Some recurring questions in the residential real estate story are, “How far along are we? When will the housing market be “normal” again?” Well, we could debate the meaning of “normal” forever and a day, but one way to add to our knowledge is to estimate how many mortgages are yet to default, or homes lost via short sales.
Since this is a local blog based in the SF Bay area and focused primarily on the East Bay, I have been collecting some data that will hopefully be relevant. For the past seven years I’ve been using public records to track foreclosures in Alameda County. Not tracking by borrower or location, but by the date the loan (the Deed of Trust) was filed. So we can get a picture of how loans have performed by their vintage, and perhaps project into the future.
One way to look at this is cumulative foreclosures as a percentage of loans made, which is shown below.
Probably the first thing to note are the trends. We can see that there was essentially exponential growth until late 2008, then a bit of a lull followed by rather steady trends since then. Each vintage, however, seems to have its own “personality.” For the time-being let’s remove 2004 and 2008 from the discussion. Both are minor contributors, and while 2008 has the potential to grow it is a long way from matching the damage that 2005-2007 loans have, or likely will, make. [Besides, there weren’t many loans made in 2008.]
Although the 2006 vintage may be losing some steam, the trend of foreclosure rates for those 2005-2007 loans is still substantially positive.
Now for some details and caveats. A cumulative foreclosure rate of 8% may not seem very frightening, but this is the percentage of all secured real estate loans that were recorded by the county. These include second mortgages and home equity loans, which are not likely to be foreclosed on as they are behind any vulnerable first mortgage. There was also a lot of refinancing activity during that period, and while some used the opportunity to take cash out of their homes, most long-term home owners were simply seeking a lower interest rate without increasing their debt. In short, the importance of the absolute value of the foreclosure rate is difficult to evaluate.
The trends are more interesting, but there are caveats there as well. But first, let’s look at the same data, this time displayed as a percentage of homes sold.
Suddenly the foreclosure percentages get our attention! The number of 2006 Alameda County loans that have been foreclosed is 56% of home sales that year!
Of course, it isn’t just purchase loans on 2006 home sales that have been foreclosed; some of those foreclosures were the result of cash-out refinancing of homes bought previously, sometimes by more than a decade. Statistics from city of Oakland foreclosures indicate that about 1/3 of foreclosures have been on refinanced loans. If that fraction holds for the county, then 37% of homes bought in 2006 have been foreclosed; and 2005 and 2007 loans are not far behind.
But there is another factor to be reckoned with: short sales. These don’t show as foreclosures, but have the same effect in that they remove that loan from the still vulnerable pool. I haven’t been tracking short sales county-wide, but in Oakland there has been about one short sale for every two foreclosures. Furthermore, the ratio of short sales-to-foreclosures has been steadily climbing, and was particularly high the last quarter of 2011. This may explain the apparent “tapering off” of the foreclosure rates in the charts, they’re being replaced by short sales.
The bottom line…well, I’ll leave much of that to you. But my succinct interpretation/guess is that while the rate of foreclosures (plus short sales) will gradually taper off, ultimately 40%-50% of loans made during 2005-2007 are yet to fail, but fail they will.
In baseball terms, we’re in the fifth or sixth inning.