FNC Report: Trade-Up Buyers Returning to the Market

An important sign of a healthy and sustainable recovery is increased housing turnover driven by trade-up buying, and a report released by FNC indicates that that this trend is returning as the home equity available to these prospective buyers is improving.

According to the Oxford, Miss.-based mortgage technology’s company foreclosure market report, foreclosure sales are in rapid decline nationwide and are still in high demand in many markets.

Additionally, FNC said foreclosure rates are approaching pre-crisis levels, which is positive news for the supply side.

Meanwhile, on the demand side, increases in home prices that are projected to continue over the next few years—even though not at the current rates we are currently seeing—has stimulated housing turnover by prospective buyers who can now take advantage of still somewhat low valued properties.

“We’ve seen hard data from the past 18 months that shows rising home prices and a foreclosure market with diminished impact due to decreasing foreclosure inventories and fewer new foreclosure filings,” said Yanling Mayer, director of research at FNC. “Meanwhile, a very encouraging trend that has been developing is the rising participation of trade-up buyers who are seeing improving home equity position and positive capital appreciation on existing homes.”

Mayer added that these types of trade-up buyers are typically “more responsive to market conditions and financial incentives.”

The FNC report shows that foreclosure price discounts compared to the estimated market value price paid by investors or homebuyers for a nondistressed property has fallen to a 10-year low at about 8.1% in the second quarter. This is down from 12.5% a year ago. During the height of the mortgage crisis in 2008 and 2009, foreclosed homes were usually sold for 25% below their estimated market value, FNC said.

In many fast-rising markets, like California, Phoenix and Las Vegas, investor activity and low foreclosure inventory drove home prices up, therefore frequently resulting in a price premium relative to estimated market value.

Despite the gap narrowing, FNC said investing in foreclosed property continues to be profitable with gross capital appreciation—the annualized percentage difference between a foreclosed property’s sales price and subsequent resale price—averaging at 7.8% on sales of homes previously purchased at foreclosure sales.

The median price for a foreclosed property, FNC said, is $98,000, an increase of 6.8% since the housing recovery began 18 months ago. Comparatively, the average price on nonforeclosure sales is $205,000, a 21.7% increase during the same 18-month period.

The report also highlighted that as of July, single-family REO and foreclosure sales accounted 12.2% of total home sales, which is down from 17.3% during the same time period last year.