California Foreclosure sales fell in the fourth quarter of 2013 (Q4 2013). The number of real estate owned property (REO) resales and notice of default (NOD) filings also decreased from the prior quarter.

REO resales are down

Roughly 7,000 REO resales took place in Q4 2013. REO resales were down from the prior quarter, and less than half of the REO resales one year earlier. Nearly 7% of all California resales were REOs in Q4 2013, down from 17% one year ago.

At foreclosure sales, individuals (mainly speculators), rather than foreclosing lenders or the government, bought 40% of homes sold, down from 48% the prior quarter, and 42% 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 drop

Q4 2013 California NOD recordings totaled just over 18,000, less than half the number of NODs recorded a year earlier. Q4 2013 posted the lowest number of NODs per quarter since 2006.

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

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

Foreclosures decline

Foreclosure sales recorded in Q4 2013 totaled just over 8,000, also less than half the number of foreclosure sales recorded a year earlier.

The number of foreclosure sales is still higher than before the recession.

Foreclosure sales occur most often among low-tier homes:

  • zip codes with median sale prices below $200,000 saw 3 homes foreclosed per 1,000 homes during Q4 2013;
  • zip codes with median prices between $200,000 and $800,000 saw only 2 foreclosures per 1,000 homes; and
  • foreclosures took place at the rate of 0.7 per 1,000 homes in areas with average prices over $800,000.

The trend in the number of foreclosures through late 2014 is expected to continue its slight decline, due to today’s decreased level of NODs. However, foreclosures won’t remain at this lower level when mortgage rates begin to rise significantly, likely in 2015.

Foreclosures are only going to return to healthy pre-recession levels when increased mortgage originations are able to be supported by permanent jobs.

Of all NODs, 32% currently go on to foreclosure sales. Projecting this forward, the number of foreclosures is expected to increase in two to three quarters. Based on the number of NODs in Q4 2013, we expect 3,600 foreclosures to occur in Q3 2014.

Among California’s largest counties, the greatest one-year drops in trustee’s sales took place in Orange County (-66%), Riverside (-65%), Santa Clara (-65%), San Mateo (-64%) and Alameda (-63%) counties.

Short sales: lenders’ Plan B

Roughly 13,000 short sales closed in Q4 2013. Short sales comprised 13% of California home resale activity, half of what they made up 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 are going to remain higher than average due to negative equity. Negative equity still plagues roughly 900,000 California homes. However, today’s downward trend in NODs are going to be countered by a drop off in home prices (and increased mortgage delinquencies) in 2014.

For many of California’s remaining underwater homeowners, future home price increases won’t  create positive equity soon enough to dismiss the idea of increased strategic defaults or short sales. 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 Dip to Eight-Year Low from DataQuick