Clear Capital: Recent Rise In REO Saturation Could Mean Price Declines Are Coming

A rise in the percentage of real estate owned (REO) properties sold in February signals that home prices could start to decline over the next several months, according to a recent report from valuations services provider Clear Capital.

According to the firm's Home Data Index (HDI) Market Report, national REO saturation – the percentage of REO properties sold as compared to all properties sold – ticked up 1.8 percentage points in February from 20.9% to 22.7%, compared to the previous rolling quarter (Sept.-Nov.), the largest gain since January 2012. This, combined with declining quarterly gains, suggest home prices could see quarterly declines by July.

In February, three out of 15 metro areas tracked reported slight declines in home prices, compared to the previous rolling quarter. The remaining 12 metros were mostly flat with not one market reaching 1% growth.

National home price gains were notably lower in February, down to 1% from 2.5% in the previous rolling quarter. This is the largest drop since 2010, when gains were coming off the first time homebuyer tax credit. As markets adjust to the new normal, 1% is significant; 2014 is only expected to see 3% to 5% growth.

The report finds that Jacksonville, Fla., had the highest REO saturation increase in February, rising 3.2 percentage points compared to the previous rolling quarter to reach 43.2%. This is the highest rate of distressed sale activity across the largest 50 metropolitan areas, and the largest quarterly increase for Jacksonville since early 2011.

Under the pressure of rising distressed activity, price gains in Jacksonville have cooled dramatically. Current quarterly gains of just 0.7% represent the lowest rate of growth for Jacksonville since mid-2011.

‘A few concerning indicators surfaced in February's home data,’ says Alex Villacorta, vice president of research and analytics at Clear Capital. ‘Our early data shows national quarterly price gains are falling at a rapid pace and suggest overall prices could dip into negative territory soon if current conditions continue. In light of expected waning investor demand, higher rates of distressed sale activity signal that the housing market still must withstand distressed sales, which account for nearly one in four transactions. Since the market fallout in 2006, home prices have dramatically declined during sustained periods of rising distressed sale activity. Over the last two years, however, rising distressed sales have been offset by investor demand, which is not guaranteed to be present in 2014.’

‘Though it is not unusual to see rising distressed activity over the winter months, the current housing picture gives reason to be concerned,’ Villacorta adds. ‘If we don't see a correction come spring, the housing market may be in for a long year.’

To view the full report, including charts and graphs, click here.


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