The Breakdown | Explaining Southern California's economy
Business & Economy

Does an uptick in foreclosures mean that housing prices will fall in California?

A foreclosed property in Pasadena. Nationally, foreclosures increased slightly in the first quarter. But that's won't do much to reduce prices in SoCal.
A foreclosed property in Pasadena. Nationally, foreclosures increased slightly in the first quarter. But that's won't do much to reduce prices in SoCal.
Reed Saxon

RealtyTrac, and Irvine-based real estate listings and analytics firm, released its inaugural "Foreclosure Inventory Analysis" on Wednesday.

The report shows that nearly 1.5 million properties across the country were actively in the foreclosure process or bank-owned in the first quarter of 2013. RealtyTrac said that number is up 9 percent from the same period a year ago, but down a whopping 32 percent from the peak of 2.2 million in December 2010.

According to recent RealtyTrac data, California and Florida have switched places on the foreclosure front. Hard-hit California metropolitan areas, like Riverside-San Bernardino-Ontario, topped the firm's lists for many months when it came to foreclosure activity. But now Florida's cities have assume that role.

That's because Florida is a "judicial" foreclosure state, where the process involves the courts. California is a "non-judicial" state, and was able to work through its foreclosure pipeline earlier.

“For the most part California has dealt more efficiently with its foreclosures," RealtyTrac vice-president Daren Blomquist said in an email. "There is not as much of a built-up backlog of shadow foreclosure inventory as there is in states like Florida and Illinois."

But the lack of foreclosures in Southern California has contributed to housing supply crunch that, in combination with other factors—low interest rates, investors chasing deals—has driven up prices.

Blomquist doesn't think the modest national foreclosure uptick in the first quarter of 2013 will do much to help bring this supply-demand imbalance back to normal. He does anticipate that foreclosure activity may accelerate toward the end of the year.

"It's likely that there will be no relief in terms of more foreclosure inventory in the next few months," he said. "The California Homeowner Bill of Rights that took effect in January will in fact likely further reduce foreclosure inventory in the short term, but will likely result in a backlash of delayed foreclosure inventory near the end of the year or early next year.” 

Stuart Gabriel, an economist who runs the Ziman Center of Real Estate at UCLA, agrees. He pointed out that banks currently holding foreclosures or dealing with a pipeline of distressed properties have an interest in not flooding the market.

"We know there's a stock of foreclosures out there waiting to be resolved," he said. "Banks and financial institutions strategically regulate the pace of foreclosures so that they won't further damage the markets where they hold a lot of loans."

The two-step here is obvious: banks want to originate new mortgages and take advantage of a rising price environment; and they want to sustain property values in areas where they operate. 

"The current context," Gabriel said, "is one of recovery, an elevated rate of price increases, and newly originated mortgages that are performing quite well."

The bottom line is that price appreciation driven by a distorted SoCal market is a trend that's going to continue for a while, even if foreclosures increase.

"There's a great demand for foreclosed properties," Gabriel said. "The properties that come to market are instantly absorbed, and there's not enough of a dump at the current time to markedly affect the supply-demand imbalance."

Homebuilders have recognized this and are ramping up efforts to take advantage of strong demand. But since we didn't do much building in the years after the housing crisis, it'll take a lot of construction to meet the demand and bring prices down.

So if you're looking to buy a home in Southern California, particularly near the coast, rising prices and a severe lack of houses will be a reality for the rest of 2013.