Slow REO Saturation Leads to Higher Home Prices

For the first time since mid-August 2010, U.S. home prices stopped declining in early January, according to a Home Data Index Market Report by Clear Capital.

Despite home prices facing a national decline of 1.6% over the last three months, there have been positive trends since the start of 2011. Since Jan. 1, national home prices have increased 0.9%.

According to the report, the slowing rate of sale of REO properties may be the cause for the increase in prices. With every increase in REO saturation, the percentage of REO properties sold compared to all properties sold in the last rolling quarter, home prices have gone down.

After a 3.2% gain during the third quarter of 2010, REO saturation increased 1.4% in January.

The Clear Capital report said a decrease in REO saturation indicates that an increasing proportion of fair market transactions are occurring. As the level of distressed transactions decrease, prices tend to increase.

Clear Capital said if the negative correlation continues, home prices are poised for further gains, well ahead of the seasonal spring lift.

“This recent national change in price direction is encouraging for the overall housing sector, yet it is still too early to determine whether this current uptick in home prices is a temporary reprieve or the start of a sustained recovery,” said Alex Villacorta, senior statistician at Clear Capital.

The report said the only region that did not experience flattening quarterly price changes was the West. The South and Northeast did not change its quarterly price movements, but the Midwest saw an 8% improvement since the December report.

Of the highest-performing major markets, 13 out of 15 saw positive gains over the last three months, according to Clear Capital. Two Ohio cities, Cleveland with a 12.6% increase, and Dayton with a 9.6% rise, saw the biggest quarterly improvements since the last report. Honolulu was the only metropolitan market on the highest-performing list to experience reduced quarterly gains.

Clear Capital said Cleveland’s improvement is due to the softening of the local foreclosure market and median home prices total less than $100,000. The city’s home prices are down more than 55% from its market peak in 2006.

For the lowest-performing markets, Detroit was the only city to experience double-digit price declines. Detroit’s decrease of 12.4% is a 2.7% increase from the end of December. The report said that nine of the 15 markets saw improved quarterly results over the last month.

“Although many markets still remain under significant downward pressure in light of increased distressed sale activities, it is clear the severity of the downturns observed in October and November have subsided,” Villacorta said. “This uptick is the first non-incentivized change in prices we’ve seen since the downturn began, and could provide great opportunity for buyers, sellers and investors alike.”