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REO Wars, Episode V: The Empire Strikes Back?

by Peter Thomas Ricci

REO listings have been on a steady decline for some time, but have they reverse course in 2014?

The decline of distressed home sales has been one of the great success stories of the housing recovery. After all, the market share of distressed sales plummeted from 40 percent of the market in March 2011 to just 11 percent as of May 2014, meaning that home sales have become a much more balanced, healthy lot in the last three years.

New numbers from CoreLogic, though, suggest that decline may soon end, and that REO sales could be reversing course relatively soon; in fact, from Aug. 2013 to March 2014 (the most recent month of data), the number of REOs in circulation rose 14.5 percent to 429,580.

The Empire Strikes Back

To understand why REOs are on the rise, a brief history lesson is order:

  • The number of REOs in circulation was a whopping 690,683 in Jan. 2011, but the “robo-signing” scandal – when banks, overwhelmed with distressed properties, essentially rubber-stamped foreclosures to expedite the process – caused an immediate slowdown in the process, as public/Congressional furor caused banks to stop the process, which slowed foreclosures and caused REOs to drop considerably throughout 2011 and into 2012.
  • Once the National Mortgage Settlement was agreed upon in Feb. 2012, though, banks resumed their REO operations, but by then, real estate investors had entered the fray; with their insatiable demand for cheap REO properties (thousands of which were purchased, rehabbed and then rented out), investors met the new REO supply and then-some, pushing supply down even further.
  • REO supply bottomed in Aug. 2013 at just 375,115 properties, but that bottoming coincided with another tectonic shift in the housing market – rising home prices and higher mortgage rates pushed those investors out of the market, and now REO supply has begun to increase once again.
  • As CoreLogic’s Sam Khater put it, “While the current level is still lower than it was during its peak in the crisis, it signals that the rapid improvement in the REO stock of the last two years is over and the market has entered a new phase as it continues to process the legacy of the foreclosure crisis.”

REOs on the Rise

Finally, we have a couple graphs below (courtesy of exclusive data from CoreLogic) that chart the rise of REOs; the first shows the fall and rise of overall REO supply, and the second singles out how REO supply has grown in specific states from Aug. 2013 to March 2014.

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