Foreclosures Are at a 4-Year Low, But That’s Not Necessarily Good News

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Foreclosure filings fell in March to their lowest level in four years, according to real estate data provider Realty Trac. For the first time since July 2007, the nationwide number of filings fell under 200,000 — a 4% drop from the month before and a 17% decrease from March of 2011. However, the news isn’t as good as it may sound.

 A closer look at the data reveals a complicated housing market, one that is still likely to get worse before genuine, long-lasting improvements take place.

“Filings” include public default notices — when a bank has told you that you’re late on the mortgage and haven’t made up those payments, so the county may begin taking steps toward repossessing your home. Filings also include scheduled auctions, when foreclosed homes go up for sale, as well as bank repossessions, when a delinquent homeowner gets kicked out of the property so that the bank can market it.

While filings have been decreasing, foreclosure “starts” — which include initial default notices and, in some states, foreclosure auctions — have actually risen three months in a row, including a 7% rise in March over February.

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Overall, we have a picture of a market that can seem unrealistically rosy. Homeowners are still defaulting on their loans at an alarming rate, yet banks have slowed repossessions. Unfortunately, that lull is likely to end soon.

Why? It’s a consequence of banks playing it conservative while the federal government and many state attorneys general fought over allegations of abuses in the foreclosure process. But with a $25 billion settlement announced in February, the machinery is cleared to restart again.

That’ll mean more repossessions, which eventually hit — you guessed it — the real estate market as a whole. As Brandon Moore, the CEO of RealtyTrac, put it in a statement:

“The dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen — both in terms of new foreclosure activity and new short sale activity.”

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In areas that have been suffering, continued softness in the real estate market is expected later this year. The states that look especially vulnerable are the usual suspects: Nevada (where foreclosure starts were up 153%), California (where defaults jumped 14% from February to March) and Florida (where one in every 123 housing units had a foreclosure filing).

It’s worth remembering, though, that all real estate is local. Florida as a whole looks vulnerable, but recent stats indicate that Miami prices were up 1.2% from the prior month on a seasonally adjusted basis. That may be because vacation home demand is rising, jumping 7% last year, according to the National Association of Realtors.

The Trulia price monitor, a fairly new metric released by the real estate listing website, indicates that asking prices are up all over Florida, including Miami, West Palm Beach, and the Cape Coral-Fort Meyers area. This increase is year-over-year, so it’s not just the effect of spring sunshine, though of course it remains to be seen if sellers will get the numbers they ask for.

California, for its part, looks very different. Asking prices are falling compared to last year, especially in the Sacramento area (down 8.3%) and around Fresno (down 6.8%). Los Angeles is only a little better (down 5.4%) and San Francisco is negative, too (down 2.9%).

If you’re watching a particular local market, keep an eye on pricing trends, sales volume (which in California is a positive, with the number of sales up 5.5%), as well as the foreclosure pipeline. Since it’s tough to precisely time the cycle in any given area, remember that the best financial protection you can set up for yourself is a plan to hold any property purchased for several years.