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May 15th, 2012

REO prices rising, but is this good for you?

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foreclosure open houseIn recent years, many housing experts have pointed the finger at foreclosures for driving down prices and the housing market overall.

But in an unusual twist, foreclosure prices are now rising in some markets while the price of non-distressed real estate falls.

Increasing sales of real estate owned by banks–commonly known as REOs–to investors recently have caused foreclosure prices to tick up. Meanwhile, home values for non-distressed real estate has continued to decline in recent months.

According to the Clear Capital Home Data Index Market Report, from April 2011 to April 2012, sales prices for REO sales rose 5.5 percent, while prices for non-distressed sales dropped 2.9 percent.

Could the increase in REO sales prices bode well for the general housing market in the coming year?

“If REO prices continue to go up, it will stabilize the lower end of the national housing market, which is a necessary first step for improvement in the market overall,” says Rick Sharga, executive vice president of Carrington Mortgage Holdings in Santa Ana, Calif. “But REO prices are only one factor that impact[s] the real estate market.”

Rising sales, rising prices

Sharga says that an increase in the overall level of new-home sales typically will drive prices up all over the market. However, he says that the limited availability of financing for jumbo loans is hurting the high end of the housing market, so that most home purchases are in the low to mid-price range.

Read: 4 factors in the rent vs. buy decision

According to Clear Capital’s report, “Going forward, the sensitive balance between the REO supply and demand will help determine how market prices react to shifts in REO saturation. If REO-to-rental investment activity continues or increases, it is likely to provide the lift needed to support price increases, especially as we enter the summer buying season.”

Sharga says that he believes REO prices have risen because of a classic supply-and-demand scenario, rather than a wave of investor purchases.

“What’s causing price increases is the lack of foreclosure inventory,” says Sharga. “Most investors who want to buy foreclosures in bulk have been unable to do so.”

Read: Buying a foreclosure? It’s more than just cheap real estate

Another reason the average price of foreclosures may be rising is that the foreclosures on the market now tend to be more expensive homes, since lower-priced homes fell into foreclosure earlier in the housing downturn, Sharga says. REO prices are higher as well because many servicers are making repairs in order to improve their return on investment.

Regional REO impact

Some areas that have been hardest hit by foreclosures have seen price increases in their overall market because of increased REO sales. For example, in Phoenix, values rose 3.8 percent over the past quarter. Phoenix has been No. 1 or No. 2 among the top 15 performing markets since February, according to Clear Capital.

The REO portion of sales rose to 27.9 percent of the national market in March 2012, with every region of the country showing an increase compared to November 2011, according to Clear Capital. In the Midwest, 37.1 percent of all sales in March were REOs. Such transactions made up 33.3 percent of sales in the West, followed by 25.3 percent in the South and 10.2 percent in the Northeast.

“The states with the highest foreclosure rates are seeing the highest REO sales now, but you can’t necessarily assume that REO prices and market home prices will rise in those areas,” says Sharga. “You have to look at local market economics, too, such as job growth.”

Investors vs. owner-occupants

Sharga says that many available REO properties do not appeal to owner-occupants because of the level of work required to make them livable. Investors who buy multiple properties often have the ability to hire contractors for several projects at one time.

“We’re in a unique time in the market with a year-over-year decline in homeownership and demand for rental properties,” says Sharga. “This is an opportunity to remove distressed properties from the market and to stabilize rising rent prices. This will allow supply and demand for the rest of the housing market to work itself out over the next two to three years.”

Sharga also says that it’s better for the market to have an investor-owned rental property than an abandoned home.

“There are 140 million single-family homes in the country and about 800,000 REOs, so even if all of them were purchased by investors and converted to rental properties, it would be a fraction of 1 percent of the housing inventory,” says Sharga.

He says all the trends, including the rise in REO prices, suggest that the housing market has bottomed out.

“People who have been waiting for an opportunity to buy may want to get serious now,” says Sharga.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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