As the country works its way further out of vestiges of the Great Recession, foreclosure notices have generally reached new lows. This isn’t the case everywhere, though. Indeed, in nearly half the country, auctions for foreclosed properties are actually increasing — primarily where the backlogs of court cases are now working themselves out of the system. Rehab investors should take note, as the market for “flipping” opportunities may be good in such markets.
Foreclosure Filings Are Generally Back to Pre-Recession Levels
Foreclosure filings — default notices, scheduled auctions, and bank repossessions — decreased again in February and now stand at their lowest levels since July 2006, according to real estate data provider RealtyTrac. As of February, the U.S. foreclosure rate was now one out of every 1,295 housing units.
Where the foreclosure processes are handled efficiently — for example, in states where deeds of trust are used and "statutory" foreclosures can be dealt with relatively quickly — foreclosure numbers are in some cases below pre-recession levels.
"This eight-and-a-half year low in foreclosure activity is a significant milestone and a sign that nationwide foreclosure activity is on track to return to historic norms this year," said Daren Blomquist, vice president at RealtyTrac.
But Slow Foreclosure Processes Mean Activity is Still Rising in Many States
Despite the national decrease from a year ago, 24 states posted a year-over-year increase in foreclosure activity. This is largely because many states still rely on judicial processes to handle foreclosures, and most of those states have experienced significant backlogs in the courts that have slowed the process of driving those cases to resolution.
“The cleanup of deferred distress is continuing in markets where a logjam of in-limbo foreclosures is still lingering from the housing crisis — as evidenced by rebounding foreclosure activity in those markets,” said Mr. Blomquist.
Foreclosure "starts" are often measured by the scheduling of foreclosure auctions, so that foreclosure "activity" is now showing a marked uptick in many judicial foreclosure states. 22 states posted year-over-year increases in foreclosure starts, including some states with consistent increases over the last few months like Nevada, Massachusetts, and Texas. (For Texas, the rise is perhaps better explained by the recent decline in oil prices, which has altered the market dynamics in a state previously experiencing a real estate boom.) 25 states posted a year-over-year increase in scheduled foreclosure auctions, with states having consistent recent increases including New York, New Jersey, and Washington. Finally, 15 states posted increases in lender repossessions (REOs), including Maryland, Ohio, and North Carolina.
“Zombie” Foreclosures Increase
Approximately 25% of current foreclosures have become “zombie” properties — homes in the foreclosure process but which have already been vacated by the homeowners. These represent further opportunity for flippers, since the properties are essentially ready for renovation as soon as the ownership transfer can be completed. “In states with a bloated foreclosure process, the increase in zombie foreclosures is actually a good sign that banks and courts are finally moving forward with a resolution on these properties that may have been sitting in foreclosure limbo for years,” said Blomquist.
Average Flipping Profits Are Up, Even Though Aggregate Flips Have Decreased
The average gross profit per flip increased in Q4 2014, to an approx. 37% gross return, according to another RealtyTrac report. This despite the fact that flipped houses have now hit a recent low as a portion of overall home sales.
"In many cases the best neighborhoods for profitable flipping in a slower-appreciating market are those that come with a higher risk because of location and condition of properties, but also have a bigger upside if investors are able to correctly predict the path of progress in the region," said Blomquist.
Flippers will thus need to be more selective and creative about the properties and neighborhoods they target — but most investors completing flips in the fourth quarter seem to have done just that. Although the share of flips in the overall housing market decreased, the average gross return per flip increased.