California foreclosure sales and real estate owned property (REO) resales fell slightly in the first quarter of 2014 (Q1 2014). However, the number of notice of default (NOD) filings rose, forecasting an increase in foreclosures later this year.

REO resales are down

Roughly 6,500 REO resales took place in Q1 2014. REO resales were down from the prior quarter. This is less than half the 16,300 REO resales which sold in the same quarter of 2013. Nearly 8% of all California resales were REOs in Q1 2014, down from 17% one year ago.

At foreclosure sales, individuals (mainly speculators), rather than foreclosing lenders or the government, bought 39% of homes solddown from 47% last year. The third-party high-bidder situation indicates speculators remain somewhat optimistic about a future rise in real estate resale pricing. However, the optimism is waning quickly.

NODs up slightly

In Q1 2014, California NOD recordings totaled just over 19,200. This is up slightly from the prior quarter, when the lowest number of NODs was recorded since 2006.

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

In California, an average of nine and a half months pass between an NOD recording and the foreclosure sale, indicated by a trustee’s deed. A year ago, it took an average of eight months.

Foreclosures decline

Foreclosure sales recorded in Q1 2014 totaled roughly 7,800, about half the number of foreclosure sales recorded a year earlier.

The number of foreclosure sales is still higher than before the recession, though it’s almost back to historical norms.

Foreclosures are expected to remain around their current level through mid-2014 due to the decreased level of NODs at the tail end of 2013. However, expect foreclosure to rise slightly by the tail end of 2014 as a result of today’s rising number of NODs. Further, foreclosures will rise again when mortgage rates begin to increase significantly, likely in 2015.

The number of foreclosures is only going to return to healthy pre-recession levels when homeowners find the financial support of a reliable jobs recovery.

Among California’s largest counties, the greatest one-year drops in trustee’s sales took place in Santa Cruz (-68%), San Diego (-51%) and Contra Costa (-50%) counties.

Short sales: lenders’ Plan B

Roughly 8,800 short sales closed in Q1 2014. Short sales comprised 9% of California resale activity, down from 21% a year earlier.

Short sales continue to eclipse foreclosures as the main route out of negative equity, though the spread between the two is narrowing. 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 are going to remain higher than average due to negative equity. Negative equity still plagues roughly 850,000 California homes. However, the long-term downward trend in NODs is going to be countered by a drop off in home prices (and increased mortgage delinquencies) later in 2014.

For many of California’s remaining underwater homeowners, any future home price increases won’t create positive equity soon enough to dismiss the idea of a strategic default or short sale. Eventually, increasing numbers of these homeowners will walk away, frustrated by the conduct of their mortgage lender, rising interest rates and flattening prices.

Re: California Foreclosure Starts Hover Near Eight-Year Low from DataQuick