Dispatch from Inman: Interest in Distressed Real Estate Heard But Not Seen

Talk of the distressed property market was woven into the fabric of conversations and panels at the Inman Real Estate Connect conference in San Francisco this week — not surprising given that one in every four sales in the first quarter was a property in some stage of foreclosure or bank-owned.

On Wednesday morning’s opening panel, featuring prominent real estate industry CEOs, at least one of the panelists acknowledged that they were personally investing in distressed properties.

A reporter at the conference told me he was hearing buzz about the shortage of distressed property inventory in many markets, reiterating what several agents in the RealtyTrac Agent Network have recently shared with us: they have many buyers lined up to purchase foreclosure properties, but often a limited number of those properties available for sale. This often results in multiple offers and even bidding wars on foreclosure homes for sale. Those agents may be happy to know that in many markets foreclosure activity is beginning to spike off last year’s artificial lows, indicating more inventory available in the form of short sale listings and bank-owned listings in the next few months.

But when it came time to understand more about that market niche, agents did not show up in droves . I know that because I was on one of the panels in the afternoon’s Distressed Properties track titled “Understanding the Distressed Real Estate Market.”

Out of a total conference attendance that I would guess was more than 1,000, only about 10 percent showed up for the Distressed Property Track. Granted, it was one of four different tracks offered during the afternoon sessions, but I would have expected a bit stronger showing given that the distressed market represents such a sizable portion of the real estate pie, particularly in some hard-hit markets in Florida, California, Arizona and Nevada where foreclosure homes can account for well above 50 percent of all residential real estate sales.

In hindsight the low attendance is likely because any agents who are in markets dominated by foreclosure sales have already jumped on the distressed property bandwagon to survive. They already fully understand the distressed real estate market. It may have been better to title the track “The Next Phase of the Distressed Real Estate Market” since there has been a definite shift recently away from REOs and to short sales.

I and others on the panel were certainly convinced that the distressed market is not going away anytime soon. There were about 1.5 million properties in the foreclosure process or bank-owned as of the end of June, according to RealtyTrac data. Based on historical roll rates of properties in foreclosure to REO or short sale, we expect about 1.2 million of those 1.5 million to end up being sold as a short sale or REO sale. At the current pace of foreclosure-related sales, it will take another 15 months to dispose of these distressed properties — even with distressed sales representing 15 to 25 percent of all sales.

Behind those 1.5 million properties in foreclosure or bank owned are another 1.3 million seriously delinquent properties, according to the MBA. We would expect about 1 million of those to end up as short sales or REO sales, representing another 13 months of elevated distressed sales.

So safe to say we’ll be seeing nearly two and half years of elevated distressed sales going forward, getting us to about 2015. That’s not to mention the 12.8 million homeowners nationwide who are underwater, owing more than their properties are worth but still making their mortgage payments. It’s likely that a big chunk of those underwater homeowners will have to sell within five to 10 years, before gradually rising home prices lift those properties above water.  Those sales will likely be short sales.

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