Rental Market and Investor Enthusiasm Heat Up the REO Marketplace

May 2, 2012

Clear Capital has released its Home Data Index (HDI) Market Report with data through April 2012. The HDI Market Report uses an array of public and proprietary data sources providing the most timely and relevant analysis available from any vendor. Report highlights include:
►National home prices still losing ground with declines of one percent over the past year.
►Northeast, South and West regions are growing at rates under one percent quarter-over-quarter.
►Midwest is hit hard, with deeper depreciation in prices over quarterly and yearly time frames.
►Price resiliency against increasing real estate-owned (REO) saturation is supported by a heating up rental market and investor enthusiasm.
“Home prices continue to show relative strength in April with virtually no change over the short-term and tapering losses over the longer term,” said Dr. Alex Villacorta, director of Research and Analytics at Clear Capital. “There has been quite a bit of buzz in the housing industry surrounding turning REOs into rentals. Our data suggests early activity from these programs could be starting to take effect, with national REO-only home price gains on a price per square foot basis vastly outpacing fair market prices on a national level. Should investor interest continue to drive the expansion of REO-to-rental programs over the next several months, there could be a significant impact on the market overall in terms of providing a rising floor to home values.”
Quarter-over-quarter results were notable only in how little change was seen this month, with numbers very similar with the price changes reported last month. The nation lost a little ground with quarterly losses of -0.2 percent, showing continuing price stability over previous month’s reports.
For the past five months, price movement at the regional level has settled in under one percent (except the Midwest) on a quarterly basis, which is a level of stability not seen for a decade. As the West, Northeast, and South are all in positive territory, significant losses in the Midwest are pulling down national numbers. The Midwest lost -2.7 percent of its value over the quarter, which is the fifth month of declines for the region. Despite mild winter weather and an early spring, it wasn’t enough to kick off a homebuying season in this region. 

Looking at yearly results, the nation is down -1.0 percent compared to last year, which is an improvement over the -1.4 percent loss posted in March’s Market Report. The Northeast, a market that has held up well throughout the housing crisis, posted a light 0.7% increase in prices year-over-year, while the rest of the regions are still trying to climb back into positive territory. The West and South, while still negative for the year, also saw improvements over last month’s report, shrinking their annual losses by 1.4 percentage points and 0.3 percentage points respectively.
Midwest year-over-year performance paints a very different picture. Posting a loss of -4.0 percent, which is deeper than last month’s yearly loss of -3.8 percent, it’s not exhibiting any sign of finding a foothold for recovery like the other geographies.
As foreclosures grew over the last six years, many homeowners became renters. This, combined with potential homebuyers putting off purchases due to market instability, has fueled an increase in demand for rental units and has buoyed rental rates. The chart below, shows the inverse relationship of rental vacancies to year-over-year rental rate changes. This relationship is clear since 2000, with a precipitous drop in vacancies starting in 2010 coinciding with a sharp increase in rates.

The combination of lower vacancies, increasing rental rates, and affordable REO properties has attracted investors to the rental markets. Many see the potential for strong and sometimes instant cash flows topped off with the potential for future appreciation. Carrington Holding Company, Amherst Securities Group, and Waypoint Financial are examples of investors now active in purchasing single family REOs and turning them into rentals and holding for longer terms rather than the typical short-term holds. On the supply side, Fannie Mae is accepting applications from investors to bid on properties for their REO-to-Rental pilot program, with similar programs expected to roll out in coming months.
Demand for REOs is very likely a key driving force behind increasing sales prices for REO properties (as measured on a median price per square foot basis) at a much faster pace than non-REO sales. Over the last year, REO-only prices have jumped a healthy 5.5 percent, while fair market sales dropped 2.9 percent. This is a significant 8.4 percentage point difference between the two sub-sectors of the national market.
Strength in REO prices is also likely a significant driving force behind the national price stability and resiliency in prices against increasing REO saturation seen over the past three months.
The portion of national REO sales, relative to total sales, continued its creep in April, marking the third straight month of quarterly growth. As described in past reports, rising REO saturation is typically associated with declining home values.

The price resiliency seen against rising REO saturation over the past three monthly reports is present again this month, with the exception of the Midwest. This region saw REO sales increase by a whopping 6.0 percent and prices decrease -2.7 percent.

Originations, Residential, Servicing, Settlement