With foreclosure sales in rapid decline nationwide and in high demand in many fast-rising markets, a report released this week by mortgage technology company FNC indicates that housing demand by trade-up buyers is rising as the home equity available to these prospective buyers is improving.
According to FNC’s Foreclosure Market Report, the foreclosure market has rapidly improved in recent months with foreclosure rates approaching pre-crisis levels—an indication of strengthening supply-side conditions. On the demand side, steadily rising home prices and an expectation of continued recovery have stimulated housing turnover by prospective buyers who are in a position to take advantage of low home prices. In the meantime, higher home prices are bringing out trade-up demand from existing homeowners who are experiencing rising home equity, which supports a down payment on their next bigger house.
“We’ve seen hard data from the past 18 months that shows rising home prices and a foreclosure market with diminished impact due to decreasing foreclosure inventories and fewer new foreclosure filings,” said FNC Director of Research Yanling Mayer. “Meanwhile, a very encouraging trend that has been developing is the rising participation of trade-up buyers who are seeing improving home equity position and positive capital appreciation on existing homes.
“An important sign of a healthy and sustainable recovery is increased housing turnover driven by trade-up buying, which is more or less discretionary spending,” Mayer said. “These buyers are typically more responsive to market conditions and financial incentives.”
FNC’s report shows that foreclosure price discounts, which compare a foreclosed home’s estimated market value to the price paid by investors or home buyers, have dropped to a 10-year low at about 8.1% in Q2 2013, down from 12.5% a year ago. At the height of the mortgage crisis in 2008 and 2009, foreclosed homes were typically sold at close to 25% below their estimated market value. In many fast-rising markets, such as Phoenix, Las Vegas, and California, investor activity and low foreclosure inventory drove foreclosure prices up, frequently resulting in a price premium relative to estimated market value.
FNC publishes the mortgage industry’s first market-value based foreclosure price discount to gauge the degree of market distress. For more information about the foreclosure price discount, please refer to FNC’s March 2011 report located here.
According to the FNC report, investing in foreclosed property continues to be profitable with gross capital appreciation – the annualized percentage difference between a foreclosed property’s sales price and subsequent resale price – averaged at 7.8% on sales of homes previously purchased at foreclosure sales. In the meantime, ownership duration on distressed investment is up, along with the average ownership duration of all existing home sales.
More highlights from FNC’s Foreclosure Market Report:
• Single-family REO and foreclosure sales are 12.2% of total home sales as of July, down from 17.3% a year ago.
• The median foreclosure price is $98,000 or $67 per square foot, up 6.8% since the housing recovery began 18 months ago. In comparison, the median price on non-foreclosure sales is $205,000 or $118 per square foot, up 21.7% during the same 18-month period.
• Foreclosure price discounts are typically larger for low-tier properties, averaging 13.7% in Q2 2013. One in four homes continues to be discounted heavily. High-end properties, on the other hand, are typically sold close to their market value.
• At 86% of total foreclosure sales, low-tier properties continue to account for the bulk of foreclosure sales. Prior to the housing bubble, low-tier homes contributed more than 90% to foreclosure sales.
• Collateral depreciation on foreclosure sales – the difference between a property’s prior purchase price and foreclosure sale price – continues to decelerate, down to 3.8% in Q2 2013 from 6.4% a year earlier. Among the re-sales of non-distressed homes, for 16 consecutive months the median home is sold at a price above its prior purchase price – enabling potential trade-up buyers to capture a small capital appreciation.
• Despite declining foreclosure rates, Michigan continues to be the nation’s most distressed market with one in three homes sold during Q2 2013 being foreclosed properties.
• Arizona, California, Nevada, and Oregon have seen the fastest declines in foreclosure rates in the ongoing recovery, down respectively from 30.7%, 33.4%, 44.9%, and 24.2% entering 2012 to 11.9%, 12.4%, 15.3%, and 7.2% by Q2 2013. At 3.2% of total home sales, the District of Columbia has the lowest foreclosure rate.
• States with continued high foreclosure rates include Alabama, Illinois, Michigan, Ohio, Rhode Island, South Carolina, and Tennessee. More notably, foreclosure rates in Alabama, Illinois, Indiana, and Kentucky are trending steadily upward in recent months, dampening home prices.
• Among the largest housing markets (MSAs), New York, Boston, Portland, San Francisco, and Washington D.C. have the lowest foreclosure rates at 4.3%, 5.4%, 6.8%, 7.0%, and 8.3%, respectively, compared to a national average of 14.8% in Q2 2013. In contrast, Detroit, Chicago, Cleveland, Atlanta, and Cincinnati have the highest foreclosure rates at 34.7%, 27.1%, 24.3%, 19.4%, and 19.3%, respectively.
• Of the cities identified by the Federal Reserve Board as the largest REO inventory markets entering 2012, Los Angeles, Phoenix, and Riverside, CA., have since improved and are in strong recovery. The recovery in Atlanta is on par with the national trend and in the 18-month period, home prices are up 9.8%; foreclosure rates are down from 32.0% to 19.4%; and the foreclosure price discount is down from 18.8% to 8.7%. Conditions in Detroit are improving despite continued high foreclosure rates. Chicago, however, lags behind the rest of the country in the ongoing recovery – foreclosure rates are elevated at about 27%, contributing to the continued weakness of home prices.
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