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Where Oh Where Have All the Distressed Sales Gone?

by Steve Cook on September 27, 2012 · 3 comments

  
New Haven, CT

The signing of the Attorneys General agreement five months ago was supposed to speed up foreclosure processing and move more properties through the pipeline faster than we’ve seen since Robogate.  Over the past year, new initiatives by the GSEs and the biggest banks, and improved transaction management technology were supposed to get record numbers of short sales to closing faster and easier than ever.

So what the heck happened?

If you’re an investor frustrated by the paucity of good deals in your market, here’s some data that might make you feel better because you’re not alone:

  • In July, sales of foreclosed and REO properties reached their lowest level since January 2008, making up just 14.1 percent of all home sales. The 17.4 percent decline in foreclosed and REO sales reported from June to July was the largest decline Radar Logic has recorded, having begun tracking the data in 2000. Year-to-date foreclosed and REO sales have declined 39.9 percent.
  • For the seventh straight month in June, the GSE’s REO inventory declined as more properties exited the stock of inventory than entered. Property dispositions stood at 74,743, while property acquisitions were fewer at 63,816 in the second quarter. Overall, REO inventory at the end of the second quarter totaled 162,537, down from 173,464 in the first quarter of this year and 196,318 in the second quarter of 2011.
  • Despite breathless predictions that short sales would flood the market this year, so far they aren’t making much more than a puddle.   As of June, short sales were down 13 percent from May and 6 percent from a year ago according to CoreLogic as cited in the monthly HUD ScorecardRealtyTrac also reported pre-foreclosure sales down 10 percent in the second quarter from the first quarter and down 9 percent from Q2 2011.
  • Taken together short sales and foreclosure sales ended the summer with a smaller market share than a year ago. NAR reported distressed sales accounted for 22 percent of August sales (12 percent were foreclosures and 10 percent were short sales), down from 24 percent in July and 31 percent in August 2011. Foreclosures sold for an average discount of 19 percent below market value in August, while short sales were discounted 13 percent.

Making things tougher these days for average investors are several dozen hedge fund financed new players bidding up foreclosures at the courthouse steps.  Attracted by reports of 8 percent margins and the promise of a secondary market in single family rental-based securities, some of these have plans to spend as much as a billion dollars on distressed properties.

Many set their hopes on reports of large numbers of backlogged foreclosures still stuck in the pipeline months after the settlement, especially in judicial states and states like Nevada and Maryland that have passed legislation on behalf of consumers that is resulting on slowing processing even more.  (See Legislating Disaster in Nevada and Maryland: Good Intentions Gone Wrong).  Unfortunately, it’s become increasingly clear the “foreclosure tsunami” won’t be much more than a summer shower. (See New Weather Forecast: Stop Worrying About the Foreclosure Tsunami)

A new report released today by Pro Teck Valuation Services provides further evidence that there will be no flood of backlogged foreclosures let loose on the market nationwide.

“With regard to the U.S. foreclosure inventory, there has been a misperception that it is a problem for the entire market.  In fact, it is quite concentrated in specific cities and neighborhoods,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “For this reason, potential buyers who have been waiting for bargain prices in desirable neighborhoods may be disappointed.”

Pro Teck’s Home Value Forecast update lists ten top performing CBSAs (Core Based Statistical Area) and ten bottom CBSAs where this month, some continue to have double digit months of remaining inventory.  However, a number of the metro areas have a fair percentage of trends moving in a positive direction, which is quite a difference from a year ago.

The bottom CBSAs for September were:

  • New Haven-Milford, CT
  • Bridgeport, Stamford, Norwalk, CT
  • Augusta-Richmond County, GA-SC
  • Rochester, NY
  • Spokane, WA
  • Portland-Vancouver-Hillsborough, OR-WA
  • New York-White Plains-Wayne, NY-NJ
  • Edison, NJ
  • Nassau-Suffolk, NY
  • Newark-Union, NJ-PA

Additional markets Pro Teck characterized as having high foreclosure inventories are North Las Vegas, Lancaster and Palmdale in Los Angeles County, and cities in the western part of Maricopa County such as Avondale and Buckeye.

