John Fariss - Appraiser Bakersfield, CA

As an appraiser in Bakersfield, the rate of foreclosures is an important statistic to watch for our market conditions. Again, for the purposes of this post, foreclosures are considered to be those properties where a Trustee's Deed has been recorded, indicating that the lender has taken possession of the property. In November we posted that the rate of foreclosures in Kern County, CA was on the decline. Well, the decline came to a soft stop.

The foreclosure rate inched up in November to 550 from 520 foreclosures in October. Not too bad. Well below the high of 1,000 in August. However, the increase continued in December pushing foreclosures to 663 for the month. This rate really needs to continue to decline to relieve the downward pressure on home prices in Bakersfield and Kern County. However, as noted in the prior post, there were a record number of rate resets in October and November, so this rate may continue to climb in the foreseeable future.

The year ended with a record number of foreclosures, certainly the highest in the past 13 years: 8,560. The next highest year was 2007 with 3,007 foreclosures, a rate less than half of last year. Between 1995 and 2004 the average yearly rate was 1,930. With a rate 4.45 times the annual average, it's no wonder that Bakersfield ended up in one of the top ten cities for home price declines in the country.

Watching this rate in the first quarter of 2009 will be very important. Home prices are at levels that are much more affordable now in Kern County. If foreclosures continue at rates similar to 2008, prices will drop back down to levels similar to the late-90's and early-00's when per square foot prices hovered in the $70 range for 8 years.

The Bakersfield Appraiser

First of all, when I say foreclosure, I'm referring only to those properties where a Trustee's Deed has been recorded, or if it is on the market, is listed as an REO. Based on my data compiled from local listing services and the county recorder, the number of foreclosures has been declining for the past two months. That's not a significant amount of time, but it rules out that the first month decline was a fluke.

For 23 months the number of foreclosures recorded each month were steadily increasing. September was the first month with fewer foreclosures than the prior month. October has continued that trend. Don't get too excited though...the number of foreclosures is still very high: 1,000 in August, 871 in September, and 520 in October. Those foreclosures all end up on the market, and they comprise a HUGE portion of the listed supply. As of last quarter, REOs were 73% of the sales through the local MLS. So, with 500+ foreclosures happening every month, the supply of homes for sale will remain high, but if the decline in foreclosures continues, the supply will decrease and prices should start to level out. At least that's the supply/demand theory.

Before we all get excited, there's one bit of news that's not so rosie. October and November were/are supposed to be record months for loan resets. That means interest rates just might be jumping for a significant portion of borrowers. If that's the case, then we can expect to see another jump in foreclosures during the first and second quarters next year flooding the supply again and pushing prices down.

This is a very important piece of the market right now and should be watched closely. Lenders are fully staffed now to handle all these foreclosures and seem to be getting them on the market very quickly now. Be sure to keep your eye on these numbers: foreclosure (trustee deed) recordings and local supply; you can do so using the FAS Report or checking out foreclosure listings.

To close on a positive note, sale volume has been on the increase for the past 4 quarters which is helping keep the supply relatively low.

The Bakersfield Appraiser

So, where is the Bakersfield real estate market headed? That's a difficult question to answer because of the many variables that affect this market. Food and gas prices are increasing. We're headed into an election. Foreclosures are skyrocketing. We've probably seen the last of fed rate cuts.

All other factors aside, the biggest affects on the local market right now is foreclosures and short sales which make up over 50% of the listings and sales right now. Lenders are getting more aggressive with pricing which is forcing everyone to lower prices to compete.

Sale volume has been strong: there were 850 sales in Q1 2008 which is about the same as Q1 2007. Marketing times also remained similar: typically 2-4 months for competitively priced properties.

Prices are a differenct story. The average sale price in Q1 2007 was $319,371 and the median was $280,000, and in Q1 2008 the average was $247,180 with a median of $228,950. The total dollar loss in Q1 2008 versus Q1 2007 is over $70 million. The average per square foot price in Bakersfield has dropped from $196 to $135, over a 31% decline in 1 year.

The supply of homes for sale is down from the peak which was near 4,500 last year. Since October, the supply has declined from 14 months to just over 11 months. As the supply of available homes decreases, the decline in prices should slow, provided sale volume remains at least the same. If the flood of foreclosures and short sales decreases then we should start seeing prices stabilize and supply decrease, but if we continue at the current rate of defaults, values will continue to decline.

Regardless of what happens with foreclosures, one fact remains: prices have declined enough that they are affordable again. That means buyers are entering the market again which will eventually put an end to the housing crisis.