Have foreclosures gotten a bad rap?
For years, economists and policy makers have believed that foreclosures are inherently toxic for neighboring home values. Many therefore assume that a housing recovery will be impossible as long as foreclosures remain abundant. The mere existence of 4 to 6 million properties in the foreclosure pipeline has contributed to a growing consensus among economists that national median prices won’t turn the corner until 2013 at best.
A new analysis of recovery patterns in some of the nation’s markets hit hardest by foreclosures suggests that under the right conditions full value properties large numbers of foreclosures—even greater than a 20 percent saturation of the market—can thrive side by side. The study by data provider Clear Capital was released earlier this week and it may radically change the way we think about foreclosures.
For investors, the study provides both a confirmation of the critical role they play in the recovery of devastated markets and guidelines to help identify opportunities that offer maximum profit potential.
Clear Capital conducted a microanalysis of a number of Florida markets that have been flooded by foreclosures. Many of these markets suffered several waves of foreclosures resulting from the subprime meltdown, the South Florida condo crash, the 2007 recession that kept snowbirds north and the subsequent housing crisis that froze many boomers in place, making it hard to sell their existing homes and buy retirement properties. In markets like Miami, Naples and Fort Myers, prices plummeted 35 percent or more below peak as the foreclosures. About a year ago, inventories shrank dramatically as sellers withdrew from the market in response to prices that were and the flow of foreclosures slowed as processing in Florida, a judicial state, slowed. Low prices sparked demand among investors and foreign buyers, and prices turned around. Among the 50 national markets Clear Capital tracks, sale prices rose 6.7 percent in Orlando last year and In Miami they rose 5.6 percent. Realtor.com’s data shows year to year list prices in Naples and Fort Myers were up by 21 percent, and West Palm Beach by 18 percent. Eight Florida markets had double digit increases in list prices in 2011.
“This positive trend isn’t receiving the attention it’s due because of the interaction of people’s expectations, perceptions and reality,” said John Tucillo, chief economist of the Florida Realtor Association in November. “When you come out of a recession, people expect the real estate market to take a huge jump forward, and when it doesn’t, they perceive that the market is ‘bad’ or still down. However, the reality is that the Florida market is improving and it has been for some time – it’s just improving more slowly than initial expectations.”
What’s even more remarkable about the Florida phenomenon is that prices for both full value and distressed properties are rising simultaneously. Moreover, prices are rising even though foreclosures still account for a lion’s share of listings. REO market share in Orlando fell 21.0 percent last year and 9.9 percent In Miami, but some 24.9 percent of Orlando’s listings and 31 percent of Miami’s listings are still REOs. (Unlike any other data source I know, Clear Capital has market-by-market REO saturation data.)
REO’s Don’t Stop Stability
How large a market share can REOs occupy in a stabilized market? Dr. Alex Villacorta, Director of Research and Analytics at Clear Capital, has no magic number but has seen markets progress towards stability with 20 percent or more REOs. He describes the recovery of deeply depressed market as looking like a see-saw more than a straight line. Foreclosures drive down prices when large numbers hit a market at once, causing a shock to the system. Prices adjust downward and eventually they reach point where investors step in to buy up bargains and create a new demand. Other buyers follow suit and prices rise. Eventually price swings lessen as the market reaches stability, which Villacorta defines as 2.5 percent a year or less as supply and demand reach equilibrium. As Tucillo suggested, Florida is not there yet, nor are many other markets.
In fact, Villacorta found that in 2011 only 12 of the top 50 metro markets returned year-over-year price movement that can be considered stable—price swings of less than 2.5 percentage points.He expects this to continue into 2012, with only 40 percent, or 20 out of 50 markets, being considered stable. Below are his price predictions for this year’s top 30 markets. (For a complete list, see the report.)
50 Major U.S. Metro Markets Price Change (2012 Forecast)
Metropolitan Statistical Area
2011 Observed Rank
|Washington, DC – Arlington, VA – Alexandria, VA|
|Phoenix, AZ – Mesa, AZ – Scottsdale, AZ|
|Miami, FL – Fort Lauderdale, FL – Miami Beach, FL|
|Tampa, FL – St. Petersburg, FL – Clearwater, FL|
|Dallas, TX – Fort Worth, TX – Arlington, TX|
|Cleveland, OH – Elyria, OH – Mentor, OH|
|Houston, TX – Baytown, TX – Sugar Land, TX|
|New York, NY – Northern New Jersey, NJ – Long Island, NY|
|Portland, OR – Vancouver, OR – Beaverton, OR|
|Denver, CO – Aurora, CO|
|San Jose, CA – Sunnyvale, CA – Santa Clara, CA|
|New Orleans, LA – Metairie, LA – Kenner, LA|
|Boston, MA – Cambridge, MA – Quincy, MA|
|Oklahoma City, OK|
|Providence, RI – NewBedford, MA – Fall River, MA|
|San Francisco, CA – Oakland, CA – Fremont, CA|
|Milwaukee, WI – Waukesha, WI – West Allis, WI|
|Charlotte, NC – Gastonia,NC – Concord, NC|
|Cincinnati, OH – Middletown, OH|
|Virginia Beach, VA – Norfolk, VA – Newport News, VA|
Villacorta expects Florida markets to extend their impressive 2011 performances into 2012. Miami and Tampa are projected to be among the five highest performing metros with 8.8 percent and 7.4 percent growth, respectively, and Jacksonville is forecast to gain 4.3 percent, placing it at a respectable eighth among the top metro markets. The exceptional growth in these markets can be a result of several factors, including being hit especially hard in the downturn. While fighting back, they remain significantly off their highs of 2006. Other factors in play in these markets include large increases in the values of their lower priced homes (near double-digits for all markets) when compared to higher priced segments of the market, and a high percentage of all cash transactions (51.8 percent) when compared to other metros.
Investors Initiate Recovery
Villacorta expects a high degree of investor activity to drive up demand as they look for bargains in Florida and elsewhere. In his view, investors are absolutely crucial to the process of recovery because, like tinder igniting a fire, they initiate stabilization by buying properties at the bottom and encourage other buyers to follow. He would advise investors this year to move very carefully. “Although ‘stable’ and ‘flat’ have been used to describe the performance of 2011 and forecast for 2012, the performance of individual metro markets has not been flat at all.”
Villacorta advises investors to take into consideration peak and trough values, and to look for markets with the greatest spread between the two. Then they should research a market to get a perception of whether a recovery is underway and an understanding of where it stands today by regularly tracking each a market’s performance as numerous dynamics, including varying REO saturation, unemployment levels and whether there is a sense of confidence in the market shown by move up buyers . “Success in 2012’s real estate market will be driven by picking markets carefully and fully understanding local drivers,” he said.