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REALTOR®: Experts Believe Spike in Foreclosures Will Not Signal Recession

Wednesday, October 31, 2007

A real estate information service recently reported lenders started formal foreclosure proceedings on a record number of California homeowners last quarter, the result of declining home prices, sluggish sales and subprime mortgage distress. However, real estate officials do not believe the spike in foreclosures will bring about a recession.

A total of 72,571 Notices of Default (NoDs) were filed during the July-to-September period, up 34.5 percent from 53,943 during the previous quarter, and up 166.6 percent from 27,218 in third-quarter 2006, according to DataQuick Information Systems. Notices of Default are recorded at county recorders offices and mark the first step of the formal foreclosure process.

Trustees Deeds recorded, or the actual loss of a home to foreclosure, totaled 24,209 during the third quarter. Last quarter was up 38.7 percent from 17,458 for the previous quarter and up 604.8 percent from 3,435 for last year's third quarter. There are 8.4 million houses and condos in the state.

"We know now, in emerging detail, that a lot of these loans shouldn't have been made. The issue is whether the real estate market and the economy will digest these over the next year or two, or if housing market distress will bring the economy to its knees. Right now, most California neighborhoods do not have much of a foreclosure problem. But where there is a problem, it's getting nasty," said Marshall Prentice, DataQuick's president.

Real estate official say the record number of foreclosures and subprime market problems are casualties of a market that could not keep pace with the record sales and price increases of the last few years, and will not signal a recession.

"There is lots of uncertainty about the economy due to the rise in foreclosures and the credit crunch, but we are still heading forward – not backwards," according to California Association of Realtors Deputy Chief Economist Robert Kleinhenz.

While noting things could get worse before they get better, Kleinhenz and other real estate experts claim California's real estate market will survive the fallout. At a recent Silicon Valley Association of REALTORS® (SILVAR) broker/manager meeting, California Department of Real Estate Commissioner Jeff Davi reminded everybody that "real estate is cyclical." He said he doesn't expect the economy to fall into a recession because unlike the economic downturn of the 1980s and 1990s, there is job growth in California today, unemployment is up only slightly, and inflation is still in check.

"The economy is good and we're not coupling this downturn with a recession," said Davi.

DataQuick Information Systems reported trustees deeds recorded, or the actual loss of a home to foreclosure totaled 410 in Santa Clara County during the July-September of 2007 period, up 704 percent from 51 in the third quarter of 2006. Although the total for the Bay Area jumped 633 percent, from 449 in 2006 to 3,242 this year, the numbers are low compared with other areas in the state. Hardest hit are the Southern California region, where a total of 13,314 homes where foreclosed on, and the Central Valley, where 6,630 homes where foreclosed on.

SILVAR President Mark Burns referred to positive aspects present in the Silicon Valley region. He said the many communities in Silicon Valley continue to hold their own in terms of median home price, with virtually no erosion in sales in the over $1 million market. Burns indicated these are established neighborhoods, with good schools, near places of employment and cultural attractions that don't require long commutes for residents. These neighborhoods are not entry-level and tend to be areas without many subprime mortgages, where foreclosures are not predominant.

It is always a good time to buy in these areas because the value of homes here will always appreciate, and most of important of all, the Silicon Valley economy is robust and insulated from economic woes experienced by other areas in the state, said Burns.

A Realtor for the past 22 years, Burns noted, "The rate of homes being redeemed by foreclosing lenders is different than in times past. The foreclosing lenders appear to be taking back more property on a percentage basis. The properties being 'sold' to these lenders at the foreclosure sale are turned around and sold at market value and the lenders are coming closer to being made whole on their costs. This is an important sign that Silicon Valley properties are still good investments and will sell quickly regardless of the circumstances. The 'bargain' foreclosure rarely becomes available to those who would consider investing in those types of homes.

"If the trends (like in other parts of California and the country) were a continuing downward spiral, many more would go up on the auction block and lenders would hope that anyone would pick them up rather than taking back the property and the going through the headache that entails for them."

DataQuick noted of the homeowners in default statewide, just under half, 45.9 percent, emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe.

On primary mortgages statewide, homeowners were a median five months behind on their payments when the lender started the default process. The borrowers owed a median $10,914 on a median $344,000 mortgage.

On lines of credit, homeowners were a median eight months behind on their payments. Borrowers owed a median $3,355 on a median $66,351 credit line. However the amount of the credit line that was actually in use cannot be determined from public records.


The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.

The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.

Variations of this article have appeared in local area newspapers.

For further information, please contact Rose Meily at SILVAR Public Affairs, email , or phone (408) 200-0109.

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