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Report: Short Sales, REO Experience Largest Increase in Three Years

April 9, 2015

Author: Brian Honea April 6, 2015

The percentage of short sales and REO sales jumped by 2.2 percentage points in the first quarter of 2015, the largest increase since the first quarter of 2012, according to data released by Clear Capital on Monday.

Three years ago, the last time distressed saturation rate experienced an increase that large, nationwide distressed saturation hit a peak of 38 percent. For Q1 2015, the distressed saturation was reported at 19.8 percent nationwide with the largest share in the South at 23.2 percent. The smallest share was in the West at 13.7 percent.

All four regions – the South, the Northeast, the West, and the Midwest – saw an increase in distressed saturation rate in Q1 from the fourth quarter of 2014, according to Clear Capital. The largest increase was in the Midwest, at 3.8 percentage points. The rise in distressed saturation comes on the heels of home price moderation that began in 2013 and continued throughout 2014.

“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,” said Alex Villacorta, Ph.D., VP 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.”

Florida, which has been the state hit hardest by the foreclosure crisis, had a distressed saturation rate of 30.6 percent in Q1, more than 7 percent higher than any other state in the Southern region. Orlando had the highest distressed saturation rate in Q1 out of the top 50 metro areas with 37 percent. Florida is a judicial foreclosure state, where the process must pass through the courts to be complete.

“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,” the report said. “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.”

Investors who sought low prices on distressed inventory with a high return on investment took advantage of opportunities in Q1. With an absence of traditional homebuyers, investors reduced high distressed saturation rates by creating more demand, thus driving up home prices in key recovering metros, according to Clear Capital.

The Clear Capital report suggests that that the uptick in foreclosure rates in Q1 indicates that there is an abundance of distressed inventory still available, but the slow pace of the judicial foreclosure process is likely to obstruct the flow of distressed inventory.



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