Shafts of Blue Amid the Gathering Clouds

Let’s see …

There are thunderstorms expected from the western Great Lakes through north Texas. Snow (seriously, in April?) is expected north of the frozen tundra of Green Bay. And temperatures in the Ohio Valley are in the 70s and 80s. All of which, of course, has absolutely nothing to do with our high today in Phoenix of 93 and the way-too-early onset of triple-digit temperatures coming this weekend.

And that’s really the point today – what is happening nationally in real estate, much like the weather, doesn’t necessarily apply to the Phoenix area.

Let’s go back to April 6, when there was an article on ZeroCrunch that predicted there were 9 million homes lurking in the shadows and ready to come flood the real estate markets, driving prices down once again. I argued then that any additional real estate inventory would not only be welcome, it was desperately needed here in Phoenix.

Moving farther onto that ledge, a couple of days ago I said the primary difference between the hyperactive market of 2005 and today’s hyperactive market (aside from a fairly steady flow of inventory then versus today’s trickles) was the foundation of the market was being built upon the bedrock of cash sales. Defaults of shoddy loans aren’t an issue when value is being determined purely by buyers and sellers and wherever the twain shall meet.

Then came this article on the Bigger Pockets blog yesterday:

But don’t break out the bubbly quite yet.  There’s a monstrous cloud on the horizon.  Some 1.6 to 2 million foreclosures have plugged up the processing pipelines for the past 18 months and now the AG settlement will free them to pour into hundreds of real estate markets across the nation.

In a statement that may go down in foreclosure history for its graphic candor, RealtyTrac CEO Brandon Moore certainly got our attention last week.

“The low foreclosure numbers in the first quarter are not an indication that the massive reservoir of distressed properties built up over the past few years has somehow miraculously evaporated,” he said.  “There are hairline cracks in the dam, evident in the sizable foreclosure activity increases in judicial foreclosure states over the past several months, along with an increase in foreclosure starts in many judicial and non-judicial states in March. 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.”

But wait … this doesn’t appear to a national forecast …

All these new foreclosures are going in one end while very little is coming out the other because faster processing has yet to start.

These new foreclosures are piling up largely in the 26 judicial states, which already have the greatest inventories because lenders have been very carefully processing at a crawl to avoid liability actions while the multi-state agreement was being negotiated. Judicial states combined accounted for 243,074 properties with foreclosure filings during the quarter, an increase of 8 percent from the previous quarter and an increase of 10 percent from the first quarter of 2011. (Emphasis added)

Arizona is a non-judicial state, which is to say we don’t have judicial foreclosures here. In Arizona, the lender files a Notice of Default and a Trustee’s Sale is scheduled for 90 days down the road. At it’s most basic, that’s all there is here. So, while there may be foreclosures stacking up here, it’s not to the degree of the 26 judicial states.

The article on Bigger Pockets also references a November story in USA Today that discussed the amount of time needed to clear this so-called shadow inventory:

Foreclosure sales are moving so slowly in half the states that at the current pace, it will take more than eight years on average to clear the 2.1 million homes in foreclosure or with seriously delinquent mortgages, new research shows.

That’s about twice as long as a year ago in the states where foreclosures go through courts — before the mortgage industry was upended by last fall’s disclosures that court papers in many foreclosure cases were improperly prepared.  (Emphasis added again)

As mentioned a couple of paragraphs ago, Arizona is not one of those states. But don’t take my word for it. Also from the article, according to LPS Applied Analytics:

The process is moving faster in other states, where courts aren’t typically involved. In those, the time to clear foreclosure pipelines — even if no other homes fall into foreclosure — has remained at just under three years, according to LPS.

But wait …

California’s pipeline would take about three years to clear at the current pace of foreclosure sales, LPS says. In Nevada and Arizona, less than two years. Foreclosures don’t go through courts in those states.

So, the tsunami that is supposed to take eight years to clear will be done and over with here in less than two years according to those who track the data closely.

Local weather on the 8’s, indeed.

Ultimately the choice is yours whether to translate the national onto a local scale. So far, the only folks I’ve seen taking ZeroCrunch’s prediction at face value also are busy printing and reading Mein Kampf: The Sequel in their spare time. It’s not a path I suggest.

Jonathan Dalton

Jonathan Dalton is a 40-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at