REO (Bank Owned Homes) Inventory: A Permanent Fixture and Investor Opportunity in Today’s Real Estate Market

Through the 3rd Quarter of 2010, distressed real estate transactions (REOs, Foreclosures and Short Sales) accounted for nearly 33% of all closed transactions, the largest portion being REO and Foreclosures combining for 25% of the closed transactions. REO inventory is currently at record highs. The REO inventory of Fannie Mae, Freddie Mac and FHA increased nearly 24% in Q3 2010 and is up 92% compared to Q3 2009. This accounts for approximately 46% of the nation's total REO supply. There is a growing number of non-performing loans on the books of these government agencies which will increase the governments distressed property ownership significantly. U.S. homeowners currently 30-90 days delinquent on their mortgage total nearly 2.3 million and it is estimated that nearly 69% of these mortgages are owned or guaranteed by the GSEs, the FHA or the VA. Couple this data with information from the Treasury that another 5 million homeowners are over 90 days delinquent or are already in the process of foreclosure, the government would have a near 56% stake in these loans that are owned or guaranteed by federal agencies totaling nearly 3.1 million homes in the federal governments REO inventory. Fannie, Freddie and FHA account for only a portion of the total REO inventory as additional inventory is also held by Private label securities, banks and thrifts.     

All signs point to REO inventory continuing to increase for years to come, particularly here in our local Seattle market as we reported the highest increase in the foreclosure rate nationwide. Fannie Mae commented in November 2010 that "given the large number of seriously delinquent loans in our single-family guaranty book of business and the large current and anticipated supply of single-family homes in the market, we expect it will take a number of years before our REO inventory approaches pre-2008 levels."  This trend in rising REO inventory will surely continue to have a continued depressing effect on non-distressed residential inventory. Federal Reserve Governor, Elizabeth Duke, reported to Congress that 4.25 million additional foreclosure filings, 2 million in 2011 and 2.25 million in 2012, would happen over the next two years. According to a study released by the credit ratings agency, Standard & Poor's, the shadow inventory (properties not yet on the market but expected soon because they are 90 0r more days delinquent, properties currently or recently in foreclosure and REO properties) could now take up to 41 months to clear and values the total properties at $460 billion. Less than 12 months ago in February 2010 that number was at 33 months an increase of over 24%.

Why is this data important and how does it impact your ability to acquire property in this market? This data is relevant for every investor putting capital to work in this market because how you invest and the properties you invest in will largely be impacted by the concentration of distressed assets on the market. Currently, one out of every three closed transactions is a distressed real estate asset (pre-foreclosure, foreclosure or REO) and they are being sold at a deep discount to non-distressed assets. According to the RealtyTrac U.S. Foreclosure Sales Report, in 2010 the average discount of pre-foreclosure properties to non-distressed properties on closed transactions was 19.44% on a nationwide basis. The average discount for foreclosure properties to non-distressed properties on closed transactions was 32.12% and the average discount for REO properties to non-distressed properties on closed transactions was 40.53%. Where some Metro areas such as Los Angeles, San Diego, San Francisco and Washington D.C. have shown year-over-year gains in values, according to the S&P/Case-Shiller Home Price Index, nine markets (Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, Portland (OR), Seattle-Tacoma and Tampa) hit their lowest levels since home prices peaked in 2006-2007, meaning that average home prices in these markets have fallen even further than the lows set in the spring of 2009.

In 2010, the Seattle-Bellevue-Tacoma metro area showed the largest annual increase in foreclosure activity nationwide with a 71% annual increase in foreclosure filings, to one out of every 129 houses. Though California, Arizona, Nevada and Florida remain the hotbeds for foreclosure activity, the increased pace of foreclosure activity has reached our local market. Pierce and Snohomish County had the highest foreclosure rate in Washington last year with one out of every 45 households receiving a foreclosure filing, the same as the national rate with this trend patterning in the wrong direction. Home values of non-distressed inventory will continue to suffer locally as the pace of foreclosure activity continues to increase in our area. However, according to a recent report by CNN Money, Tacoma and Seattle were rated as the 1st  and 6th best bet for a real estate market recovery in the country. The Seattle-Bellevue-Tacoma metro area will be a leader in the real estate recovery nationwide, as it always has been throughout history. Taking advantage of the deep real estate discounts available through acquiring distressed assets will enable investors to not only acquire properties that can be quickly renovated and resold for an immediate profit, but also build a diversified long-term real estate portfolio that will be positioned well to perform and cash flow as the market continues its recovery process. Our focus on acquiring distressed REO properties in key areas and communities well positioned for a turn around will help the investors that we work with profit for years to come.                

Please feel free to contact me at any time via our website at www.jamesregroup.com to learn how you can get started investing in REOs, via phone at 206-300-2693 or contact me via email at terryj@jamesregroup.com to learn how to get access to our exclusive REO inventory. All information is private and confidential.

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