Progress on Foreclosures

The weak state of the national and California real estate markets continues to be the principal reason that the recovery from the Great Recession has been so disappointing.  To underscore this fact, according to Standard & Poor’s Case-Shiller home-price index, U.S. home prices ended 2011 at the lowest levels since the housing crisis began in mid-2006. Despite historically low mortgage interest rates, housing markets have been beset by a weak job market, abundant foreclosures, and tighter mortgage requirements.

On the other hand, the news is not all bad.  In January, national pending home sales—a leading indicator of existing home sales—rose to their highest level since April 2010, according to the National Association of Realtors.  Completed home sales reached 4.57 million units in January, the highest level of sales since May 2010, when the housing market was lifted by federal tax credits.  The supply of homes available for sale in January fell to its lowest level since January 2006.

California roughly mirrors the nation.  Real estate conditions have improved substantially from the depths of the recession, with the exception of home values which remain depressed.   The $268,300 median sales price of existing single-family homes sold in January 2012 was only slightly higher than the lowest price recorded at the depths of the housing crisis—$247,600 in February 2009.

FORECLOSURES IMPROVING (?)

An important factor weighing on home prices is the still frustrating level of foreclosure activity.  Home foreclosure action began heating up in late 2005 when home sales slowed dramatically.  Foreclosures in California escalated rapidly in 2006 and then skyrocketed to unprecedented levels in 2007 and 2008, and then peaked in 2009.  Lenders sent out nearly a half million default notices to California homeowners in 2009—more than seven times the number sent in 2005.  Defaults declined significantly in 2010 and 2011.  However, with 258,000 notices issued in 2011—a 15 percent drop from 2010—the pace was still more than three times greater than in 2005.

Moreover, the drop in notices in 2011 may overstate how much housing conditions have actually improved.  The revelations, investigations and settlement negotiations surrounding the ‘robo-signing’ foreclosure scandal caused some lenders to institute foreclosure moratoriums and otherwise slow the foreclosure process.  Some mortgage servicers began letting delinquent borrowers fall a year or more behind on their payments before taking action.  More servicers began accepting short sales—selling a home for less than the value of the mortgage—rather than pursue foreclosure.   There may remain a larger stock of troubled mortgages than appears.  While the full impact of the recent ‘robo-signing’ settlement between the five largest mortgage servicers, 49 states’ attorneys general, and the federal government is still unclear, it will likely lead to an increase in distressed sales in the near future, which could result in further downward pressure on home prices.  It could, though, also accelerate the ultimate real estate market readjustment needed for a recovery of California’s housing markets.

REGIONAL DISPARITIES

Although no region of the state was left unscathed by the financial crisis and recession, the impacts were not evenly spread.  The most vulnerable areas were those whose growth had been most dependent on home building activity during the run-up from 2002 through 2005.  These were predominantly the inland regions that became the preferred destination for households moving from high-priced coastal communities in search of more affordable housing.  Unfortunately, the resulting job growth in these destinations was heavily tilted toward home building and related industries such as retail sales.  In the Riverside-San Bernardino-Ontario metropolitan area, retail trade employment at building materials and garden equipment stores expanded nearly 44 percent from 2001 to 2006—almost twice the pace of overall job growth.  Statewide, employment in this sector grew only 18 percent.  Thus, it was not surprising that these regions suffered the most from the housing market collapse.  These contrasts are clearly reflected in the regional pattern of foreclosures.

The Central Valley, which stretches from Colusa, Sutter, and Yuba counties in the north down to Kern County in the south, bore the brunt of the housing meltdown.  Based on notice of default actions taken on a per capita basis, the Central Valley suffered the greatest increase in foreclosure actions—rising from nearly two actions per 1,000 residents in 2005 to over 16 in 2009, the peak year for foreclosures.  Even though this area improved the most in absolute terms since 2009, it still suffered the second highest foreclosure rate in 2011, 9.1 actions per 1,000 persons.  This is also nearly three times the 2000-2005 pre-collapse rate of 3.3 actions per 1,000.

The Southern California region encompasses diverse areas from the coastal communities stretching from Ventura to San Diego to the Inland Empire.  The foreclosure rate for the region as a whole rose considerably from 2005 to 2009, but significantly less so than in the Central Valley.  The foreclosure rate rose from nearly 1.6 actions per 1,000 residents in 2005 to 12.4 in 2009.    These are aggregate figures, though.  This region includes Riverside and San Bernardino counties, both of whose foreclosure rates undoubtedly rivaled that of the Central Valley.  Be that as it may, this area’s rate improved almost as much the Central Valley—falling nearly in half between 2009 and 2011.

The Mountain Region lies predominantly along the California-Nevada border north of San Bernardino County.  Even though this region fared marginally better than the Central Valley during the housing meltdown in 2007-2009, it hasn’t recovered as quickly as most other areas.  Its foreclosure rate in 2011 was comparable to that of the Central Valley, 12 actions per 10,000 residents.

The San Francisco Bay area and the Central Coast regions fared much better.  Before the bust, these areas weren’t nearly as dependent on construction and housing activity as the inland regions.  The foreclosure rate didn’t rise as dramatically—peaking at just over 10 actions per 1,000 residents in 2009.  During the recovery, the San Francisco Bay area benefited from above-average economic growth driven by strong investment in high technology industries and healthy export growth.  Its foreclosure rate in 2011, only 6 actions per 1,000 residents, was the lowest amongst these major regions.

The Northern California region, which encompasses all of the northernmost counties above the Central Valley and the San Francisco Bay area, had the least tumultuous experience.  It suffered the smallest increase in its foreclosure rate—rising from 1.2 actions per 1,000 persons to only 7.4.  Things improved during the recovery, but its rate in 2011 was still comparable to the San Francisco Bay Area and the Central Coast.

WHO’S MAKING PROGRESS

These regional patterns indicate which areas have made the most progress and which still have a long way to go.   The San Francisco Bay area made the most progress towards bringing its foreclosure rate down to the pre-recession levels, 6 actions per 1,000 residents in 2011.  Southern California also improved significantly, with the rate falling to 6.6 actions per 1,000.  Not surprisingly, San Francisco and Southern California were the only regions that saw an overall increase in residential building activity in 2011.  The foreclosure rates in Northern California and the Central Coast also improved to comparable rates, 6.2 and 6.5 actions per 1,000 respectively.  The Mountain and Central Valley regions, on the other hand were still hamstrung by foreclosure activity significantly higher than the rest of California, 9.1 and 9.3 actions per 1,000 respectively.

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