If you're looking to buy a distressed or real estate owned property at a cheap price, you better move quickly—and be prepared to pay a lot more than you did a year or so ago.
Experts say the supply of foreclosed homes and REOs is dwindling quickly and probably has already peaked. That's driving up the price of these homes but also the price of owner-occupied homes, which should eventually lead to a more normal housing market, allowing people in underwater homes to refinance their mortgages or sell their homes at a profit.
"The REO property numbers in the marketplace are definitely shrinking. For banks and the GSEs, REO properties probably peaked in the first part of 2012 and have been steadily declining," says Chuck Newcomb, chief operating officer of BestAssets, an REO asset management company in Sugar Land, Texas.
"We're continuing to see lower and lower inventories of REO," agrees Rick Sharga, executive vice president at Carrington Mortgage Holdings in Santa Ana, Calif. "We're seeing fewer homes going delinquent, which makes the pipeline smaller. We're seeing more short sales and loan modifications, which essentially stop REOs from happening. And when the REOs do hit the market, there's such a demand for them they're basically moving as fast as they hit the market."
"The banks are still sitting on a lot of inventory, but not as much as they had been," he adds.
According to RealtyTrac, foreclosure activity in April dropped 23% from a year earlier to its lowest level in more than six years, before the housing bubble burst and the Great Recession began.
Recent statistics from CoreLogic tell a similar story. There were 55,000 completed foreclosures in March 2013, the company says, down 17% from 66,000 in the year earlier period. Foreclosures have dropped by more than half since 2010.
Randy Wussler, vice president of product management and marketing at San Diego-based DataQuick, agrees that the "bull" market in distressed real estate has probably peaked. However, he says, "We do have to be realistic about how fast we can work through what is still a sizable inventory of distressed properties."
In its most recent analysis, DataQuick found year-over-year declines in the number of new foreclosures in 29 of the 42 largest counties in the country. But the flip side of that means that there were increases in 13 counties, or more than 30% of the total.
"The supply of distressed properties is falling for certain, but certain dynamics cause us to temper our enthusiasm just a bit," he says. "Specifically, REO inventory is down, but the months of supply of REO inventory is not falling as fast."
For example, in Clark County, Nev.; San Diego County, Calif.; and King County, Wash., REO inventory fell 55%, 36% and 41%, respectively, from 2011 to 2012. But the corresponding month’s supply of REO fell only 13%, 8%, and 18%, respectively. "We’re not completely out of the woods," he says.
Sharga also notes that there is still a big backlog of foreclosures in states that require judges to order and administer foreclosures. Many of those properties have yet to hit the market.
"There is a bifurcation right now between states that do nonjudicial foreclosures and states that don't," he says. "What we're seeing is that the backlog is clearing a lot faster in the nonjudicial states like California, Arizona and Nevada, and as a result we're seeing a more robust housing recovery. On the other hand, in states like Illinois, New York and New Jersey, which have enormous backlogs in foreclosures that have yet to be processed, we're not seeing the markets come back quite as rapidly."
In addition, Wussler adds, as more nondistressed properties have come on the market as home prices have improved, distressed properties lose some of their attraction, which might slow the drop in distressed sales.
"Inventory is tight, but there are more nondistressed properties on the market now than in the recent past and the discount rates buyers have enjoyed on distressed properties aren’t as high as they used to be," he says. "As a result, the incentive for a buyer to consider a distressed property—and all the added challenges associated with this type of property—isn’t as great as it used to be, which will lead to lingering distressed inventory."
Sharga says that "the overhang of distressed properties is one of the headwinds that the housing market still faces," but agrees that all of the recent improvement has helped raise prices of all types of homes. "From an overall housing market perspective it absolutely is" a good thing, he says.
"We do anticipate continued price appreciation in 2013," agrees Wussler. "The market drivers are for the most part very positive."
George Yacik has been covering the residential mortgage business for more than 20 years and writes frequently for industry publications. He can be reached at email@example.com.