California housing prices have been trending upward of late, buoying spirits, although not quite as dramatically as last week’s announcement of a sharp drop in foreclosures.

Foreclosure notices declined 62% in January compared to the month before and were down 75% from one year before. The state decline led the nation, which as a whole saw an 11% drop in January foreclosures from December and a 28% drop from a year ago.

Ideally, a healthier housing picture should be the result of higher employment, economic growth and the disposal of toxic mortgages lingering on bank books. That hasn’t been the case. All three factors have marginally improved in California and the nation, but not enough to account for the state’s eye-popping foreclosure numbers and rising prices.

Although banks have reasons of their own for holding off on foreclosures, many analysts are pointing to the California Homeowners Bill of Rights, legislation that became law on January 1, which restrains financial institutions from taking a pound of flesh from homeowners while the bodies are still warm.

The law has a number of features. It restricts dual-tracking, a process where the mortgage servicer forecloses on a property while the owner is trying to secure a loan modification. It guarantees a single point of contact for homeowners trying to navigate the foreclosure system, levies $7,500 fines on lenders who record unverified documents, extends the statute of limitations on mortgage fraud and gives tenants in foreclosed properties at least 90 days notice before eviction can begin.

But underpinning these changes are record-low interest rates imposed by the Fed, poor fixed-rate returns, low housing inventory, a heavy influx of foreign money and investors looking for property they can rent or flip. Dr. Housing Bubble, a blogger who wears his bias on his nameplate, noted that investor buying hit a record high in 2012. More than 32% of all California homes sold in 2012 went for cash, the vast majority of which were not owner-occupied dwellings.

According to the doctor, those in California who aren’t investors are taking out jumbo loans and engaging in short sales. He also notes that “unlike previous generations this group now approaches the home buying market with over $1 trillion in student loan debt.”

“The only way we keep moving at the current pace is if all of the above groups continue to purchase: investors, flippers, foreign money, FHA loans, low Fed rates.  Missing from the equation is household income growth but then again, this is repeating the history of the first bubble run.”

The good doctor does not offer a quick cure and consumers are not oblivious. The Consumer Confidence Index, released on January 29, declined from 66.7 in December to 58.6, erasing all of the gains made through 2012.  

–Ken Broder

To Learn More:

Foreclosure Filings Drop to 6-Year Low on California Law (by Dan Levy, Bloomberg)

Foreclosures Drop 75% Following Passage of Homeowners Bill of Rights (by Rebecca Brand, California Progress Report)

All Cash Buying Hits a Record in 2012 (Dr. Housing Bubble)

U.S. Foreclosure Starts Fall to Six-Year-Low in January (RealtyTrac)