Fewer foreclosures mean even fewer houses to sell in a market where there are few homes being built and not enough resales to make a dynamic market, said Nathan Moeder, principal at The London Group.
“It looks to me like a return to normalcy,” said Norm Miller, professor at the Burnham-Moores Center for Real Estate at the University of San Diego.
The current foreclosures are likely those that have been stalled by the borrowers hoping rising prices would bring them above water, Miller said.
Long term, he said he expects foreclosures to be about 1 percent of sales of properties with mortgages; a normal market is less than 2 percent.
“I’m not sure we’re there yet, but it sounds to me like we’re really close to a normal market,” Miller said.
Trustee deeds — the final step in the foreclosure process, transferring ownership from the delinquent borrower back to the lender or a third party — were filed on 156 properties in June, 4 percent higher than in May and 48.7 percent lower than June 2013.
That 4 percent increase from May to June represented six properties, which Moeder said could be attributed to how fast banks can process the sales during that time.
There were 1,163 trustee deeds filed from January through June, down 44.8 percent from the same time period in 2013 when there were 2,107 trustee deeds filed.
Trustee deeds were down 44.1 percent in June from January, when there were 282 filed.
Notices of default, which initiate the foreclosure process by registering that a borrower is behind in payments, rose 14.1 percent from May to June, and fell 31.9 percent from June 2013 to June 2014, according to the San Diego County Assessor's Office. Lenders issued notices of default to 487 borrowers in June, up from 427 in May and down from 715 in June 2013.
There were 2,954 notices of default issued in the first six months of 2014, down 28.7 percent from 2013 when there were 4,140 notices of default issued.
Notices of default were down 10 percent in June from January, when there were 541 issued.
The decrease in foreclosures is just another pipeline of housing supply that’s shrinking, Moeder said, and the low inventory is putting pressure on prices.
Short sales and foreclosures were picked up by investors in the past and some have been flipped and sold to owner-occupied buyers, Moeder said. Even if all the remaining investor-owned properties came back on the market at once, he said it still wouldn’t be many homes relative to the number of resales needed for a healthy market.
Fewer distressed sales on the market cause home price indexes to overstate the appreciation rate, Miller said. As the mix of home sales changes to include fewer distressed properties and more regular sales, the median prices in the indexes are higher and not representative of the true appreciation, he said.
When Case-Shiller home prices are up by 5 percent, he said the typical home might actually be up 3 percent.
“It happens every cycle: They overstate the decline on the way down and the increase on the way up because the sample is so affected by the distressed sales,” Miller said.
He said home prices are moving up but “not a whole lot” right now, adding that the true appreciation is probably up about 5 percent on an annual rate for the county.
The year-over-year decreases in trustee deeds and notices of default can be attributed to a strengthening economy with increased employment, increased job security and interest rates remaining low, Moeder said.
Miller agreed, and said that the key reasons for foreclosure are declines in home prices and unemployment. The low interest rates also continue to prop up home prices, Miller said.
Moeder said he doesn’t expect interest rates to rise until the end of 2015, when he forecast only a slight increase.
And even when rates do increase, Moeder said San Diego shouldn’t expect another wave of foreclosures. Those buying homes today are putting down larger down payments and have to have their income verified, he said, making for healthier, better-written loans.
Moeder said he doesn’t expect another wave of foreclosures “unless the shoe drops and we start losing jobs again, which I don’t think anyone sees ... now.”
Miller agreed, and said it would take a couple months of negative job numbers to reverse the trend.
“I don’t see any reason why we would be heading into a recession right now,” Miller said.
He said it would take a major event like an act of terrorism or war in the Middle East to spike oil prices and trigger a recession.