Restricted REO Inventory Side Effects

This is the fourth in a series of posts highlighting some of the findings from an in-depth report on REO trends and outlook that RealtyTrac released at the REO Expo conference on June 13, 2012. To download the full report for free, go to

Since the robo-signing controversy in October 2010 forced lenders to re-evaluate and revamp their foreclosure procedures, there has been a roller coaster pattern in REO activity in many local markets, including Chicago, Miami and Atlanta as demonstrated in the graph below.

Here’s our interpretation of what is happening: lenders have been able to gradually sell off REOs in these markets over the last 18 months even as they have been holding back on new bank repossessions because of shifting foreclosure processing guidelines.

As lenders slowly adjust to those new guidelines they are pushing through batches of distressed loans into REO — but only those they are confident have been foreclosed on properly. This all results in the saw tooth pattern showing up in some markets.

Positive Side Effects
Although the foreclosure processing delays triggered by robo-signing are stalling any quick and definitive real estate recovery, they have caused some side effects that may be positive for the overall housing market.

First, the artificially restricted supply of REO inventory is resulting in pent-up demand in some markets. That means new foreclosed homes for sale — particularly those in good condition — often receive multiple bids and can be sold quickly.

Take for example the hard-hit Sacramento market. In April, the metro area’s foreclosure rate ranked 10th highest among all metropolitan statistical areas nationwide with a population of 200,000 or more.

But despite that high foreclosure rate, buyers in the Sacramento area are hungry for more inventory, according Ben Richardson, a Realtor with Crossroad Ventures Group in the Sacramento suburb of Roseville.

“We need more inventory. I need more homes to show my buyers,” he said. “We are seeing multiple offers on everything. As much as I hate to see people lose their homes in foreclosure, we need more inventory from someplace.”

The shortage of REO inventory is also resulting in a stabilization of REO sales prices. While the average price of pre-foreclosure (short) sales dropped to a record low in the first quarter of 2012, average REO sales prices have flattened out over the past several quarters.

Related News
REO Spillover (Part 3)
Where Have All the REOs Gone? (Part 2)
REO Shrinkage (Part 1)

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