California’s status as a non-judicial state is now being cited for the state’s low foreclosure inventory at the end of 2015. According to CoreLogic, a leader in collecting and evaluating global real estate data, only 0.4% of homes with a mortgage in California were in any stage of foreclosure at the end of 2015, compared to the national average of 1.1%.
The data indicates a disparity between foreclosure numbers in judicial states versus non-judicial states. The foreclosure process moves much more quickly in non-judicial states, which support a less expensive and simpler method that does not require court approval. Real estate statistics back this theory, with states like California reporting lower foreclosure inventory than judicial states like Florida’s 2.3 percent, and with New York and New Jersey inventory rates even higher at 3.5 % and 4.2 %, respectively.
The trend also continues for seriously delinquent mortgages – those marked as unpaid by the mortgage holder for 90 days or more. Only 1.6% of homes with a mortgage in California were deemed seriously delinquent at the end of 2015, which is half of the 3.2% national average.
Foreclosures totaled only 5.2% of the 450,700 homes sold throughout 2015 in California, resulting in 23,900 completed foreclosures in The Golden State. California’s foreclosure statistics are promising, but a rate change by the Federal Reserve could shake the stability of the state’s housing market.
It has been about a decade since the housing market crash resulted in half of all home sales in California being distressed sales, but it appears we have turned the corner and analysts are optimistic that the foreclosure crisis has played itself out here.
However, a bump to the target short-term rate by the Fed in December could deter homebuyers from taking on a new mortgage. The Fed’s interest rate was increased by another 0.25% in December after being held near zero for the past eight years. The rise of the effective Federal Funds Rate to .55% helped drive mortgage rates up a bit during the second half of 2016. The current 30-year mortgage rate is about 4.32%, up almost a full percentage point over last summer’s low, and there is some expectation that the housing industry will see fewer sales if lending rates continue to rise.
Industry experts predict home sales will take another dip sometime this year, in 2017, as homebuyers’ purchasing power weakens due to rising mortgage rates. Not only will home sales slow, but in some housing markets that have not yet seen a full recovery of home values, we may also see a minor increase in foreclosures. As many homeowners still wait to recover from the equity lost during the recession, and with 7% of mortgaged homeowners still underwater, it is projected that a portion of those mortgages will go into default sometime during the next 12 months.
One factor that can affect the California market long-term is from legacy foreclosures. Freddie Mac and Fannie Mae mandate a seven-year wait period from an owner’s foreclosure date before they can qualify for another mortgage. That period may be reduced to three years if the owner can prove a severe hardship, such as job loss or illness, or in select cases, that three-year period can be waived if rare, extenuating circumstances occurred.
In a positive light, the slight increase in foreclosures will eliminate most of the remaining distressed properties from the market. This removal of distressed homes will benefit both the remaining homeowners and those who have already been foreclosed upon, as property values realign with market realities and more sensible and stable loan programs are introduced to new borrowers.