Finding – or imagining – a market bottom

The Intero Insider: Finding – or imagining – a market bottom

By Gino Blefari
President and CEO, Intero Real Estate Services

There’s an increasing amount of talk – both locally and in the national media – that we may have reached the bottom of the real estate market’s downturn.

Stories about properties selling quickly are becoming more common, as are instances of bank-owned properties selling with dozens of offers.

Moreover, in the past week, the National Association of Realtors reported that existing home sales saw an increase of 3.6% in June. Also, the Commerce Department reported that sales rose 11% in June to a seasonally adjusted annual rate of 384,000, from an upwardly revised May rate of 346,000. The last time sales rose so significantly was in December 2000.

The average person may take all of this to mean that we have indeed reached the bottom – or even that it has already passed.

But if you follow the market as closely as we do here at Intero, you come to a different, and less clear-cut, conclusion.

As I reported a few weeks ago, there are promising signs at the market’s lower end. But to get a better sense for whether or not the market as a whole will see an upward trend soon, one needs to look at the foreclosure pipeline - the number of properties making their way through the lengthy foreclosure process.

According to ForeclosureRadar, a company that tracks California foreclosure data, Notices of Default – the first step in the foreclosure process – increased 11.8% in June to 45,691, the second highest monthly total on record and a 10% year-over-year increase from June 2008. Perhaps because of recent government restrictions on foreclosures, these properties are clogged in the pipeline. Yet it seems like there are more to come – to put NAR’s optimistic existing home sales report for June (as mentioned earlier) into perspective, last month we saw an increase in home sales nationwide, yet in California in June alone the total number of new home sales was less than 80% of the total Notices of Default issued. So this tells us to expect a flood of new foreclosures hitting the market as bank-owned for sale listings several months from now and ongoing.

To compound matters, Notices of Trustee Sale – the second step in the foreclosure process, when the property owner is notified that the lender, or trustee, will attempt to sell the property at auction – decreased by a surprising 28.9% in June. Which tells us that this drop in the available supply of homes has created what seems to be a false sense of market recovery.

A third factor, from an article in the Wall Street Journal in May of 2009 - Mortgage Modifying Fails to Halt Defaults cited the Fitch Ratings Report which stated, that although thousands of home owners have been saved from foreclosure through loan modifications, anywhere from 25%-60% of these homeowners, have or will re-default and re-enter the foreclosure process in the coming months.

These three statistics tell a deeper market story: Yes, things may be improving, but it is also clear that there is a way to go before foreclosures stop flooding the market and placing downward pressure on prices.

So, like me, keep an eye on what’s happening now in the market – but also on what’s to come.