The fall in housing prices -- like falling prices anywhere, really -- has the effect of perpetuating itself, by scaring would-be buyers. Nobody wants to catch a falling knife, particularly if they have to borrow a lot of money to do it.

So you'd think that the correct strategy would be to site on the sidelines, wait, watch for home stabilization, and then buy. And since nobody thinks the market will just shoot back up in a straight line, there's really not much reason to worry about waiting. Patience is advised.

But even stabilization may be misleading.

The Field Check Group has a good post looking at the San Diego housing market and warning about a "false bottom" in prices. The basic issue is something we discussed yesterday, between the foreclosure moratorium, the ongoing growth in new foreclosures, and all the bank-owned homes that are currently on the market, there's a fresh supply of homes a-comin'. And the indication is that buyers aren't ready for it.

It's a very long, chart-filled piece, but here's a taste:

But before you get too excited about the prospects of San Diego real estate and put in an order for a pool of REO’s to flip or notes to work out, a wave of foreclosures is coming.

In the past three months alone, Notice-of-Trustee Sales are back at near peak levels of 2500 per month. An NTS is the second stage of foreclosure that comes 14-60 days prior to the property being taken to the courthouse and sold.

With most loss mit and mortgage mod plans known to servicers now, there is little reason to file an NTS unless in fact the property has a good change of going to foreclosure. With San Diego sales at about 3k per month, 2500 NTS per month could cause a serious supply/demand imbalance that must be absorbed for this market to become and remain healthy. This will be especially difficult considering that the peak sales season ends in August and Notice-of-Defaults (two charts down) that feed NTS, have also surged recently. Judging by the flow, recent NODs will feed foreclosures perhaps through the end of the year — that is as far out as we can see.

This NTS surge is especially troubling considering that foreclosure related supply only presently makes up approx 15% to 20% of total housing supply and Ma and Pay Organic homeowner make up the rest. With 3000 monthly sales and supply coming at a rate of 75% of total sales, that does not leave a lot of demand for organic sellers. First timers and investor can’t carry this entire market on their own. Organic sellers must be able to sell and re-buy in order to keep demand stable and strong.

Notice-of-Defaults – the first stage of foreclosure that occurs after a borrower misses 3-4 payments — have surged in the past five months. The dip down in 2008 was solely due to a CA moratorium law — SB1137 — that had the effect of kicking the can down the road.

There have been more new Notice-of-Defaults each month for the past five months than properties sold. NOD’s turn into foreclosures within 5-8 months — this is not a great sign. The new mortgage mod initiatives had better work well.

Read the whole thing >