California Homeowners Bill of Rights pushes foreclosure starts down to levels last seen in 2005. Florida takes foreclosure activity title away from California
When it comes to buying a home, the average buyer is at the mercy of what is available on the market. Typical buyers do not have access to REO portfolios or early knowledge of short sales that will turn out to be screaming deals. The current market is one where inventory is scarce like water in Death Valley but access to debt is plentiful. The amount of all cash buyers has been a big factor as well driving up prices on what little good inventory is out there. California also recently enacted the Homeowners Bill of Rights which will slow down an already slow foreclosure process. Because of this, foreclosure starts in California are down to levels last seen in 2005 when the market was raging in a furious mania. We are seeing a very different market today being driven by a low interest rate environment and an insatiable investor appetite. Let us first look at the impact of the Homeowners Bill of Rights.
A giant drop in foreclosure starts
Foreclosure starts dropped off a cliff in January because of California’s enacted new Homeowners Bill of Rights:
This is the lowest level of foreclosure starts since 2005. The process has already been slowed since banks have figured out that there is more profit in holding inventory off the market then actually putting it out for sale. Keep in mind that very little of this is helping your average American homeowner. Even here in California, I get e-mails from couples being out-bid on properties by all cash investors courtesy of the low rate easy money environment. I’m also noticing the level of credit card offers I’ve been receiving over the last year is nearly on par to what it was in 2005 and 2006. Money (debt) is cheap if you can get your hands on it but the problem is you are competing against billions of dollars of hot money flowing out of Wall Street and foreign hands into targeted markets. With such little inventory, this external pressure has turned the market into a feeding frenzy.
Distressed inventory is still high:
5.2 million properties are in some form of distress. 1.7 million of these properties are foreclosed. What is telling of course is that total overall inventory is at decade lows:
The difference between the peak inventory in 2008 at 3.5 million and our low at nearly 1.7 to 1.8 million is 1.7 or 1.8 million properties (essentially what is sitting in the distressed pipeline). But what you are seeing especially in certain niche markets is that most of the inventory has disappeared. We are seeing annual declines of 50, 60, or 70 percent.
You would think that the underlying fundamentals would drive this up but they are not:
Adjusting for inflation household incomes are back to levels last seen in the 1990s and California is no exception. We also find out that last month incomes saw their biggest one month drop in 20 years:
“(USA Today) WASHINGTON — Personal income growth plunged 3.6% in January, the biggest one-month drop in 20 years, the Commerce Department said Friday. And consumer spending rose just 0.2% with most of it going toward higher heating bills and filling up the gas tank.
The income drop was offset by Americans’ savings a hefty 2.6% rise in December. But most of that gain, analysts said, reflected a rush by companies to pay dividends and bonuses before income taxes increased on top earners at the start of 2013.”
This doesn’t really add any evidence to an organic recovery in the housing market. One thing we can be happy about here in California is that we are no longer the king of foreclosures:
Florida has once again regained the title of having the most foreclosure activity on a raw number basis even with less people than California. A big part of this of course is coming from the new legislation enacted in California which ironically, is going to be another reason on the growing list of items as to why California inventory is so incredibly low.
I have seen some reports showing that inventory is picking up nationwide but this doesn’t seem to be the case in California, at least not yet. For example, 2 years ago Pasadena had 489 listings while today it is down to 216 (a drop of 56 percent). Culver City went from 124 2 years ago to 26 today (79 percent drop) according to Movoto market trends.
This trend is obviously unsupportable. If we keep heading in this direction there will be zero homes for sale come the end of the year. Welcome to the unintended consequences of massive market intervention.