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Rising REO Prices Are Squeezing Investor Margins

by Steve Cook on June 6, 2012 · 1 comment

  

Competition for REOs is driving up prices significantly in most regions of the country, which in turn is having an effect on investor margins in some of the largest traditional investor markets.

Nationally, REO prices have risen an average of 8.1 percent over the last year on a median price-per-square-foot basis have outpaced non-REO price declines of -0.7 percent by 8.8 percentage points, according to the latest data from Clear Capital.

For those looking for bargains and rely on the discount between “normal” and distress sales, rising REO prices make life more complicated.  Not only are prices higher but the increased demand driving appreciation makes it harder to ferret out good deals ahead of the competition.

Many welcome a rise in REO prices, because it signals a stabilization of the market and suggests that demand will be adequate to absorb the released of additional distressed sales into the market. For investors holding properties in hopes prices will appreciate, the REO price increase is good news, because positive REO numbers suggest overall prices are rising as well.

However, the impact of rising REO prices on overall market prices is limited by the degree of REO saturation. The smaller the REO market share, the less impact rising REO prices have on the overall market, according to Clear Capital.

For example, the Northeast has seen incredible growth in the REO-only sector shown above, yet has only recorded 1.6% gains year-over-year in overall prices. Because the Northeast has a mere 10% REO saturation, the lowest level across all regions, even substantial growth in the REO price segment hasn’t swayed overall prices significantly. Additionally, the Northeast’s REO prices are more sensitive to shifting demand, fueling the seemly high annual gains.

Clearly the Midwest is the only region that continues to see REO price declines on a year over year basis. While REO-only price growth has led the other regions into broader based growth, the Midwest has yet to receive assistance from this sector on overall progress. It’s worth noting that the Midwest’s REO saturation levels are still the highest of all the regions. As such, price weakness in the REO-only segment has been harder for the market to shake off, resulting in sustained declines at the broader level, as seen in overall yearly declines of -3.1%.

However, each of the three regions now seeing gains in REO prices first saw long term reductions in REO saturation rates. And while the Midwest continues to face declines, it has achieved a reduction in its REO saturation rate over the last several years, from a high of 45% in 2009, down to 37% in May.

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