Once a stain on housing, REOs and short sales are a reminder of the legacy of the housing downturn. Investors, seeking discount prices, transformed what was once undesirable into fashion-forward, instant cash flow in key markets. While in other markets, distressed inventory still hinders overall prices from getting a leg-up.
With stocks plummeting last week and the global economic impact on our domestic economy and housing markets still unknown, distressed sales continue to be a critical market indicator. Just like in the fashion industry’s iconic September issue, learn to be a trendsetter—from stateside to Puerto Rico—by letting distressed market measures give you full perspective of the market.
Nationwide, quarterly distressed saturation (or the percentage of REOs and short sales to all sales) increased by 0.7 percent in August 2015, from 15.4 percent to 16.1 percent. While we are closer to historic, pre-2008 rates of distressed saturation which hovered around 4 percent of all sales, increases in distressed activity leading into winter could shift momentum towards peak distressed saturation levels of 40 percent. Typically, we see distressed saturation fluctuate with the seasons and increase in the winter season.
“Distressed saturation continues to be a challenge we face in today’s housing market,” says Alex Villacorta, Ph.D., vice president of research and analytics at Clear Capital®. “In fact, today’s ‘traditional’ housing market continues to be defined by distressed saturation levels. In Act One, at the start of the downturn, distressed properties were an albatross around housing’s neck. In Act Two, between 2011 and 2013, investors stepped in, buying, rehabbing and selling or renting distressed properties, which gave way to higher demand and rising prices.
“While the overall effect of higher rates of distressed saturation in Act Three of the recovery is unknown, one thing is clear; when it comes to housing, REOs and short sales are not a passing fad. Last week’s crash leaves the economy and housing tenuous at best, especially as we move from the promise of the summer buying season. The last third of the year will reveal whether the housing recovery can withstand broader global volatility. If investors pull out, oversupply of distressed inventory could bring us back to Act One. Or, a renewed source of distressed inventory could be all the rage, reviving demand from investors and traditional homebuyers, alike, in an inventory-starved market. With the summer buying season coming to a close, the maturing housing recovery has encountered an uncertain global and domestic economic picture. The driving factor will be whether traditional consumers will be willing, and more importantly, be able to participate. As the global and domestic economic outlook unravels, we will continue reporting on its effect on housing.”
The West’s and Midwest’s distressed saturation rates have exceeded that of the nation, increasing by 0.9 percent and 1.2 percent, respectively, while we observe the largest gains in distressed saturation in the South, with a 1.5 percent increase from 18.6 percent to 20.1 percent. The Northeast was the only region to experience a decrease in distressed saturation, where rates dipped 0.3 percent from 14.3 percent to 14.0 percent.
For the past three years, distressed saturation in the San Juan (Puerto Rico) MSA has been steadily increasing, having grown eight percentage points, from a reading of 9 percent in 2013 to 17 percent today. This trend is unusual in the current housing environment. Over the same three year period, nearly all of the major metro markets have experienced steady declines in distressed saturation. In terms of pricing, this near doubling of the saturation rate has corresponded with a rapid change in price declines from a yearly loss of 1.5 percent in 2013 to a yearly rate of decline of 10.2 percent.
The Midwest is the only region to see quarterly gains in price appreciation, nearly doubling from 0.4 percent to 0.7 percent. The region still lags behind the West, which experienced declining gains of 0.1 percentage points, yet still continues to report highest quarterly growth at 1.2 percent. The South and Northeast appreciation rates remained stagnant, reporting 0.8 percent and 0.2 percent growth over the quarter.
Regional performance is echoed at the MSA-level. The San Jose, CA and Detroit, MI MSAs both report healthy growth rates of 2.1 percent. While the South did not see accelerated price gains, continued growth through August could be a sign that this region is on firm footing moving forward. Seven of the 15 top performing markets are located in the South, while four of the lowest performing MSAs are in the Northeast.
For more information, visit www.clearcapital.com.