These near term conditions must also be viewed in the larger context.  Home equity is improving, freeing 1.3 million homeowners from negative equity this year.  Serious delinquencies and defaults have been declining steadily for two years.  Defaults have been declining for years.  Foreclosure starts in August were half of what they were in 2008.

It’s becoming clear that this will be a watershed year in the business of buying and profiting from distress sales.  In many markets, the discounts and variety available one or two years ago will probably never return.  In others investors can track foreclosure inventories closely to identify opportunities, like fishermen using sonar to find their quarry.  Yet those opportunities will continue to exist, especially where state laws make the foreclosure process longer than it need be.

Photo: Doc Searls

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{ 3 comments… read them below or add one }

Dale Osborn September 27, 2012 at 12:00 pm

There are still a few of us who heard a rumor it was to pick up in the 4th quarter of 2012 waiting on the sidelines. If your data is correct and it does not happen, I guess we will be left waiting on the sidelines! Another rumor besides the intervention of hedge funds was the selling off of the properties in large blocks to major investors who then turn around and retail the properties to other investors. It will soon be the 4th quarter of 2012 so will have to hold my breath and cross my fingers that properties become available during this time frame!

Reply

Steve Cook September 27, 2012 at 12:26 pm

Dale,

I have no crystal ball and I ciould be wrong. Figurng out what the heck is going on with foreclosure backlogs right now is virtually impossible for ordinary people like you or me.

However, I do believe that in the near future “national” trends wont be very useful and that inventories will vary greatly on a state asnd local basis, largely due to state law, as noted by Pro Teck. I would suggest that it might be a good idea to track local pre-foreclosure and foreclosure inventories through a good service and be prepared to take advantage of opportunities.

There were foreclosures long before 2007 and there will be foreclosures after the Foreclosure Era ends, just not nearly as many. Successful investors will change their strategies and business models to accommodate the changing marketplace.

Thaks for yor comment,

Steve

Reply

Greg Hancock September 29, 2012 at 5:48 am

Thanks for this post Steve,

I respect and feel your surmise is absolutely correct. I believe it’s important for investors (and owner-occupants) to understand the market from another angle or two. Deep discounts. They do seem to be scarcer, but perhaps banks and HUD have learned some lessons in pricing.

For instance, here in Ohio we saw in 2011 that about 80% of homes sold, did so around 85% of the asking price, and in 2012 we see the sales more in the 92-94% range. Not all, but most. Greene County is an excellent example of this. Days on market have gone down as well. I believe banks and HUD (though a long way to go) seem to be learning to price more aggressively and effectively. So, perhaps one way to consider it, is not such much disappearing discounts, but better pricing. Though the days of seriously deep discounts seem to be over.

I often see and hear the “doom and gloom” of National Media’s take on real estate, housing markets will always be a highly local phenomenon. While many states suffer, others are healing, even beginning to thrive. Here in the “Buckeye” (Ohio) we see incredible market activity, but due to unique events. For instance, Ohio finally embracing legalized gambling, with major casinos under construction and due to open in Spring. Investors and buyers are snapping up properties in anticipation of higher rents and home values, more and better job opportunities. CNN recently named several Ohio communities including West Chester and Springboro among the “Top 100 Places to Live”, and the eighth best state to own or start a business. A complete reversal of fortune. I moved here from California, no explanation needed there!

Hamilton County would be a prime example of all of this. Hamilton County (home of Cincinnati) had many more multi-family, foreclosures, “starters” and properties prime for flips and rehabs in 2011, however, there’s still and astounding 6,500+ properties from low budget to luxury homes and ample opportunity for investors.

Yes, investors will need to adapt. Some buy and flip, but we also see many investors buying, holding, renting and waiting for values to increase more. Not a bad idea.

Greg

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