California Foreclosures Plunging, Sales Rising

The Mortgage Corner

The number of California homeowners entering the foreclosure process plunged to the lowest level in more than seven years last quarter, reports DataQuick. The unusually sharp drop in the number of mortgage default notices filed by lenders stems mainly from rising home values, a strengthening economy and government efforts to reduce foreclosures, says DQ.

No wonder, as the median price paid for a California home last quarter was $297,000, up 22.7 percent from a year ago, according to DataQuick. During first-quarter 2013 lenders recorded 18,567 Notices of Default (NODs) on California houses and condos. That was down 51.4 percent from 38,212 during the prior three months, and down 67.0 percent from 56,258 in first-quarter 2012.

Graph: Econoday

Most of the loans going into default are still from the 2005-2007 period, per DQ. The median origination quarter for defaulted loans is still third-quarter 2006. That has been the case for more than three years, indicating that weak underwriting standards peaked then. The most active creditors in the formal foreclosure process last quarter were Wells Fargo (5,546), JP Morgan Chase (3,863) and Bank of America (2,565).

And Calculated Risk’s Bill McBride has become very sanguine about real estate’s role in boosting economic growth. He maintains that new home sales will pick up due to unfilled demand, due to the big jump in household formation—to 1.3 million new households last year and the prediction this level will be maintained over the next decade. He sees the so-called existing-to-new home sales ratio trending back down to its historical average of 6 to 1 from its current heightened ratio, in this very interesting graph. It was the “flood’ of depressed sales from foreclosures that depressed new home sales because of the plunge in housing prices brought on by the foreclosures.

Graph: Econoday

According to the Census Bureau, there were 104 thousand new homes sold in Q1 2013, up about 19.5 percent from the 87 thousand sold in Q1 2012. That is a solid increase in sales, and this was the highest sales for Q1 since 2008, per Calculated Risk.

“Although there has been a large increase in the sales rate, sales are still near the lows for previous recessions” said McBride. “This suggests significant upside over the next few years.  Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years. Also housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades.”

Harlan Green © 2013

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Signs of Recovery II

February could be the month real estate values hit bottom in some regions. That doesn’t mean prices pick up anytime soon, however. Though HUD reported that existing-home prices with conforming loan amounts did rise 1.7 percent for the first time in more than a year. But it does mean sales are beginning to rise and even housing starts are beginning to show signs of life.

There are other signs of economic life, as well. Retail sales have picked up for 2 consecutive months, and durable goods’ orders (e.g., autos, appliances and capital goods) rose for the first time in 6 months. Not to be outdone, the Mortgage Bankers Association reported that mortgage applications continue to soar, up 41.5 percent last week, with refinances actually up 73 percent. This is while total applications have risen 18 percent in a year

Both new and existing-home sales also rose, up 4.7 and 5.1 percent, respectively in February. This is while affordability has been steadily increasing, with the National Association of Realtors Housing Opportunity Index showing that 62 percent of all homes sold in Q4 2008 were affordable to families with a median income of $61,500, up from 47 percent at the end of 2007.

Existing home sales have been stuck at or below the 5 million unit range for almost 1 year. The problem is the large inventory of foreclosed homes that have flooded the market. Relief should come from the Housing Assistance and Sustainability Plan (HASP) that was recently introduced. More than $7 billion has been set aside to inject additional monies into Fannie Mae and Freddie Mac, and to lenders who will drop their interest rates to lower mortgage payments in order to keep more families in their homes.

There is a tremendous gap between new and existing-home sales because fewer new homes are being built. This has brought down their inventory levels as well, a sign that new-home supply is returning to historic levels.

That may be why housing construction rose 22 percent in February with a 3 percent increase in building permits. It was the largest increase in housing starts in 19 years, though most of it was new apartment units and is subject to huge monthly swings.

The S&P Case-Shiller overall price index continued to decline in January, however, down another 2.8 percent in the 20 major metropolitan areas surveyed. San Francisco and Los Angeles have declined 32.4 and 25.8 percent, respectively, in the past year and will decline further.

This means that we are already seeing a price bottom in properties eligible for the Fannie Mae-Freddie Mac loan programs. The jumbo loan market is also beginning to recover with 5-year jumbo fixed ARMs declining to as low as 4.875 percent with a 5.25 Annual Percentage Rate. This will certainly bring back the high end real estate market as well.

Harlan Green © 2009