Distressed Homes Draw Investor Interest

The U.S. housing recovery appears to be speeding up as higher demand for distressed homes forces prices up and inventory down, which creates even more demand for the …

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The U.S. housing recovery appears to be speeding up as higher demand for distressed homes forces prices up and inventory down, which creates even more demand for the properties. Both properties in foreclosure and short sales are seeing upward price adjustments and experts say the “foreclosure” discount margin is narrowing. A good deal of the growth has been driven by large institutional investors that intend to convert the single-family homes into rentals in an attempt to capitalize on the still-growing demand for rental properties. For more on this continue reading the following article from TheStreet

Distressed property prices are rising on the back of strong investor demand and limited inventory, RealtyTrac said in a report released Thursday.

Properties in foreclosure or owned by lenders sold for an average price of $171,704 during the fourth quarter, increasing 2% from the third quarter and a4% from the fourth quarter of 2011.

Short sales — where the borrower and bank agree to sell the property for less than the amount owed — also saw improving prices, helping to reduce lenders’ losses. Short sales in 2012 were short of the loan amount by an average of $81,621, down 7% from an average $87,809 in 2011.

Other firms have also reported a narrowing "foreclosure discount."

Mortgage technology firm FNC measures the foreclosure discount by comparing the foreclosure sale price to the underlying market value of the property, which is the market price the seller would receive if the property were sold under normal circumstances.

FNC last week reported that the foreclosure discount had dropped to 12.2% in the fourth quarter of 2012, compared to the 25% discount seen at the peak of the credit crisis in 2008 and 2009.

According to that report, higher-priced foreclosed homes were selling for close to market value, while lower-priced homes still suffered an 18.4% discount in the fourth quarter of 2012.

According to RealtyTrac, the average price of a foreclosure sale is at a 30% discount to the average non-foreclosure sale price.

Distressed property sales still account for 43% overall existing home sales, which has the effect of depressing overall prices.

However, the number of new foreclosures have been declining, while the existing inventory of foreclosed homes has been rapidly seized by yield-hungry buyers.

Rental Gravy

Large institutional investors — most notably Blackstone (BX) — have pumped millions into foreclosed homes with the intention of converting them into rentals, as demand for rental housing continues to climb.

Analysts estimate that $6-8 billion has been raised for conversions of repossessed homes to rental units.

As a result, prices of distressed properties are now rising, with some states, such as Arizona and California, reporting bidding wars for a shrinking inventory of foreclosed homes.

The average price of foreclosure sales in Arizona was $142,266 in 2012, up 13% from the year earlier.

Foreclosure-related sales accounted for 21% of all U.S. residential sales during 2012, down from 23% of all sales in 2011 and down from 28 percent of all sales in 2010.

Short Sales Instead of Multiyear Foreclosures

Short sales of homes not in foreclosure now account for 22% of all sales, a slightly greater share than foreclosures. In the fourth quarter of 2012, short sales were up 17% from the previous year.

Banks have increasingly pursued short sales instead of foreclosures as timelines to repossess homes now stretch into three to four years in states that follow a judicial foreclosure process.

Even in non-judicial states, where foreclosure action can be initiated without court approval, short sales have been viewed as the preferred alternative as the costs of foreclosure are significantly higher.

The five biggest mortgage servicers, including Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and Ally Financial are also obligated under a national mortgage settlement to offer borrowers alternatives to foreclosures such as short sales.

According to the latest report from the settlement monitor, banks conducted short sales totaling $19.5 billion between March 1 and Dec. 31, 2012.

This article was republished with permission from TheStreet.

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