California, the state that led the U.S. into the housing boom and bust with some of the most reckless subprime mortgage lending, is now leading the way out.
California, the birthplace of subprime mortgage lending, saw an explosion of foreclosures thanks to such industry innovations as “no-doc” loans that required no proof of income. The state’s recovery is mirrored by U.S. home values that rose 1.2 percent in July from a year earlier, according to the S&P/Case Shiller index of property prices in 20 major cities. It was the second straight 12-month advance and the biggest jump for the real estate gauge since August 2010.
“We’re starting to see improvement in some of the hardest hit areas, strong demand, competitive bidding on properties and rising prices,” Sean O’Toole, chief executive officer of ForeclosureRadar.com, which tracks sales of foreclosed properties, said in a telephone interview.
The gains are moving in tandem with foreclosure declines as lenders control the flow of bank-owned homes that come to market, crimping inventory and pushing up prices, said Daren Blomquist of Irvine, California-based RealtyTrac.
Initial FilingsInitial filings in September fell in 31 states, led by California, the most-populous U.S. state, which dropped to a 69- month low. Defaults dropped 45 percent from a year earlier, 34 percent in Arizona, 22 percent in Michigan and 21 percent in Georgia, RealtyTrac said.
Home sales in California’s biggest population centers climbed in August to the highest level since 2006, according to real estate research firm DataQuick. Median house and condominium prices in six Southern California counties jumped 11 percent from a year earlier to $309,000, while values in nine counties in the San Francisco Bay Area gained 11 percent to $410,000, the San Diego-based company said.
“Much of the pickup reflects a continuation of trends we’ve seen for months, like the unleashing of pent-up demand in move-up markets and high levels of cash and investor buying,” DataQuick President John Walsh said in a Sept. 13 statement about the Southern California sales surge.
Pent-Up DemandKB Home (KBH) is seeing “dramatic improvement” in California, where strength in the coastal markets, including the Bay Area and Orange County, is spreading inland, Chairman and Chief Executive Officer Jeffrey Mezger said on a conference call with analysts last month. The West Coast is KB Home’s largest market.
“It’s simply a different market than it was six months ago in the inland areas as inventories have declined significantly and prices are now rising,” Mezger said.
The Los Angeles-based homebuilder fell 1.4 percent today trimming its gain this year to 118 percent. That compares with the 75 percent advance for the 11-member Standard & Poor’s 1500 Homebuilding index.
New home orders in the U.S. are likely to remain robust, according to Barclays Plc. “We expect building product companies to remain profitable, driven by momentum in the new home construction market and offset by continued weakness in discretionary housing products,” Barclays analysts led by Vincent Foley wrote in a note to investors today.
‘Constrained Inventory’Investors and first-time buyers who can qualify for a loan are being lured to lower-priced locations, even with a 3.2-month supply of homes statewide that’s about half the historical average of a “balanced inventory,” according to Leslie Appleton-Young, chief economist of the California Association of Realtors. At the height of the housing crisis, inventory stood at more than a 16-month supply, she said on an Oct. 2 media call.
“Sales would be higher if the inventory weren’t so constrained,” Appleton-Young said during the call. “We don’t see that changing significantly in 2013.”
California home sales probably will increase 1.3 percent to 530,000 units in 2013 for the third consecutive year of gains, the Los Angeles-based Realtors group forecasts. Estimated sales of 523,300 in 2012 would represent a 5.1 percent jump from 2011.
“Pent-up demand and first-time buyers will compete with investors and all-cash offers on lower-priced properties, while multiple offers and aggressive bidding will continue to be the norm in mid- to upper-price range homes,” according to Appleton-Young’s forecast
Orange CountyOrange County, home base for defunct subprime lender New Century Financial Corp., had the highest median price of the six Southern California counties in August, rising 6 percent from a year earlier to $445,000, according to DataQuick. San Francisco led northern counties, up 13 percent to $700,000.
Bulk-buying of foreclosure properties by firms such as Colony Capital LLC and Carrington Holding Co. LLC has soaked up some of the housing excess in inland counties, said O’Toole, of Discovery Bay, California-based Foreclosure Radar.com.
The mortgage industry, which lowered underwriting standards to increase loan volume and fuel price gains, used so-called robo-signers to handle the flood of foreclosures that followed.
Judicial ReviewThe country’s top banks, including JPMorgan Chase & Co. and Bank of America Corp., agreed to a $25 billion settlement in February after attorneys general in 49 of 50 states participated in a probe of fraudulent paperwork used to repossess homes.
Driving the recovery in California has been the relative speed it has worked through foreclosures, in part because home repossessions there don’t require judicial review as they do in about half of U.S. states, said Ivy Zelman, CEO of Zelman & Associates LLC. There are 24 non-judicial states, according to RealtyTrac.
A new California law that goes into effect Jan. 1 may make it harder for lenders to seize property, which could delay the clearing of distressed homes and a swifter statewide recovery, Blomquist, a RealtyTrac vice president, said in an interview.
“We’ve been seeing a downward trend in new defaults, while the market in California is gradually improving,” said Blomquist. “The danger is that the law will delay foreclosures in the short-term, and be followed by a spike down the road.”
Scaled BackInvestors may already be getting out of the market after California’s housing gains. Insight Capital Research Management Inc., which had $360 million under management as of June 30, has scaled back positions in homebuilders, including those with heavy California exposure, said Mike Ashton, portfolio manager with the Walnut Creek, California-based fund.
Even in the Vallejo/Fairfield metropolitan area, which had the highest U.S. foreclosure rate in September at one filing for every 202 households, California’s relative housing value is on display. The average foreclosure property there cost $187,939, compared with the U.S. average of $170,040, RealtyTrac said.
To contact the reporters on this story: Dan Levy in San Francisco at firstname.lastname@example.org; Heather Perlberg in New York at email@example.com
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