A Silver Lining in a Troubled Market

     

     When it comes to real estate, especially here in southern California, I commonly get asked the question, “When do you think the worst is behind us?”  Using new foreclosure filing figures as my guide, I am unfortunately here to report that recent studies show the real estate market may not be as well off as some analysts had forecasted in prior months.  According to RealtyTrac Inc., a leader of the online marketplace in collecting and aggregating foreclosure data worldwide since its inception in 1996, lenders commenced foreclosure proceedings against more homeowners nationwide last month.  In fact, over 109,000 new Notices of Default [NOD] were filed in May 2012, representing a 12% increase from the prior month and a 16% increase compared to May 2011.  Much like picking up an opponent’s tell in a competitive game of poker, these trends reflect how lenders are becoming more aggressive in their efforts to address delinquent mortgages.

     Unless a homeowner is able to reinstate [or make up missed payments in full] their loan, or unless a loan modification or refinance is obtained, NOD’s eventually lead to either foreclosure auctions, home repossessions, or short sales.  Since foreclosures, REO’s and short sales all tend to sell at a discount, such transactions would continue to negatively impact home values. 

     There is an upside, however, which we can all feel good about.  Although the rate of foreclosure initiations has increased of late, so too has the number of short sale closings as compared to foreclosures.  In fact, Realty Trac reports that the first quarter of 2012 shows not only a 25% increase in short sales as compared to the prior year, but REO sales decline of 15% this first quarter.   What does this tell us?  Lenders have increasingly embraced the short sale as a more lucrative loss mitigation tool as compared to repossession and the eventual real-estate owned [REO] sale to follow.  Since short sales tend to sell at a smaller discount than REO homes, such transactions have less of a negative impact on home prices.

     So although we will likely continue to see new foreclosure cases injected into the marketplace over the next several months, we can take solace in the fact that better loss mitigation systems are now in place to absorb the negative implications of such foreclosure activity.  If you want my quick retort the question, “When do you think the worst is behind us?”, I would respond as follows –

     I do not envision any further extreme losses in home values as we saw with the initial bubble burst in 2006 - 2007.  However, the dynamic between new foreclosure filings and more efficient loss mitigation approaches will likely continue to thwart drastic home value growth for the next few fiscal quarters.