Sales of distressed properties are at a 10-year low
Investors account for about 20 percent of all existing-home purchases, according to the National Association
of Realtors. With home sales estimated at 5. 5 million units for 2017, that means the investor-purchased share is
about 1.1 million homes.
Conventional wisdom is that most investors look to purchase distressed inventory — bank-owned homes (REO),
short-sale properties, or homes being sold at foreclosure auctions. But new numbers suggest that something
very different is actually taking place in today’s housing market.
Data provided by Attom Data Solutions, current through this past
October, indicates that distressed-property sales in 2017 were at their
lowest level since 2007, when just
shy of 450,000 such homes were
sold. The vast majority of those
2007 sales — almost 313,000 —
were REO assets.
Those of you who have been in
the industry long enough remember that the mortgage market
meltdown began in 2008, and the
subsequent foreclosure tsunami
was unlike anything anyone had
Distressed property sales peaked
in 2011, with over 1.2 million distressed homes sold, representing
some 28 percent of all existing-home sales.
Since 2013, the number of distressed-property sales has been steadily dropping, however. That figure was
projected to be less than 10 percent of all homes sold in 2017. The mix of distressed assets also has shifted
significantly, with far fewer homes being repossessed by noteholders and converted to REO inventory.
It’s likely these trends will continue in 2018, given delinquencies and defaults are both running below pre-recession levels. Further, ongoing home-price appreciation continues to reduce the number of borrowers who
are underwater on their loans, and will consequently reduce the number of short sales needed.
On balance, all of this is good news for the mortgage industry. Fewer underwater borrowers, fewer delinquencies, fewer short sales and fewer foreclosures add up to a much healthier lending ecosystem, and those
dynamics allow lenders to focus on building new business instead of fixing problems that have continued to
linger since the Great Recession.
There are, however, some implications hidden in these numbers that are worth watching. According to Black
Knight’s October 2017 Mortgage Monitor report, the percentage of loans in foreclosure stood at 0.68 percent.
A foreclosure rate below 1 percent suggests that lenders are still being too risk-averse. There are probably still
thousands of potential borrowers who represent good credit risks, but are unable to secure loans.
Fewer distressed property sales also will very likely shift much of the investment activity in the market from
fix-and-flip (where a discount is critical) to hold-and-rent scenarios — where profit comes from monthly cash
flow rather than home-price appreciation. While most fix-and-flip investors use cash or hard money loans for
their purchases, they usually sell the properties to buyers who use conventional financing. This market is likely
to shrink as the distressed inventory dries up.
In addition, mortgage companies have invested heavily in servicing operations to manage delinquent and
defaulted loans and stay within today’s more stringent regulatory framework. With the pipeline of distressed
loans rapidly being exhausted, employees in those operations may find their positions in jeopardy.
Investors helped accelerate the housing-market recovery, but did so in large part by purchasing the kind of
discounted properties that may soon be in short supply. As investors shift to a rental strategy, lenders may want
to consider new loan products that address those investors’ changing needs.
Given the current trajectory, the overall number of distressed-property sales could drop back to normal levels of
less than 5 percent of all sales as soon as 2019, marking the official end of the foreclosure crisis and the return to
full health of the long-recovering housing market. n
Rick Sharga is executive vice
president of Ten-X. He is one of the
country’s most frequently quoted
sources on real estate, mortgage
and foreclosure trends. Sharga has
appeared on top television shows and
briefed government organizations and
corporations on foreclosure trends.
He also conducts foreclosure training
for leading real estate organizations.
Before Ten-X, Sharga was an executive
vice president and primary spokesman
for Carrington Mortgage Holdings.
Reach Sharga at email@example.com.
Source: Attom Data Solutions and the National Association of Realtors
Total distressed property sales
(REO, third-party and short sales)
Distressed property sales as a percentage
Distressed Property Sales
of total existing-home sales