Over 4,000 REO in OC, over 230 in Irvine
Many have speculated as to when the housing market will bottom. The short answer is, nobody knows, but there are some guideposts to watch out for. First, in order for house prices to bottom, they must be affordable. Sub-4% interest rates combined with falling prices have made houses affordable on a monthly payment basis. Second, supply and demand must rebalance and demand must outstrip supply for prices to go up. That criteria is more elusive.
When the housing bubble popped in 2006, people began defaulting on their mortgages. A credit crunch ensued in 2007, and foreclosures began to mount. By 2008 we reached the threshold of how many foreclosures the market could adsorb, so lenders began accumulating shadow inventory — delinquent borrowers allowed to squat in the houses they occupy.
Since 2008, lenders have been managing the flow of REO to prevent a widespread market crash similar to Las Vegas where prices are down 70%. Evidence of this steady management of foreclosure flow can be seen in the monthly foreclosure statistics. Look at how little the numbers vary from month to month.
This uniformity is not a result of people defaulting on a regular schedule. People defaulted in large numbers over the last several years, and lenders have accumulated these borrowers in shadow inventory. In the meantime, they meter out their inventory at a rate designed to hold prices steady. As we know, prices have been falling slowly, so lenders have not been completely successful in managing to keep prices up.
No area is immune. Even well-to-do Irvine has more delinquencies than the banks can process. They manage the flow in Irvine as well.
I find it interesting that foreclosure outcomes are nearly universal in their composition: two-thirds go back to the bank, and one-third goes to a third party. I have seen this phenomenon across nearly every market for the last four years.
By managing the flow of foreclosures, lenders manage the total number of REO in their inventory. The inventory levels are remarkably stable.
The result of this management of foreclosure flow, REO inventory and MLS sales is an accumulation of shadow inventory and an increasing time to foreclose. Until these inventories are worked off, the housing market is not going to bottom.
The average Orange County foreclosure took just over 11 months from the filing of a default notice to the sale.
While that’s down from the past few months, it’s still up 11.4% from a year ago.
That’s among the findings reported in ForeclosureRadar’s December report.
According to the foreclosure website, it took lenders an average of 332 days to complete a foreclosure after the filing of a default notices.
Since default notices typically are filed after a homeowner has missed at least three months of house payments, that means that the typical foreclosure could take a minimum of 422 days until a home is auctioned off to the highest bidder.
In reality, the NOD isn’t filed until the borrower has missed many more than three payments. Many readers of this blog know someone who hasn’t make a payment in over a year and has not received any notices.
In December 2010, the typical foreclosure took 298 days (just under 10 months) to complete – 388 days when the pre-default notice period is included.
That compares to a 2011 peak of 428 days (14 months) in October – and 518 days when including the pre-default period.
In addition, the December report says:
- Default notices fell to 1,004, the lowest monthly number of 2011. That’s also down 26.8% from Dec. 2010.
- Foreclosures fell 4.4% to 494, down from 517 the year before.
- Of the 494 homes that changed hands at foreclosure auctions last month, 32% were purchased by third-party bidders, while 68% were repossessed by banks, most likely because no one made the lenders’ minimum offer.
- Nearly 13,000 O.C. homes are in some stage of foreclosure: 5,826 are ipre-foreclosure, such as having stopped making house payments; 7,057 are scheduled for some type of sale, and 4,343 have been repossessed by banks following a foreclosure auction.
Clearing out the inventory is a two-step process. First, delinquencies need to drop down to their normal range of 3.5% to 5.5%. We aren’t there yet, and recent statistics are going the wrong direction.
The second step is to see foreclosure rates drop down to their historic norms. We haven’t turned the corner on that one yet.
In short, house prices probably won’t bottom this year. Any bottom will prove ephemeral as the inventory processing will gear up if prices actually start to rise. Until that inventory is gone, it will be a bumpy ride.