Foreclosure Issues Counterbalance Good News in California

by Simon Lindsay on States

Analysts say that despite the two-month rush in California home sales, the state has to work through a year’s worth bank-owned foreclosures.

It is anticipated that foreclosures will peak by next quarter and prices will fall 35 percent by next year, while stabilization of the housing market is expected in mid-2010.

Last month’s report provided that the existing home sales rose by 85 percent in August and 65 percent in September. MDA DataQuick’s statistics showed that 51 percent of the total sales in September came from foreclosed properties.

Experts say that REO sales bring down prices and move housing market dynamics. Since September, there have been a slowdown in the notices of default, but foreclosures have kept on rising in California.

In September, with a newly released state law requiring a lender to communicate with the borrower before filing a default notice within at least 30 days before, plus a rise in loan modifications when IndyMac Bank has been seized by Federal Deposit Insurance Corp., default notices have dropped, but without a corresponding decrease in foreclosures.

Foreclosures’ peak is expected on the coming year’s first quarter, including a successive drop in REO inventory after a few months, if REO sales stay on high levels. A 12 to 18 month lag between foreclosures and REO inventory peaks may happen.

Declines in home prices in California differ by neighborhood. In Riverside and Stockton, prices drop by as much as 60 percent; while there have been no dramatic drops in prices in Los Angeles and San Francisco, some high-end neighborhoods. But as a whole, home prices are estimated to drop by 35 percent unless there will be great government intervention.

Banks have been very aggressive since borrowers find a hard time getting financing due to the credit crisis. Also, the rapid price drops in California has resulted from the increased supply without purchasing power.

What investors do now is buy and rent properties for positive cash flow as they wait for the stabilization of the housing market before selling.

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