The key to a quick sale is to set a low asking price, which is why foreclosed homes are usually the cheapest ones on the market. There is only so much demand for homes, so when banks are sitting on a large stock of foreclosed homes, they quickly come to dominate the supply side of the market.
That’s a pretty good description of what’s going on in the Bay Area right now. While fewer than 1% of Bay Area homeowners defaulted on their loans during the first quarter of 2009, more than half of the homes that were resold during the same period had been foreclosed on during the previous year.
Take a look at the chart, below, which shows the recent history of mortgage defaults in the Bay Area.
A default is said to occur when a borrower misses a scheduled loan payment. When that happens, the lender may issue a Notice of Default, which is the first step in the foreclosure process. According to Dataquick (which provided the data for the chart), 80% of borrowers who default on their loans ultimately lose their homes to foreclosure.
After falling for six months (due to changes in California law and a temporary moratorium on foreclosures), default activity resumed its upward trend in the first quarter of 2009. Lenders issued a record 19,438 default notices to Bay Area homeowners.
There is anecdotal evidence that housing demand is recovering in the Bay Area, perhaps due to the recent performance of the stock market. On the other hand, unemployment is still rising sharply, so I wouldn't be surprised if the recent surge of optimism turns out to be a flash in the pan. In that event, prices will be mainly driven by supply-side factors. Considering the recent trend in mortgage defaults, Bay Are home prices are likely to be under pressure for some time to come.
(In case you're curious, default notices were issued on roughly 0.2% of San Francisco homes during the first quarter. Meanwhile, previously foreclosed homes accounted for roughly 12% of resale activity.)
