The “State” of REO

As the REO Gold Rush on the West Coast dries up, bonanzas migrate south

• Nationally, the proportion of short sales and REO (Real Estate Owned) sales rose 2.2 percentage points in Q1 2015. The nation has not observed an increase this large since Q1 2012, when distressed saturation hit its peak nationwide at 38%.
  • The rise in distressed property sales in Q1 2015 comes on the heels of home price moderation across the country since the end of 2013 and throughout 2014.
  • The national distressed (short sales and REOs) saturation rate of 18.9% distributes regionally with 13.7% of sales in the West, 23.2% in the South, 15.1% in the Northeast, and 22.1% in the Midwest.
  • Quarter-over-quarter, all four regions saw an increase in distressed saturation. The West increased by 1.4 percentage points, the South by 2.1, the Northeast by 2.6, and the Midwest with the largest gain of 3.8 percentage points.
  • Investors seeking low prices with high yield took advantage of distressed opportunities, helping some of the recession’s hardest hit metros. They reduced high rates of distressed saturation by creating demand in the absence of traditional home buyers at the start of the recovery. In turn, this helped drive up prices in key recovering MSAs (Metropolitan Statistical Areas).
  • With the West seemingly tapped out of these deals, the distressed migration moves south to hotspots like Florida. (See Map 2.)
  • It should come as no surprise that the Northeast and Midwest, the two regions with the largest increase in distressed saturation, are made up of 78% and 67% of judicial processing states, respectively.
• Not so sunny in Florida. Florida is home to four of the five Top 50 MSAs with the highest percentage of distressed sales. Florida’s distressed saturation rate of 30.6% is higher than that of the entire Southern region by 7.4 percentage points.
  • Orlando – Of the Top 50 metro areas, Orlando has the highest percentage of distressed saturation in Q1 2015 at 37%. Over the past three quarters, distressed saturation has slowly ticked up by at least one percentage point per quarter. Conversely, price growth over the past three quarters has begun to slow, 0.5% in the current quarter, down from 3% one year ago.
  • Miami-Fort Lauderdale-Miami Beach – Miami’s distressed saturation rate of 29.9% has also increased over the last three quarters. Naturally, price growth has also slowed in Miami, with its current Q1 2015 rate of growth at 1.1%, down from 3.8% a year ago.
  • Florida is a judicial-only state, where the foreclosure process is slower than in non-judicial states. The uptick in distressed saturation and drastically moderating prices in the past year could mean that there is a backlog of shadow inventory hitting these judicial markets. If the supply continues to increase faster than demand, this area could see prices continue to fall, creating more uncertainty in overall home prices yet also potentially offering a housing bonanza with deals for investors and traditional home buyers alike.
• The Foreclosure Obstruction. The rise in Q1 foreclosure rates suggests an abundance of distressed inventory still available in the market. The pace of the judicial process is sure to obstruct the flow of distressed inventory through the market. Judicial states, like Florida, could expect to be backed up for some time, belaboring a healthy recovery in certain markets. (See Graph 1.)

“The rise we’re seeing in distressed saturation across the board is another sign that the legacy issues from the housing collapse are still being processed today, and suggests that homeowners are still trying to find a foothold in a slowly improving economy,” says Alex Villacorta, Ph.D., vice president of research and analytics at Clear Capital. “The judicial process has clearly delayed the processing of many distressed homes, and as a result the steady, and in some areas, high proportion of distressed activity is showing signs of dampening overall growth rates. Historically, we have observed distressed saturation increase during the winter months, but given the other headwinds already blowing against the broader market, this will warrant close monitoring once the traditional home buying season returns.”

Zip Code Level Short Sale & REO Saturation
Zip Codes with distressed saturation above 35% are shown as Red in Maps 1 and 2. Distressed saturation has made a marked improvement in the Western part of the country between the first quarter 2011 (Map 1) and the current first quarter 2015 (Map 2). However, the South, Midwest, and Northeast currently have large areas that are still seeing 35% or more of all real estate transactions falling into the distressed category.

Map 1. Percentage of distressed saturation throughout the nation at the peak of distressed saturation rates. Source: Clear Capital

Map 2. Though the magnitude of distressed saturation since 2011 has diminished, distressed saturation continues to increase, particularly in Florida. Source: Clear Capital

Graph 1. Distressed Saturation By State. Judicial vs. Non-Judicial, Through March 2015. Source: Clear Capital

Chart 1: National and Regional Markets – March 2015. Source Clear Capital

Chart 2: Highest Performing Major Metro Markets – March 2015. Source Clear Capital

Chart 3: Lowest Performing Major Metro Markets – March 2015. Source Clear Capital

About the Clear Capital Home Data Index (HDI) Market Report

The Clear Capital HDI Market Report provides insights into market trends and other leading indices for the real estate market at the national and local levels. A critical difference in the value of the HDI Market Report is the capability of Clear Capital to provide more timely and granular reporting than nearly any other home price index provider.

The Clear Capital HDI Market Report

• Offers the real estate industry (investors, lenders, and servicers), government agencies, and the public insight into the most recent pricing conditions, not only at the national and metropolitan level, but within local markets as well.
• Is built on the most recent information available from recorder/assessor offices, and then further enhanced by adding the company’s proprietary streaming market data for the most comprehensive geographic coverage and local insights available.
• Reflects nationwide coverage of sales transactions and aggregates this comprehensive dataset at ten different geographic levels, including hundreds of metropolitan statistical areas (MSAs) and sub-ZIP code boundaries.
• Includes equally-weighted distressed bank owned sales (REOs) from around the country to give the most real world look of pricing dynamics across all sales types.
• Allows for the most current market data by providing more frequent updates with patent pending rolling quarter technology. This ensures decisions are based on the most up-to-date information available.

Clear Capital HDI Methodology

• Generates the timeliest indices in patent pending rolling quarter intervals that compare the most recent four months to the previous three months. The rolling quarters have no fixed start date and can be used to generate indices as data flows in, significantly reducing the multi-month lag time experienced with other indices.
• Includes both fair market and institutional (real estate owned) transactions, giving equal weight to all market transactions and identifying price tiers at a market specific level. By giving equal weight to all transactions, the HDI is truly representative of each unique market.
• Results from an address-level cascade create an index with the most granular, statistically significant market area available.
• Provides weighted repeat sales and price-per-square-foot index models that use multiple sale types, including single-family homes, multi-family homes, and condominiums.