A Note Regarding Foreclosure Activity

Each quarter in our Residential Economic reports, Real Estate Economics presents trends and a near term forecast for residential foreclosure activity throughout Southern California and its various regions. Foreclosure activity tends to inflate near-term supply and reduce price support, and is an important element in our new housing demand model.

The chart below presents historical trends and a near term forecast for residential foreclosures throughout Southern California:

As shown, foreclosure activity has moved sharply upward during the past five quarters. Unfortunately, during the next four quarters, foreclosure activity will worsen before it improves. As shown above, foreclosure activity during the past quarter approached 10,000 homes. By third quarter 2008, the level of foreclosures activity will approach 11,600 homes. The impact has been, and will continue to be, a contribution to the current over-hang in housing inventory and reduced home price support. Unlike market priced comparables, much of this added supply will be offered at below market pricing in order to move inventory quickly. Unlike in past cycles where foreclosure activity was a reflection of job losses, foreclosure activity in this cycle is largely being caused by small-time speculators who are giving up their investment positions, often walking from 5 to 10 homes that were bought on speculation. Loose lending practices did allow many non-qualified households to enter into homeownership before they were ready, but these new homeowners will fight to stay in their home, whereas speculators will give up their positions without as much concern.

Despite the negative impact of foreclosures, it should be noted that foreclosure activity will not be the primary market driver. Economic growth will continue to be the main driver as prices approach a floor wherein they can be supported by Southern California’s economy.

As was presented in previous newsletters, demand for new housing remains intact throughout Southern California. The problem during the present cycle has not been demand. It has been overstated prices. Overstated prices were caused by “artificial demand” fueled by speculators and investors who were artificially inflating demand by up to 30% in some markets. When this artificial component of demand collapsed during 2nd quarter 2006, prices were left hanging well beyond core economic support. The current disruption is simply a trend back to where home prices can be support by the economy.

The overhang in inventory caused by foreclosures will continue to impact the market for another 8 to 16 in most markets.

Real Estate Economics provides foreclosure activity for markets throughout California. This information can be obtained from our website, at www.RealEstateEconomics.com, or by contacting one of our sales associates.

If you need assistance or technical training on how to analyze your specific market areas, please contact Jennifer Banks at (949) 502-5151 ext. 108 or at Jennifer.Banks@RealEstateEconomics.com.