Sonoma County REOs are Just Beginning

Dave Roberts has another post up asking: "Is The Golden Age of REO Bargains Over?"

He cites the low number of Sonoma County REOs on the market relative to sales, and while he provides the caveat that his data is just a snapshot and "Sonoma County foreclosures might shoot up again", he ends by saying:

The more than 800 buyers who were quick got homes already. Another 300 are in the process of buying. The ones who were slow to act are now fighting with all the rest of the late movers to get one of the 160 remaining bank owned homes in Santa Rosa or Windsor.

So should you be "quick" or "slow"? Before you answer it's important to look at some data that was left out of his analysis. You've worked hard to save up that down payment. I wouldn't panic and jump into the market based on the quote above.

Looking at the following chart you'll see it's not a question of if foreclosures "might" shoot up in Sonoma County, but WHEN THEY WILL:


The blue bars are Notices of Default (borrowers are 60-90 days late on their mortgage) and red bars are Trustees Deeds Recorded (a signal homes were lost to foreclosure). See the raw data here.

Many Notices of Default turn into foreclosures, as the graph clearly shows and common sense dictates.

You'll notice that in the second half of 2008 fewer and fewer people were falling behind on their mortgages (i.e. the blue bars started shrinking). This seems odd given that this was when unemployment was dramatically increasing and home prices were plummeting.

It turns out this was not a sign that borrowers fortunes were improving. Again, as common sense dictates, the economy was getting worse and borrowers were under increasing strain. So what caused Notice of Defaults to fall? Answer: the California State Legislature.

Last summer they passed SB 1137 that substantially slowed the foreclosure process in California. Now, before a Notice of Default could be filed, a lender had to make contact with the borrower and waiting periods were mandated. Additionally, due to the holidays Fannie and Freddie voluntarily slowed down the process as did many banks.

As Mark Hanson of the Field Check Group has pointed out this has created pent up supply and tens of thousands of foreclosures will be hitting the market over the next 1 to 5 months. This coincides perfectly when regular sellers will be putting their homes on the market for the spring and summer selling season. In short, supply will be increasing.

The proof that this is happening in Sonoma County is evident in the chart. In the first three months of 2009 Notices of Default have skyrocketed once again. Foreclosures will surely follow.

Don't panic and feel you need to jump in and buy a foreclosed home because supply is drying up. With this pent up supply about to hit the market and unemployment hitting all time highs... THIS MESS IS JUST BEGINNING.