Bank Sales Weigh on Non-Distressed Home Values

With a groundswell of unpaid mortgages and home seizures adding to inventories of bank-owned properties for years, REO sales have commanded a bigger share of the market.

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Getting these foreclosed homes off banks' books and back into the hands of responsible homeowners is an essential part of the housing sector's recovery. But with so many on the market, bank-owned sales are weighing down property values, not only within the distressed property segment but for non-foreclosure homes as well.

""RealtyTrac"":http://www.realtytrac.com reports that REOs sold during the first quarter carried an average markdown of 35 percent compared to the price of homes not in foreclosure.

According to the real estate analytics firm ""Hanley Wood Market Intelligence"":http://www.hwmarketintelligence.com/, evidence of adverse home price movement from bank-owned sales is painfully evident in foreclosure riddled markets.

Two analysts with the firm, Jonathan Dienhart and Ken Lee, conducted an analysis of sales activity in REO-heavy markets and the impact on prices of regular resale properties that are not bank-owned.

They found that the areas with the largest nominal number of REO sales and the regions that experienced the largest annual increases in REO activity all saw median existing home prices lag the national average during the first quarter.

In a ""Housing Intelligence blog post"":http://www.housingintelligence.com/economics/how-bank-sales-hurt-resale-prices.html, the two market researchers explain that Phoenix and Miami had the most REO sales out of all the metropolitan statistical areas (MSAs) in the country during the first quarter period.

After factoring out market prices for bank-owned properties, the median price of non-REO existing homes still fell 5.8 percent in Phoenix and 6.2 percent in Miami when compared to year-ago levels.

Coincidentally, the researchers note, Miami also recorded the second largest year-over-year increase in REO sales, up 36 percent from the first quarter of last year.

Miami was bested only by its northerly counterpart Tampa, which experienced 57 percent annual growth in REO closings. Non-REO home prices in Tampa declined 2.6 percent from the first quarter of 2010.

""In these figures, we learn that foreclosures that ultimately lead to REO sales will continue to weigh on home prices,"" Dienhart and Lee blogged.

""Clear Capital"":http://www.clearcapital.com has addressed the bank-owned factor in its monthly analyses of home price trends. The company has paid close attention to what it calls REO saturation over the past few years.

REO saturation refers to the percentage of bank-owned homes sold as compared to all properties sold. Nationally, Clear Capital says REO saturation has climbed sharply since dipping to a relatively low level of nearly 20 percent in mid-2010. The company's last market report put REO saturation above 34 percent in June 2011.

""Until the wave of defaults subside, do not expect any marked improvement in overall price performance,"" according to Hanley Wood's Dienhart and Lee.