Investors have always liked bank-owned properties or REOs — real estate owned by lenders and insurance programs. That’s because REOs often represent attractive investment opportunities, properties that lenders and insurance companies really want to dump. Given the pandemic economy you might expect an REO market surge but so far that hasn’t happened. The big question is why.
“In the year of Covid-19 some might predict lots of REOs but that hasn’t been the case,” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and real estate data. “What we’re seeing is that REO sales are slow. That’s because banks and other REO sources simply don’t have much inventory. The REO surplus that so many expected is simply not here. The result is that buyers will have to look at additional sources for investible properties.”
It’s hardly unreasonable to think that we might have seen numerous foreclosures and REOs this year and next. Just look at what happened the last time the economy saw widespread disruption.
During the mortgage meltdown between 2006 and 2010 — a period with rapidly falling property values and adjustable rate financing that often resulted in higher monthly payments — the frequent answer for distressed homeowners was to unload the property. This could be done by selling the home and bringing enough cash to closing to fully repay the loan; selling at a loss with the lender’s permission — a so-called short sale; or losing the property to foreclosure. In 2009, according to RealtyTrac, almost four million foreclosure filings — default notices, scheduled foreclosure auctions and bank repossessions — were sent to 2,824,674 homes.
This time around we’re not seeing such numbers. The reason is that today’s market situation is entirely different from the housing crisis of a decade ago.
If you look at the mortgage meltdown millions of homes were available at discount, especially bank owned ones. That’s because the property no one bought the home on the open market (strike one) and when foreclosed it could not get an acceptable bid at auction (strike two). The result was that the lender or insurer took back title (strike three). Banks and insurers now owned a property they didn’t want; a property they had to maintain, insure, and repair; and a property where taxes and HOA fees had to be paid. These properties that could not be sold in the open market or at auction — classified as “real estate owned” or REOs — could now be bought at discount by investors.
Today the marketplace is entirely different.
Rising Home Prices
First, home prices are soaring, not falling. According to the National Association of Realtors (NAR), the typical home sold for $313,000 in October, up 15.5% from a year earlier.
“October’s national price increase,” said the Association, “marks 104 straight months of year-over-year gains.”
If a homeowner today gets into the financial trouble there’s a strong likelihood that the property can simply be sold. With a sale the loan can likely be paid off without a foreclosure. If there’s no foreclosure there won’t be a foreclosure auction. If there’s no foreclosure auction there won’t be an REO.
Second, the country’s workforce has been divided into three groups: those with income, those with income who can work safely, and those who have lost jobs or a good portion of their income. While millions of people have been terribly hurt by the pandemic, it is also true that many others are doing well financially. Consumers, as an example, increased deposits by more than $1 trillion in each of the first two quarters according to the FDIC.
Strong savings mean that for many households — though certainly not all — there’s an ability to wait-out tough times. There’s no financial panic. Indeed, the Dow closed above 30,000 for the first time on November 27th.
People are hunkering down. The result is less inventory and lots of multiple offers. According to NAR, in October the total housing inventory amounted to “1.42 million units, down 2.7% from September and down 19.8% from one year ago (1.77 million). Unsold inventory sits at an all-time low.”
Low Interest Rates
Lastly, historically-low interest rates have had an enormous impact on the marketplace. Not only can property owners stay in place, they can do so more cheaply than in the past. Fannie Mae reported in late November that rates for 30-year financing averaged 2.72%, an all-time record. Today’s rates compare with an average of 3.94% in 2019 and 4.54% in 2018.
“Despite the pandemic and the economic slow-down the housing market has done remarkably well,” said Sharga. “Strong demand means opportunities for investors to flip or rent properties across the country. People want housing. The key is inventory acquisition. Investors will have to identify the most-likely prospects, Fortunately, there are online resources that make it possible for even individual investors to consider large numbers of properties with great speed and little cost.”