Explaining Southern California's economy

California foreclosures and short sales are a smaller part of October market

Reed Saxon

A foreclosure sign in Pasadena. Foreclosures and short sales are a smaller part of the market in October, according to the California Association of Realtors.

California’s real estate market has been anything but healthy since the housing bubble burst. But there are now signs that the patient is on the mend. And really, what a difference a year makes! Last October, so-called “distressed sales” made up half of all monthly transactions in California real estate.

In this case, "distressed" means foreclosures and short sales. Short sales in particular have become popular. That's when the lender accepts less for the house that what the borrower owes.

A year later, the numbers have been reversed. The California Association of Realtors now reports that in October, distressed sales fell to just over a third of the market. Los Angeles County mirrored this statewide trend.

One reason why distressed sales are falling is that there simply aren’t as many of them on the market. There was only a 2-month supply of foreclosures in September and a 3-month supply for short sales. Those inventories could rise as banks put more foreclosures in the market and borrowers who remain underwater on their mortgages, just not as much as a year ago, decide to go for a short sale. 

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Home foreclosures continue decline in California

Stockton, CA Leads Nation In Rate Of Foreclosures

Justin Sullivan/Getty Images

Cars drive through downtown Stockton, California. The city tops the list of U.S. cities for foreclosure activity in the third quarter, according to RealtyTrac.

California is in an interesting position when it comes to home foreclosures. On one hand, according to RealtyTrac's just-released third-quarter Metropolitan Foreclosure Market Report, the state still has some of the highest foreclosure rates in the entire country, with bankrupt Stockton leading the pack. 

On the other hand, California cities continue to see substantial year-over-year declines in foreclosure activity. San Francisco, Los Angeles and San Diego saw their foreclosures plummet, by 36, 29 and 26 percent, respectively. 

On its face, this sounds like pretty good news. But as I reported earlier this week, the foreclosure crisis hit California so hard that its cities have a long way to go before the situation normalizes.

RealtyTrac compared 2012 to 2008 in political terms — What does the situation look like for areas that went for Obama versus McCain? — and found that counties carried by Obama have seen big improvement on the foreclosure front.

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California home sales, foreclosures, and the fiscal cliff

Reed Saxon

A foreclosure sign in Pasadena. As the backlog of foreclosures has been worked through, borrowers who are less underwater are turning to short sales. But the expiration of a Bush era tax law could upset this market.

Distressed homeowners who are underwater on their mortgages, owing more than the house is worth, have two main options, if they don't try to pursue a government-sponsored modification program: foreclosure or short sale.

Financially, foreclosure makes more sense for borrowers who are way underwater, owing say $400,000 on a house that's now worth $300,000. Struggling to make the monthly payments, maybe because some financial cataclysm has befallen the family, just adds to the pain. Super-distressed homeowners quit making payments and wait for the bank to repossess the home. Unfortunately, this process tends to depress prices and lower overall home values if a region is particularly hard-hit. 

If you want to look for places where foreclosures are in crisis mode, the bankrupt California cities of Stockton and San Bernardino are a good place to start (although the pace of foreclosures in those areas has slowed substantially in recent months).

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September foreclosures: California continues to see improvement

Reed Saxon

A foreclosure in Pasadena. RealtyTrac reports that California's foreclosure rate fell substantially in September, year-over-year.

There's good news and bad news for California on the foreclosures front. The bad news is that California is still one of the top three states nationwide for foreclosure rates. The good news is that the situation is improving dramatically and has been for months.

So how does a nice, big year-over-year drop in foreclosures starts strike you? That’s what Irvine-based RealtyTrac has tabulated in its latest Foreclosure Market Report for September and the third quarter of 2012: a 45 percent plunge. That’s nearly a six-year low.

Foreclosure starts also dipped from August to September in California, by 19 percent. California isn't just getting a break on foreclosures — the state is beginning to see real recovery from one of the worst aspects of the housing crisis.

That all sounds great, but we're not out of the woods yet. California remains in the top three for foreclosure rates nationally, along with Florida and Arizona. And when it came to notices of default — the first stage of the foreclosure process — California led the U.S. in the third quarter of 2012, with almost 47,000 NODs filed.

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Distressed home sales are declining across Southern California

Distressed-Sales-August

CAR

Distressed homes sales have been declining in Southern California large counties both year-over-year and month-over-month.

Inventory-Tight

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The supply of homes for sale has been getting tighter and tighter since last year, reducing pending sales but pushing up prices in many cases.


The California Association of Realtors released data on August pending and distressed home sales today — data that shows that the housing market in the Southland and elsewhere in the state is improving to the degree that a lack of housing inventory is becoming a problem. 

This could ultimately be a good problem to have, if its spurs builders, such as L.A.-based KB Home, to start constructing new houses. KB beat earnings expectations last week and now seems to be pretty bullish on a housing recovery.

It's also good for sellers, as a shortage of supply is pushing prices up. It's worth noting that market is now clearing the overhang of distressed properties, a process that we've been waiting for particularly in hard-hit California. As you can see from the charts above, distressed sales — short sales and foreclosed properties, or "REOs" ("real estate owned") — have been falling year-over-year and month-over-month is Los Angeles, Riverside, and San Bernardino counties. 

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