California RE woes

Ok, so most everyone is aware of the major real-estate debacle going on throughout the nation. Things are pretty bad here in Southern California. We’re probably only slightly better off than Floirda and Las Vegas. A few counties in Northern California are getting especially hammered and Riverside County (just North of us here in San Diego) is getting totally brutalized due to the compounding effect of crazy-high fuel prices (Temecula/Murrieta/Wildomar/Hemet – a large percentage of people who live there drive 30, 60 or even 100 miles one way to work).

Anyway, I just wanted to document a few components that bring some of this into perspective. A week doesn’t go by that someone doesn’t ask me if now is a good time to buy a home. Just last night I had a conversation with a fellow that wanted my advice as to whether he should buy some homes or purchase an apartment complex. Regarding buying a home (or homes) I told him that prices were going to continue to drop for many months and that he should not be in any hurry to rush out and buy a home – prices would probably continue to lower for the next 12 months (at least). The following are some statistics that inform my opinion.

First of all – you need to know a few things (and forgive me if you already know this). A Notice of Default (NOD) is what a bank/lender issues to a borrower who has not made payments on their loan (they are in default). Banks typically issue these once someone is 3 or maybe 4 months behind on their payments. This time-frame is actually in flux a bit right now becuase lenders are so inundated with people who are defaulting on their loans that it may be longer before an NOD is issued. Once the NOD is filed – the borrower has 90 days (in California) to cure the default. If the defualt is not cured (by making up for unpaid payments, or some other arrangement with the lender) within 90 days the lender can file a Notice of Trustee Sale (NTS). Once the NTS is filed, an auction (foreclosure sale) date is scheduled – this date is (by law) at least 21 days after the filing. If the borrower does not somehow cure the default, file bankruptcy or figure out a way to forestall the auction/foreclosure sale – the property is auctioned off to the highest bidder at the county court-house. Individuals may bid on this property. Typically, the bank simply wants to get back what they have lent on the property. If no one bids on the property, or no one bids as much as the bank is willing to accept – the property becomes owned by the bank (we call this type of property Real Estate Owned or REO). The bank can accept less than it is owed. If someone bids more than is owed … the surplus goes to pay off other loans (if any) or the proceeds could actually go to the borrower/former owner. However, once the bank owns the property, that’s it – the bank owns it and they are in complete control as to what they do with teh property. Ok, so now you know about an NOD, NTS and REO’s.

Let’s start with NOD’s in California for the past few months:
March – 42,700
April – 44,100
May – 43,011

Now, even though there were less NOD’s in May – there was an increase of NTS filings for the month of May at 34,564. Remember, the NTS filings in May are a result of NOD’s filed in or before February, 2008. There were 37,362 NOD’s filed in February, 2008. So, check out those numbers – look at the number of NOD’s in February and the number of NTS’ in May (3 months later) – a very high percentage of February’s NOD’s are being foreclosed upon. Now, this isn’t entirely accurate because many of May’s NTS filings could be from other NOD’s prior to February and perhaps many of February’s NOD’s were cured. However, it is still indicative and there is a definite correlation – even if it is a bit indirect.

What that tells me is that we are going to continue to see over 1,000 homes per day in foreclosre in the State of California for the next several months (at least).

Also, it is worth noting that over 97% of all properties that go to auction/foreclosure sale end up being owned by the bank (in California). As this trend continues the banks become owners of huge inventories of properties. The banks don’t want to own these properties and so they are trying to liquidate – which means lower prices. But what happens when over 30,000 properties per month come into the market-place? There is an over-supply and this equals lower prices.

Anyway, there’s a bunch more to be said about the fact that a large number of these properties do not show up as listed for sale on your typical Realtor® listing service/website. Instead the banks may use other means to try and unload the properties or may simple keep the inventory under wraps. Because of this factor (and others) it is very difficult to tell just how much inventory there actually is out there – and how much it is worth.

The post is getting too long now … I’ll post more about San Diego, specifically later on…

*stats from foreclosureradar.com and sandicor’s MLS.