Foreclosure sales dropped significantly in the fourth quarter of 2012 (4Q 2012). 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
19,000 REO resales took place in 4Q 2012. That is46% fewer REO resales than one year earlier. REO resales accounted for 17% of all California home sales activity, down from 34% one year ago.
Investors, rather than the lender or the government, bought 42% of homes sold atforeclosure sales.This is up from 31% last year. This third-party high-bidder situation indicates speculators remain optimistic about a future significant rise in resale pricing.
NOD recordings decrease
38,212 NODs were recorded in California in 4Q 2012. That is:
- down 22% from the prior quarter; and
- down 38% from one year earlier.
NOD volume peaked at 135,431 NODs recorded in the first quarter of 2009.
An average of nine months passes between an NOD recording to trustee’s foreclosure sale in California. This is up very slightly from the prior quarter and down from one year earlier.
21,127 trustee’s deeds were recorded in 4Q 2012. That is:
- down 8% from the prior quarter; and
- down 32% from one year earlier.
The number of foreclosures 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 4.3 homes foreclosed per 1,000 in 4Q 2012. Zip codes with median prices between $200,000 and $800,000 saw only 2 foreclosures per 1,000. Foreclosures were less than one-half per thousand in areas with average prices over $800,000.
The overall trend favors a gradual decrease in foreclosures until interest rates begin to move up, probably in 2015. However, foreclosures won’t return to pre-recession levels until California experiences an increased level of employment and home prices.
39% of all NODs currently go on to foreclosure. Projecting this forward, foreclosures will trend downward over the next three quarters, as expected. Based on the number of NODs in 4Q 2012, around 15,000 foreclosures will occur in 3Q 2013. The recent large drop in foreclosure sales reflects a similar drop in NODs in 1Q 2012. This lag is due to the nine-month foreclosure process.
Among California’s largest counties, the greatest one-year drops in foreclosures took place in San Francisco (-51%), Alameda (-48%), Orange (-38%) and San Diego(-37%) counties.
Short sales: the lender’s new Plan B
Roughly 30,000 short sales closed in 4Q 2012. That is 26% of California resale activity. The number of short sales was roughly level with the prior quarter and up 4.2% from one year earlier.
Short sales are swiftly eclipsing foreclosures as the main route out of negative equity for home owners.Lenders go with this “Plan B” to avoid taking on additional REO property and potential government settlements.
What’s in store at home?
Although steadily decreasing, foreclosures in California will remain higher than average due to negative equity in around 2 million 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. Eventually, large numbers of these homeowners will default out of frustration, or a simple lack of money.