Foreclosures are up. So, what’s the big deal?

By Joel Persinger
YourRealEstateDude.com

It seems that wherever I go these days someone is talking to me about something discouraging they have read or heard about the real estate market. Last week, a client of mine had a party at his home to show off all the improvements he’s made prior to putting the home on the market. While I was there, I ended up in a discussion with a friend about foreclosures and what effect the rise in foreclosures is going to have on the market in the coming years.

Based upon the rise in foreclosures and the “struggling economy”, this gentleman has become convinced that home prices are going to drop like a rock in the coming year; perhaps even to the level of prices some five years ago. Since his argument was based upon his impression that the economy is struggling mightily and that foreclosures are a major indicator of coming trends, it might be instructive to take a hard look at the economic facts.

With very few exceptions, economists tell us that the nation’s economy is doing quite well. The same can be said of the local and state economies. The forecasts offered by the Burnham-Moores Center for Real Estate at U.S.D which were released in December are prime examples. But, if you still aren’t convinced, just talk to the retailers who cleaned out my wallet over the holidays! They’re probably still counting their profits.

It is true that some sectors of the economy are not doing as well as others and that the real estate sector has experienced a slow down. However, it is quite normal for some economic sectors to out-perform others. In fact, I can’t remember a time when this was not the case. Nevertheless, unemployment is down, consumer spending appears steady and even though fewer California homes sold in 2006 than in 2005 the price of homes in California still went up! The California Association of Realtors reports that the median price of an existing single-family home in California increased 1.4 percent in the month of November alone. This increase isn’t huge, but it flies in the face of the conventional opinion that home prices are dropping like stones. Appreciation has slowed dramatically, but home prices are holding steady and even increasing ever so slightly on average.

The other piece of the argument was foreclosures. It is true that the number of foreclosures has increased and such events make great headlines. But, what no one seems willing to tell you, is that the number of foreclosures is such a miniscule percentage of the number of homes sold or owned at any given time that it makes the foreclosure number hardly worth mentioning.

According to data provided by San Diego based InnoVest Resource Management, mortgage lenders recorded 9,058 notices of default in San Diego County in 2006. This is just under twice as many as were recorded in 2005. A notice of default or N.O.D. is the document that is filed by a lender to start the foreclosure process. The filing of a N.O.D. does not automatically mean the home will be sold in foreclosure. On the contrary, there are many opportunities for the owner of the home to make good on the loan and keep the house. The statistics on InnoVest’s website show that less than 20% of the homes for which a N.O.D. was recorded in 2006 were actually sold by the lender. That means that over 80% were never actually foreclosed upon. If we then take the 20% figure as the actually foreclosure number roughly 1,812 properties were sold as a result of foreclosure in San Diego in all of 2006. That is less than 7% of the homes sold, not including duplexes, vacant land, etc. The figure would actually be lower still if the month of December were accounted for. November is the last month for which current data is available from the San Diego Association of Realtors for 2006 sales.

The foreclosure number becomes even less significant the more we work the figures. For example: if you divide the number of foreclosed upon properties by the total number of homes in San Diego County on which there is a current mortgage loan, the resulting percentage doesn’t even hit the radar screen.

So, as you’re listing your new year’s resolutions for 2007, consider a resolution to look on the bright side. There are good things just around the corner for real estate and I wouldn’t want you to miss out by listening to the naysayers.