration created by their mortgage lender and rising interest rates and will simply walk away.

Re: California Foreclosure Starts Up From First Quarter DataQuick