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Declining Distressed Inventory Forces a Change in REO Strategy

bank-owned-five [1]Distressed home sales have been on a steady decline since hitting their peak seven years ago in January 2009 at the height of the housing crisis. For years, agents prospered while there was no shortage of REO properties available for them to put on the market. Now that the backlog of foreclosures and REO properties has been clearing for years, how is this affecting business?

CoreLogic [2]’s November 2015 Distressed Sales data reported that REO and short sales combined made up 12 percent of all residential sales for the month, a decline of 2 percentage points from the previous November. The distressed sales share for November 2015 was approximately one-third of its peak reached in January 2009, when REO properties and short sales made up almost one-third (32.4 percent) of all residential home sales.

There is no question that distressed sales are way down due to the steady decline in available inventory over the last seven years. While the distressed sales share is not quite back to its pre-crisis level, which is approximately 2 percent (CoreLogic estimates they will reach that point in mid-2019 if the current rate of year-over-year decline continues), the declining REO and distressed inventory has forced agents to return to their pre-crisis routines.

“For the longest time, we enjoyed the inventory,” said Ruben Peña, president of TC Austin Residential. “Agents can get very comfortable in their current situation when a product is being given to them or being offered. When the product is no longer available, they realize that they now have to go to work. We forget about the simplicity of going out and asking for the order. When inventory is high, no one is busy working on getting the inventory, because it’s being given to them. When inventory is low, we forget that we have to go back to the basics and how to go out and ask for the inventory.”

All but nine states reported a year-over-year decline in distressed sales share in November 2015. Maryland had the largest share during the month at 20.2 percent, and North Dakota had the smallest share at 2.7 percent. The largest year-over-year decline occurred in Nevada, which experienced a 5.4 percentage point drop. California’s November 2015 distressed sales share was 8.2 percent, which is 59.2 percentage points lower than its peak of 67.4 percent in January 2009.

1-27 CoreLogic graph [3]Specifically within the distressed category, REO sales accounted for 8.7 percent of all residential home sales in November 2015—a decline of 1.5 percentage points from the previous November and the lowest share for any November since 2007. At their peak in 2009, REO sales represented 28 percent of all home sales. Short sales have remained in the 3 to 4 percent range since falling below 4 percent in mid-2014; in November 2015, short sales accounted for 3.2 percent of all home sales.

The dwindling amount of REO properties and foreclosed homes available for sale has resulted in a change in strategy for some realtors.

“There’s no reason why someone who wants to buy a house can’t buy a house,” Peña said. “The problem is, you can’t buy a house when there’s no inventory. If I want to buy a car, I can go online and visit any online auto shop and say I want this model, this color, in this price range. But when it comes to housing, I can’t do that because the inventory is not there. I have the ability as a buyer to say I want this house, a three bedroom, a two bath, in this neighborhood. But I can’t go online and find it because the inventory is not there. What I have to do as an agent is create the inventory. I have to work the field, work the market, find properties that buyers are interested in buying, and make them available.”

One way to cope with the dwindling distressed inventory is specialization, according to Joyce Essex, an agent with Coldwell Banker Real Estate.

“Whether it’s REO or traditional sales, performing, probates, bankruptcies, investors, whatever it is, know that market, so when the market shifts, you have the knowledge, you know who your clients are, you know who the competition is, you know the laws, the rules, and you know the marketing and the technology,” Essex said. “Make sure that you specialize and really know what you're working on at the time and hopefully have a couple of different spaces where you can add value to the client.”