Foreclosure Increase Ominous or Not?

Sonoma County home sales dropped 25 percent in 2006. Sonoma County faces a 60 percent risk of further (price & sales) declines over the next two years, according to a survey released Wednesday.

Sonoma County had 143 foreclosures 4th Quarter 2005 and by 4th Quarter 2006 we are up to 323. 125.9% But don't give it a second thought. The guys at DataQuick will let us know if we should start worrying.

Datawho?

You know, DataQuick... those guys who count foreclosures as sales and call it all good.

"Risk is based on home prices, employment and the affordability of housing. The county's economy has stalled, losing jobs in recent months. And affordability has worsened because incomes did not keep pace with soaring prices before the recent downturn."

"While the correction was expected, it has been steeper and faster than anticipated. The 323 notices of default sent to Sonoma County homeowners in the fourth quarter compared with 143 during the same period a year earlier."

"The 125 percent increase was the largest since DataQuick began tracking defaults in 1992. It was the highest number since 328 notices were sent in the third quarter of 1997."

"Foreclosure activity has been rising because households facing financial difficulty, often from a job loss, illness or some other trouble, may have more difficulty refinancing or selling homes."

"Historically, only 5 to 7 percent of homeowners in default end up losing their homes, as most either refinance or sell. But 32 percent of the state's homeowners who were in default earlier in the year lost homes to foreclosure in the fourth quarter."

"Just over half of the loans that went into default statewide during the fourth quarter were made between January 2005 and February 2006. So those loans were made to buyers purchasing homes around the time the market was peaking in summer 2005, Karevoll said."

"Loans from this period also are at greater risk if they are interest-only or mortgages with minimum payment options."

"Interest-only loans and mortgages with minimum payment options proliferated in Sonoma County as buyers looked for ways to reduce monthly payments to purchase homes as prices soared." (70% of 2006 loans in Sonoma County were I/O of some sort)

"But those loans can put buyers in riskier financial positions, especially if they purchased homes with little or no down payment, relying on the market to build home values rather than paying down a loan."

"Exchange Bank does not fund interest-only and option loans. But the bank will package them through outside lenders for buyers who cannot afford more traditional loans with fixed rates and down payments."

'"Just because of the higher-priced homes, that is the product that is in demand in order to qualify," said Colleen Oller, vice president and real estate loan officer for Exchange Bank. "But now we're seeing a downside to that, especially if they're needing to sell. The value of those homes is not what they paid for them and they've got no equity built up."'

'"We're in the midst of an adjusting market right now, and we won't know until spring or summer if this is ominous or not," said Marshall Prentice, DataQuick's president."

Please see Dr. Housing Bubble for cool charts, graphs and great analysis of California's flood of foreclosures.