New Weather Forecast: Stop Worrying About the Foreclosure Tsunami

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The time has come to pull down the sand bags and stow away the life boats.  It’s now pretty clear that the long anticipated tsunami of foreclosures expected  to be set loose by the Attorney Generals’  agreement signed in March ain’t gonna happen, at least the way some of us feared it would.

“We continue to see reports that there will be a wave of foreclosure sales after the election or at the start of the year. The lack of Foreclosure Starts this month puts a nail in the coffin of this theory. There will be no wave of foreclosures for at least five months,” writes Sean O’Toole of Foreclosure Radar.  Sean’s just about the smartest and best informed guy in the foreclosure world, but he’s not alone in his view.  (By way of disclosure, Sean is a former client and good friend).

Not so long ago, I was one of those raising alarms about the potential impact of 1.5 million backlogged foreclosures set free by the agreement.  I feared they would wreak havoc upon local markets just beginning to stabilize, extending the Foreclosure Era for a year or more.  (See The Inventory Story: More REOs on the Way and Inventories: The Day of Reckoning is Coming).  I even made the issue the focus of my presentation to the Bigger Pockets Conference in March.  I’m glad to eat a little crow, especially if it brings the recovery a little a nearer.

What I didn’t foresee was the double whammy of a plunge in new foreclosures that Sean describes coupled with same time exploding demand, especially from first-time buyers who have been sitting on their hands so as not to miss the “bottom.”  I helped conduct a national survey for Realtor.com last spring and was surprised by the results. Some 75.5% of potential buyers who don’t already own a home said they were looking at foreclosures.  Add to those folks the bourgeoning population of investors looking for a deal before prices rise further and you’ve got the kind of demand that hasn’t been since in six years.  Bidding wars started breaking out across the nation for lower tier properties.

On the supply side, for-sale inventories declined from the lows they reached during processing slow down following the Robosigning scandal.  Processing remains painfully slow, as the AG agreement’s processing reforms have yet to be implemented.   U.S. properties foreclosed in the second quarter were in the foreclosure process an average of 378 days from the initial foreclosure notice to the completed foreclosure, up from 370 days in the first quarter and a record high going back to the first quarter of 2007. Starts picked up after the AG agreement, but foreclosure filings were down ten percent year–over-year in July.  The raw number of foreclosure-related sales (224,429) decreased 12 percent from the previous quarter and was down 22 percent from the second quarter of 2011 — the first annual decrease in foreclosure-related sales after five quarters of increases.  According to the report, there were 58,000 completed foreclosures in the U.S. in July 2012 down from 69,000 in July 2011 and 62,000* in June 2012.

However, large backlogs, both “shadow” and visible, were the sources of the tsunami fears.  CoreLogic reports completed foreclosures in July 2012 are down to 58,000 from 69,000 in July 2011 and the backlog has fallen from 1.6 to 1.3 million in the past six months, though judicial states still have good reason for concern.  With for-sale inventories so low and demand so high, there could be no better time to get these properties to market, for lenders and local homeowners alike.

It’s the longer term view that’s most encouraging.  Defaults have declined steadily for two years, signaling the end of the Foreclosure Era (see Twilight of the Foreclosure Time).  In four of the five Western states ForeclosureRadar covers, the numbers are dramatic.  August 2012 California Notice of Defaults were down 23.6 percent from the prior month, and down 49.1 percent compared to last year. In Arizona, Notice of Sales were down 16.1 percent from the prior month, and down 42.2 percent compared to last year. The decline in Foreclosure Starts is even more significant on an average daily basis, down 36.9 percent from the prior month in California with 23 business days in August vs. 19 business days in July. In Oregon, non-judicial foreclosure activity almost came to a halt, with Foreclosure Starts down 80.6 percent vs. last month and down 93.9 percent vs. last year, most likely indicating a move to judicial foreclosures as discussed last month.

So it looks like the tsunami will be no more a nasty puddle at worst, even in the worst judicial states, where local laws will artificially extend the pain of the Foreclosure Era while the rest of the nation moves on.

Photo: USGS

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About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.

2 Comments

  1. Interesting developments, marked by a lack of inventory and compounded by large hedge funds entering the bidding for what little inventory is available (see WSJ article http://online.wsj.com/article/SB10000872396390443696604577644700448760254.html?KEYWORDS=foreclosure). This trend is good news for those trying to sell in otherwise vulnerable neighborhoods, and solace for the “buy-and-hold” investor who’s been hanging on, but this should also sound a note of caution for new investors seeking to do flips. It’s going to be harder to find and get the really good deals. A friend reported yesterday that a “hoarder house” they had bid on went for $100K over list price in San Mateo County here in Northern California.

  2. The foreclosure market is pretty hot in most areas. Many first time home owners are getting homes at reasonable prices and for those that do not sell in the Owner Occupant time period, the investors are also picking up some great deals as well. Very informative article. Keep the site posted on the foreclosure information as it becomes available.

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