REO Sales Impacting Recovery Effort

RadarLogic said the rise in home price indices being reported through 2012 is not sufficient because it’s being compared to weaknesses that occurred during the second half of last year. Image: Fotolia

Even though the housing market continues to see increases in home values throughout the country, one firm is reluctant whether the nation is in a real recovery.

Through January, Clear Capital data revealed that quarterly price trends remained flat throughout the nation, while yearly gains increased, according to the firm’s monthly home data index report.

At the national level, home prices in January advanced 0.9% over the rolling quarter, unchanged from December’s rate of growth. However, even though values remained stagnant from last month, they are still in positive territory compared to quarterly declines of 1.6% during the same time period last year.

On a yearly basis, national home prices were up 5.4%. The Truckee, Calif.-based asset valuation provider said the main driving force for this increase was due to low-tiered homes, typically REO properties, being sold for $102,000 and less.

Despite what appears to be positive news, RadarLogic said the rise in home price indices that are being reported through 2012 is not sufficient because it’s being compared to weaknesses that occurred during the second half of last year. 

According to the New York-based analytic provider, the company’s RPX Composite has weakened during the second half of every year since the end of the housing boom. Through November 2011, the composite fell by 7%, less than any other year since 2009.

That is why RadarLogic is even skeptical of its own data, which increased 9.2% from November 2012 compared to the previous year.   

Moreover, RadarLogic said the year-over-year increase in housing price indices has been largely driven by a shift in the composition of sales rather than appreciation in the value of individual properties. For example, REO sales and foreclosure auction sales—known as motivated sales—have declined from 24% of the 25-MSA RPX transaction count in November 2011 to 12% a year later.

Over the same period, the 25-MSA composite price for motivated sales was 32% to 39% lower than the composite price for all other sales.

“When we control for the shift in the mix of sales by looking solely at the composite price for non-motivated sales, we find that home prices increased at slightly over half the rate of the RPX composite price,” RadarLogic said in its monthly report.

This shift in sales mix is taking place because institutional investors are looking to build large portfolios of rental properties, RadarLogic stated. Furthermore, the investors have temporarily reduced the available supply of desirable REO assets and driven up prices, causing them to search elsewhere to acquire units.

Meanwhile, there are still a large number of homes in the foreclosure process and on their way to become part of the REO inventory. If these properties enter the market in a sufficient quantity, they could drive down REO prices to a point where investors will shift their attention back to foreclosures and REO, RadarLogic noted, therefore increasing the percentage of total sales and resulting in home price indices decreasing again. 

“A real recovery in the housing market will be driven by an increase in household demand,” RadarLogic’s report said. “Improvements driven by investor demand will likely be temporary.”