Foreclosure Trends

There has been a lot of positive news about the real estate market in the last week or two. Pending sales for July are up from previous months' levels. Home prices nationally rose in June for the second straight month. The Case-Schiller home price index showed that 18 of the 20 metropolitan areas it surveys reported price increases averaging 1.4% in Q2.
Yet there is an ominous cloud on the horizon. Foreclosures continue to rise. Yet few of these are reaching the market. The Mortgage Bankers Assoc. reported in late August that 13.2% of all mortgages nationwide were at least 30 days overdue or in the foreclosure process in the second quarter of the year. This is an increase from the Q1 rate of 12.1% and the 9% rate of Q2, 2008.
Most distressing was the news that 9% of all prime loans, the most secure, were past due or in foreclosure, up from 5.4% in 2008. Prime loans accounted for 58% of all new foreclosures, up from 44% a year earlier and compared to 33% for sub-prime loans. Fixed-rate prime loans accounted for 20% of new foreclosures or 1/3 of all prime loan foreclosures.
Yet the government continues to believe that the loan modification processes they have in place are sufficient. While there are 1.8 Million homes in foreclosure at present and another 1 Million more possible according to Deutsche Bank, only 300,000 loans have to date been re-negotiated.
More than two-thirds of all home sales nationally are either short-sales or foreclosures and of the remaining third only 31% of these are "non-distressed" sales, i.e. sales that were unforced or optional for the seller (a relocation is considered one example of a "forced" or non-optional sale). That means that only 10% of all sales nationally are the result of something close to a normal market sale with a completely willing seller.
Short-sales continue to dominate the local market and times for obtaining the required existing lenders price approval seem to be lengthening again. Fewer bank-owned homes are coming to market. Whether this is a concerted plan to "meter out" the number of foreclosed homes to market in hopes of keeping prices high or not, the number of REO homes coming to market does not match the reported number of foreclosures. Second lenders are requiring more money as their part of the short-sale settlement; many times that results in a conflict between the first lender and the second that necessitates the buyer or the real estate agents paying more to resolve the difference (typically in the $7000 range locally).
Locally, in the entry level segment of the market (under $400,000), there are only 30 homes available today in Morgan Hill, Gilroy and San Martin. This is the lowest inventory in several years and reflects the continuing demand by first-time buyers and investors. With the $8000 first-time buyer tax credit set to expire Dec 1st, the demand will only increase in the interim.