Explaining Southern California's economy

The shift from foreclosures to short sales in California continues

Foreclosure

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For sale signs are posted on a foreclosed house on September 15, 2011 in Glendale. Foreclosures are continuing to decline in California, while short sales are edging up.

It looks as if the foreclosure crisis in California is ending. At the same time, the real estate market is developing a definite appetite for short sales.

Foreclosures in California have dropped to levels not seen since 2006, the real-estate tracking firm DataQuick reported on Wednesday.

So homeowners finally have a financial leg to stand on, as rising prices and a gradually improving economy have thinned the ranks of people losing their homes.

That doesn’t mean the market is healthy again. As foreclosures have declined, short sales — in which lenders allows homeowners to sell for less than they owe on the mortgage — have edged up.

They represented more than a quarter of all sales in the state in the final quarter of 2012. And they're getting more popular with one important constituency. 

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California catches up with Congress on short sale mortgage debt relief

A short sale home in the Spring Valley a

MARK RALSTON/AFP/Getty Images

Homeowners who do short sales won't owe federal taxes on the forgiven portion of the debt. California may soon follow suit.

Homeowners who do short sales — selling their homes for less than they owe to the bank — got a break when a deal was made in Washington on the fiscal cliff. They won’t owe taxes on the difference between the sale price and the loan debt because the Mortgage Forgiveness Debt Relief Act was extended.

Now California may do the same.

Last December, State Senator Ron Calderon introduced a bill — SB 30 — that would extend mortgage debt forgiveness for Californians on their state taxes. If it passes, it will join the federal tax relief that was already extended by Congress.

The California Association of Realtors (CAR) has put its weight behind passage of Calderon’s bill. The trade group sees the bill as critical to the “continued recovery of California’s housing market.” A shortage of homes for sale in the state is driving up prices.

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There's a short sale boom in California — but will it last?

A short sale home in the Spring Valley a

MARK RALSTON/AFP/Getty Images

A short sale home in Las Vegas. Short sales have begun to supplant foreclosure-related sales in the U.S. market.

The real estate market is California has improved - slowly and steadily - but a shift is underway. Real-estate data firm RealtyTrac, which specializes in foreclosure information, has released its 2012 U.S. Foreclosure and Short Sales Report and it indicates that short sales are supplanting foreclosure-related transactions in the state. 

A short sale is, in essence, a kind of foreclosure without the the bank getting stuck with the property. In a short sale, the lender agrees to accept less than what’s owed on a home — but the homeowner locates a willing buyer. The process can take a while. But for borrowers who are underwater on their loans — and many in California still are — a short sale can be one way out of a bad financial situation.

It also means that the homeowner avoids foreclosure.

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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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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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