Foreclosures Take a Steep Dive in California; Shadow Inventory Is Gone

A year ago, as the housing recovery started to take hold in California, analysts warned of a “shadow inventory” of homes on the verge of foreclosure that could stop the recovery in its tracks. The prospect of many homes about to land on the market at fire-sale prices threatened to sow uncertainty, hold back price appreciation, and prompt yet another surge of foreclosures.

Toy housesWell, all that talk was just that: talk.

A pair of housing reports released last week confirmed that foreclosures and distressed-property sales have dropped dramatically to levels not seen since before the recession took hold, with little or no inventory left in the shadows.

The research firm DataQuick said the number of California homeowners entering foreclosure fell last quarter to the second-lowest level in more than seven years — down 58.6 percent in just the past year.

The third-quarter numbers were even better in the nine-county Bay Area, with foreclosures down 58.5 percent (in Marin County) to 68.4 percent (in Napa County) in one year’s time, for an average Bay Area drop of 61.9 percent.

DataQuick attributed the statewide drop-off to a rebounding job market, solid gains in housing prices, and a variety of government programs meant to keep homeowners out of foreclosure.

Notices of default, an early step in the foreclosure process, plummeted in the first quarter of this year, DataQuick said, as a package of new state foreclosure laws — the “Homeowner Bill of Rights” — took effect on Jan. 1.

“Cleanup of the foreclosure mess is ongoing, but it’s difficult to imagine a huge new wave,” said DataQuick President John Walsh, in a statement. “We still get asked about the long-feared ‘shadow inventory’ of distressed properties that some people predicted would trigger another big surge in foreclosures. Such warnings, which go back years, often reflected a worst-case scenario and didn’t account for the breadth and depth of the government’s eventual intervention in the crisis.

“Lots of legal, regulatory and political hurdles popped up, slowing the foreclosure rate,” said Walsh. “Then the economy stabilized and home prices started rising.”

Optimism in the DataQuick report was confirmed by figures from the California Association of Realtors.

The share of equity sales – nondistressed property sales – rose in September for the 10th straight month, making up 85.8 percent of sales across California, the highest share since November 2007, according to CAR. A year ago, equity sales accounted for 62.7 percent of sales.

Conversely, the combined share of all distressed property sales — short sales and bank-owned properties but not foreclosures — continued to fall in September, dropping to 14.2 percent, down sharply from 37.3 percent a year earlier.

“The continuing decline in short sales indicates more previously underwater homes are moving into positive equity as home prices are bolstered,” noted CAR.

(Image: Flickr/Woodleywonderworks)