REO Share of Home Sales are Closer to Normal, But Far From Pre-Crisis Levels

During the height of the housing/foreclosure crisis in 2009, real estate-owned (REO) sales made up 28 percent of total homes sold nationally.
As of February 2015, the national REO sales share was 10 percent, compared to the pre-crisis share of about 2 percent, CoreLogic writes in its Insights Blog.

There are many benefits to having a more normal REO share of sales.
REO sales sell at a discount to non-distressed resales, but when the REO share shoots up, the discount contracts. This effect could be seen in the U.S. housing market during the housing crisis when the discount of REO prices to resale prices shrank to about 30 percent, compared to the pre-crisis discount of between 40 to 60 percent.
Conversely, fewer REOs help boost home prices across the board for non-distressed properties.
“Falling REO shares would most likely help local prices, not only because fewer REOs are selling at a discount, but also because the saturation effect should go away,” writes Molly Boesel for CoreLogic. “REO sales can also serve as a substitute for new home sales. Many areas were overbuilt in the run-up to the housing crisis, therefore a lower REO share may boost homebuilding in some areas of the country.”
However, few metro areas are close to pre-crisis levels, and many are still far off.
REOs Plus Short Sales
Distressed sales — real estate-owned combined with short sales — accounted for 13.5 percent of total home sales nationally in February 2015, a 3 percentage point drop from February 2014 and a 0.8 percentage point decrease from January 2015, according to the latest report from CoreLogic.
At its peak, distressed sales totaled 32 percent of all sales in January 2009, with REO sales representing 28 percent of that share.
The ongoing trend away from REO sales helps drive improving home prices, as bank-owned properties typically sell at a larger discount than short sales.
There’s always some amount of distress in the housing market. But by comparison, the pre-crisis share of distressed sales was traditionally about 2 percent. In some metropolitan areas, the REO share peaked at around 70 percent during the crisis.

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