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Number of homes entering foreclosure drops 22.1% to six-year low

The decrease in default notices, coupled with a decline in home repossessions, could help quicken the recovery in the real estate market.

January 23, 2013|By Alejandro Lazo and Andrew Khouri, Los Angeles Times

California's foreclosure crisis eased considerably during the final quarter of last year, with the number of homes entering foreclosure dropping to a six-year low.

The steep decline, accompanied by a similar drop in home repossessions, clears the path for a quickened pace of recovery this year. Fewer foreclosures on the market should lead to higher home prices and a healthier real estate market.

"Ultimately, fewer foreclosures means an even tighter market, which means a more rapid recovery," said Christopher Thornberg, a principal at Beacon Economics. "I see very little to forestall the real estate market this year."

The real estate research firm DataQuick reported a 22.1% decline in default notices during the final three months of 2012 compared with the previous quarter — and a 37.9% drop from a year earlier. A total of 38,212 default notices were logged on California houses and condominiums last quarter, the lowest number since the final quarter of 2006. A default notice is the first formal step in the state's foreclosure process.

Since the number of new foreclosure cases peaked in early 2009, experts and analysts have feared a second wave of home loan defaults flooding the market. Three years later, that appears unlikely as banks turn to foreclosure alternatives and home prices rise.

"We are past the peak of this," said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley's Haas School of Business.

A steadily improving economy has helped ease homeowner woes. And the vast number of underwater borrowers — those owing more on their homes than they're worth — have continued to pay their mortgages instead of walking away. Rising home prices should help more underwater homeowners come up for air, allowing them to regain equity and sell their homes if they run into financial trouble.

"Home values increased through most of 2012, and the rate of increase picked up toward the end of the year," DataQuick President John Walsh said in a news release. "That means fewer and fewer homeowners are underwater."

California's median home price rose 22.4% last quarter to $300,000.

California has also been able to work through its foreclosure problem faster than other states, in part because foreclosures take place largely outside the courtroom, said Celia Chen, a housing economist with Moody's Economy.com. That means California has not been bogged down with the same level of paperwork issues and delays that states such as Florida or New York have experienced.

California has also benefited from economic growth from Asian trade and from the technology industry centered around Silicon Valley. Indeed, the technology-rich Bay Area's declines in default notices outpaced both the statewide drops and those in every other region.

Those foreclosed homes that are hitting the market are being snapped up by investors to either rent or flip. Investors bought 42% of all homes sold at foreclosure auctions statewide last quarter, according to DataQuick.

Big hedge funds have become so interested in cheaply priced homes that flippers are now increasingly searching for homes in the $400,000 to $600,000 range throughout Los Angeles County, said Robert Fragoso, executive vice president for Anchor Loans, which makes short-term loans to investors. The new interest among renovators in pricier homes should also push up prices. Already, some homes are selling for more than the asking price, Fragoso said.

"I am seeing the inventory levels right now at very, very, very low rates, especially when you are talking about the product that has already been remodeled," he said. "We are getting multiple offers on almost everything within days of it hitting the market."

Banks have been increasingly averse to foreclosure because state and federal regulators increased scrutiny on the process, which led to huge settlements as well as new laws. Major lenders have now stepped up short sales and other kinds of loan modifications to deal with troubled borrowers.

Although the foreclosure crisis has abated, the number of people losing their homes remains at a very high level compared with historical averages, said Paul Leonard, California director for the Center for Responsible Lending. Those entering foreclosure are most likely people suffering from California's still tough economy or those with the most limited resources. Aid programs and reforms by federal and state authorities are still needed, he said.

"One has to be very cautious," Leonard said, "even as we have seen substantial declines in the overall levels of default and foreclosure."

alejandro.lazo@latimes.com

andrew.khouri@latimes.com

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