New Foreclosure Discounts Fail to Sustain Buyer Demand

Foreclosure property sales sold at much deeper discounts than ever and continue to represent a significant portion of total sales, yet persistent erosion of buyer demand elevates concerns about future sales and inventory growth.

RealtyTrac’s 3Q 2010 U.S. Foreclosure Sales Report data show that while one-fourth of all sales during the third quarter were sales of properties in default, scheduled for auction or bank owned, demand decreased by 25% from the previous quarter and 31% on a year-to-year basis despite historically higher average price discounts.

James Saccacio, CEO of RealtyTrac, blamed the expiration of the homebuyer tax credit for creating “a substantial dip in overall buyer demand in the third quarter,” including demand for foreclosures even though those who did purchase a short sale or REO were able to get an average discount of over 32%, “the highest average foreclosure discount we’ve seen since the fourth quarter of 2005.”

Given the significant discounts these properties sold for, one would expect a surge in buyer demand, which would have been the case in a normal market. But there have been fewer buyers. Also, there have been fewer first-time homebuyers. These buyers who gave a boost to demand in 2009 and during the first two quarters of this year lost the benefit of a tax credit incentive in the third quarter.

Daren Blomquist, RealtyTrac director of marketing communications, told this publication the change seen this quarter is some sort of a market self-correction because, had tax credits not been available, at least a portion of these buyers would have entered the market later during the year. He expects this self-corrective process will continue leading to more reductions in first-time buyer demand to the level that is more normal for the current state of the market.

In other words, overall buyer demand is still far from returning to normal levels despite discounts. (The average discount on foreclosure purchases is calculated as the percentage difference between the average sales price of foreclosure sales and the average sales price of nonforeclosure sales.)

A total of 188,748 U.S. properties in some stage of foreclosure sold to third parties at an average sales price of $169,523, compared to $249,721 for properties not in foreclosure.

Sales volume of nonforeclosure properties decreased 29% from the previous quarter and nearly 31% from 3Q09, with REO sales decreasing nearly 26% from 2Q10 and nearly 35% from 3Q09, while quarter sales of preforeclosure properties (in default or scheduled for auction) dropped 24% from both 2Q10 and 3Q09.

REOs sold for an average discount of nearly 41%, up from 34% in 2Q10 and nearly 35% in 3Q09 making these properties much more affordable. Nonetheless REO sales accounted for only 15% of all sales in the third quarter, the same as in 2Q10 and slightly below the 16% in 3Q09. 

A total of 74,815 preforeclosure properties that changed hands during the quarter accounted for nearly 10% of all sales. These sales were up only slightly from the 9% they represented during those previous quarters even though the short sales that are often related to the preforeclosures sold at an average discount of 19%, compared to 13% in 2Q10 and 18% in 3Q09.

Again and again data show that, at best, buyer demand remains subdued. These insiders expect the sales numbers will bounce back but stay lower than what they would have been during a healthier, more normal market.

Blomquist says the main takeaway from this quarter’s findings is that foreclosures still are a big part of the market. “October was the 20th straight month” with an increase in foreclosure activity while problem markets like California where activity picked up and they have been trending downward in the past 10 months.

He suggests cautious optimism.

The economy still is in the middle of the crisis cycle and need be cautious when recognizing these emerging positive signs, he said, foreclosure sales are a lagging indicators of recovery that indicate there will be further increases in foreclosure inventory and probably another two to three years until it clears out. “It is going to take some time, it’s not going to be an overnight recovery.” Plus even advances in the best performing geographic markets may reverse if the job market does not improve.

The foreclosure-processing controversy is another factor expected to affect foreclosure sales, Saccacio said, since it was brought to light at the very end of the third quarter and “could chill demand even further, particularly for foreclosure properties.” Consequently only a quick resolution to that issue would be able to help the market “continue to properly clear out foreclosure inventory and get distressed properties into the hands of qualified buyers and investors.”