Let’s start with a pop quiz. Which metro last quarter topped RealtyTrac’s list of best REO markets?
Vegas? No dice. Miami? Nope, prices are up in Miami. Phoenix? No way, Phoenix ranked second nationally in price increases last quarter. Of course, you read the title of this article, so already you knew the right answer wasn’t a Sand State city.
How about Milwaukee?
That’s right; the foreclosure discount capital of the nation is Milwaukee, where the difference between median REO prices and non-REO properties was 57.9 percent in the fourth quarter even though there were only 538 REO sales in the market.
Milwaukee is even more proof that when it comes to prices and market stability, what counts most is not so much the volume of REOs in a market but how they come into the market. Housing markets are like sponges soaking up spilled suds. They can absorb a lot of REOs as long as they come in sips, not steins. On the other hand, even Milwaukee’s 500 foreclosures among 7600 total listings can wreak havoc on prices (and create bargains for investors) if they arrive by the keg. (Sorry about the beer metaphor).
Ready for another? Which market in the nation was ranked lowest performing in February by Clear Capital in terms of quarter over quarter price declines?
If you guessed Cleveland, you were right. Prices were down 9.4 percent from the previous three months and down 7.3 percent year over year. Cleveland would have fared even worse if its inventory wasn’t down 14.81 percent from a year ago and the age of its inventory down 4.86 percent.
Two factors are causing the current extraordinarily low inventories around the nation (see The Inventory Story: More REOs on the Way.) One is sellers holding out for better prices, which isn’t going to change in Cleveland as long as prices keep heading south. A second is the shortage of REOs, which will be solved soon enough as the lenders process properties backed up by the Robo-signing Scandal. A judicial state, Ohio has more than its share of foreclosures delayed in the process. Soon enough they are going to arrive on the Cleveland market.
Local investors should bide their time until that occurs over the 60 to 90 days. If REOs come in as a wave, they will create remarkable bargains; if not, the market may be able to weather the influx without further declines.
Not just Milwaukee and Cleveland but the Midwest as a region is suddenly the center of price declines and soaring REOs. Prices were down 1.8 percent, quarter over quarter and 4.3 percent year over year. REO saturation increased 2.1 percent, reaching 32.2 percent for the region as a whole, far above the national median of 25.8 percent.
Other Midwestern markets with high REO saturation levels are Columbus (31.5 percent), Minneapolis (42.2 percent), Detroit (49.1 percent), Chicago (33.4 percent) and Dayton (30.1 percent). Even at their high levels, Columbus and Minneapolis managed modest price gains of 3.6 percent and 1.1 percent over the winter months of December through February. However, during the same period prices fell 4.5 percent in Detroit, 2.2 percent in Chicago, and 1.7 percent in Dayton.
One reason the Midwest is looking so bad is that the rest of the nation, especially the “Sand States” which bore the brunt of the foreclosure plague for so long, is looking better. The spotlight is now on a region that differs dramatically from Florida, Arizona, Nevada and California in ways that could affect their appeal to investors.
- Few Midwestern markets experienced the boom from 2001 to 2006 to the same degree as the Sand States, which suggests they may not have as much upside potential. Nor did they experience the 2007-2009 bust, but unlike markets in Florida and other foreclosure areas, their prices are still dropping and are far from stabilized.
- Unlike some Sand States, especially Florida and Las Vegas, their markets have little appeal to foreign investors.
- For domestic investors interested in buying and holding, few Midwestern markets attract resort or retirement renters. Their rental markets are entirely driven by local employment, which is not a pretty picture in some Midwestern cities.
- Support services, such as property management and rental marketing, are hard to find.
Six of the nation’s 23 judicial states are in the Midwest: Illinois, Indiana, Iowa, Kansas, Ohio and Wisconsin. Some, like Kansas and Iowa have had relatively low numbers of defaults, and the backlog of foreclosures to process is not as serious as Illinois, Wisconsin and Ohio. How the release of foreclosures in the wake of the AG settlement is handled locally will determine how long it will be before the Midwest joins the nascent housing recovery.