The flood of foreclosures that swept over the nation’s housing markets from 2009 to 2012 marked the greatest number of defaults since the Great Depression. More than 5 million families lost their homes to foreclosure by the end of 2013, most of them in four “sand” states: Arizona, California, Florida and Nevada.
While many feel that the effects of the foreclosure crisis are behind us, the phenomenon may not be as dead as many think. While nowhere near their 2009–2011 levels, foreclosures and distress sales are still elevated above pre-crisis levels. In some local markets, foreclosure discounts and foreclosures are actually increasing over the past 18 months. Their real numbers may never be known because they are being purchased by large institutional investors before they hit the retail markets. For a discussion of institutional inventors’ purchasing patterns, see Following the Footprints of Institutional Investors in Atlanta Real Estate.
Distress sales (foreclosures, REO sales and short sales) wreak havoc on local real estate markets by putting downward pressure on home values. Since banks want to quickly sell distressed properties, a foreclosure, REO or short sale usually sells for a significant price discount. The more distressed properties there are in a particular market, the more impact their sales can have.
Tighter lending standards and rising home values have stopped the flood, and individuals and institutional investors have bought and converted a significant number of foreclosures into rental properties. Today, foreclosures, short sales (properties sold at a deep discount by delinquent owners) and REO sales (foreclosures sold on local retail real estate markets) have fallen from the headlines in most markets, even in the sand states.
A review of Home Value Forecast data from the third quarter of 2014, 2013 and 2012 brings to light some sobering realities. Our analysis found that foreclosures are still impacting local markets.
We looked at two of the nation’s most notorious foreclosure hotbeds during the Foreclosure Era: Las Vegas, Nevada and Fort Myers, Florida. They are both resort destinations and markets where a high percentage of home sales were REOs in 2009. Otherwise, they could not be more different. Las Vegas, of course, is the nation’s gaming and entertainment capital. Fort Myers is a Gulf Coast retirement and vacation center.
Let’s first look at REO sales and a percentage of total sales:
Las Vegas peaked at over 70% REO sales as a percentage of total sales, Fort Myers at just shy of 50% — compared to the historical average of 5%, these numbers are astounding. Right now both communities are averaging approximately 15% REO sales as a percent three times the historical average, and have been climbing for the last year.
Taking a look at the “REO discount” (the discount homes that sell in REO versus a normal sale) shows how Las Vegas’ high percentage of REO changed the dynamics of the housing market.
Las Vegas REO discount has been low for more than twenty years due to two different phenomena: rapid growth and a historic crash. Since 1990, Las Vegas’ population has grown 233% — the simple rules of supply and demand kept the REO discount low due to new residents moving to the area looking for properties in established neighborhoods. Post-crash, where homes lost more than sixty percent of their value and the majority of homes for sale were REO, the retail market was driven by REO market, a flip from the norm.
As Las Vegas returns to more market fundamentals there is one thing to remember – in Las Vegas there can always be an increase in supply. With miles of surrounding desert, if demand for housing heats up, more units can easily be added. In mature markets with limited land, like Fort Myers, new single family homes are hard to add.
During the same 1990 to today window, Fort Myers population grew 51%. REO discounts were more in line with national averages before the crash and seem to be returning to that average after hitting 50%+ in 2009. Fort Myers, while extraordinary in the reach and depth of the housing crisis, is rather ordinary in its recovery. Market fundamentals seem to be back, foreclosure is lingering, but the “new normal” is just that.
As you would expect, the future for these two communities looks completely different. Using the Collateral Analytics Home Price Forecast we can see that Fort Myers is expected to match its pre-crash housing high within five years while Las Vegas will still be 25% below. Hopefully economic factors will change so Las Vegas, too, can fully enjoy the recovery.
CBSA Winners and Losers
Each month, Home Value Forecast uses a number of leading real estate market-based indicators to rank the single-family home markets in the top 200 CBSAs to highlight the strongest and weakest metros.
The ranking system is purely objective and is based on directional trends. Each indicator is given a score based on whether the trend is positive, negative or neutral for that series. For example, a declining trend in active listings would be positive, as will be an increasing trend in average price. A composite score for each CBSA is calculated by summing the directional scores of each of its indicators. From the universe of the top 200 CBSAs, we highlight each month the CBSAs which have the highest and lowest composite scores.
The tables below show the individual market indicators that are being used to rank the CBSAs, along with the most recent values and the percent changes. We have color coded each of the indicators to help visualize whether it is moving in a positive (green) or negative (red) direction.
This month’s top 10 includes Washington State, Texas, and California metro areas. All are experiencing low months of remaining inventory and fewer days on the market for sales. In addition, interestingly, the San Francisco metro area is experiencing sales price increases to more than $1 million with less than 2 months of remaining inventory and 1 percent of foreclosure sales. However, we do not think this indicates a bubble for the market at this time.
Although the bottom ten are focused primarily in Florida due to the continued higher number of foreclosure sales, the tide is turning with decreases in the overall number as a percent of total sales in several markets and other positive indicators, such as the lower months of remaining inventory and increases in sales prices.