This morning we got the most recent RealtyTrac data on foreclosure filings. At first glance, the reduction in foreclosure filings looks optimistic - until we realize it was not a broad based reduction.
From the release:
April foreclosure activity decreased 5 percent from the previous month and was down 14 percent from April 2011. One in every 698 U.S. housing units had a foreclosure filing during the month.
"Rising foreclosure activity in many state and local markets in April was masked at the national level by sizable decreases in hard-hit foreclosure states like California, Arizona and Nevada," said Brandon Moore, CEO of RealtyTrac. "Those three states, and several other non-judicial foreclosure states like them, more efficiently processed foreclosures last year, resulting in fewer catch-up foreclosures this year.
Interestingly, the article goes on to say:
"In addition, more distressed loans are being diverted into short sales rather than becoming completed foreclosures," Moore continued. "Our preliminary first quarter sales data shows that pre-foreclosure sales - typically short sales - are on pace to outnumber sales of bank-owned properties during the quarter in California, Arizona and 10 other states."
I find this very interesting in that short sales are becoming a larger proportion of sales. While the banks still take losses, at least they don't incur the costs of foreclosing, selling (and the scrutiny involved with the foreclosure process) and maintaining the properties while the process progresses. This is actually a more efficient means of taking a loss.
After three straight monthly increases, U.S. foreclosure starts - default notices or scheduled foreclosure auctions, depending on the state - decreased 4 percent from March to April. A total of 97,665 properties started the foreclosure process for the first time during the month, down 2 percent from April 2011.
Despite the overall decrease in foreclosure starts, 26 states posted monthly increases in foreclosure starts, and 27 states posted year-over-year increases in foreclosure starts. States with the biggest annual increases in foreclosure starts included New Jersey (180 percent), Utah (179 percent), Indiana (49 percent), Pennsylvania (44 percent), Florida (43 percent), and Michigan (42 percent).
The largest MoM increases in foreclosure filings were in Boston (+46%), Tampa (+18%) and Minneapolis (17%) and the largest decreases MoM were Phoenix (-22%) and San Francisco (-19%).
(click to enlarge)
As the above heatmap (from RealtyTrac) shows, the "goodnews" states (low foreclose rates) are the smaller states in terms of population. What this also means is that a few large states will continue to bias the results (as they did to the upside this morning).
From The April Foreclosure Report by Foreclosure Radar:
Despite investors purchasing a higher percentage of foreclosure sales, margins have rapidly declined in recent months. In both Arizona and Nevada winning bids on the courthouse steps on average equal the current estimated value of those properties. In California the discount between market value and winning bid have on average declined to 12.3 percent. This leaves investors who intend to resell their purchases with record low profits after eviction, repairs, and closing costs.
"Foreclosure declines would be wonderful news if they were being driven by a true market recovery in which hundreds of thousands were no longer unable to make payments, and millions were no longer upside down. That is not the reality today. Instead we are seeing unprecedented government intervention into the foreclosure process leaving underwater homeowners in limbo, while stealing opportunity from investors and first time buyers." stated Sean O'Toole, Founder & CEO of Foreclosure Radar. "California's pending legislation, which is similar to laws we previously saw enacted in Nevada, will almost certainly bring foreclosure activity to a near halt there if passed. The reality is that these laws don't solve anything as they fail to address the real problem - negative equity - while instead they punish real estate professionals, homebuyers, and investors far more than the banks they were aimed at."
Essentially, Foreclosure Radar (an investor viewpoint) is saying that margins are decreasing in foreclosure purchases and government intervention continues to keep the market from clearing. Ultimately, "real" foreclosure rates and improvement will not begin until government intervention in the market declines.
Bottom Line: Foreclosure statistics continue to be volatile and have not shown a clear trend. The larger states and non-judicial states continue to overly influence the results (as one would expect), but opportunities for investors (institutional and retail) continue to exist although prices have appreciated and the truly outsized returns have been had. There are, however, decent returns available and I continue to expect a greater institutional interest in foreclosed properties, especially those sold on a portfolio basis [as I recently wrote in an article on Two Harbors (TWO)].
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.
