Home/Mortgages/REO Saturation Plays Key Role in Market Prices

August 4, 2011 (Jeff Alan)

U.S. home prices increased by 4.1 percent in the latest rolling quarter according to Clear Capital’s Home Data Index (HDI), but the seasonal gains were not nearly enough to offset the declines recorded last winter as year-over-year prices are still down 7.9 percent as REO sales continue to apply downward pressure on market prices.

All four regions posted quarterly gains for the first time, without any tax credit stimulus, since 2006. The largest price gains were in the Midwest (6.3%), followed by the Northeast (5.2%), the South (4.2%), and the West (0.7%).

All regions posted year-over-year declines with the Midwest suffering the largest decline of 13.1 percent followed by the West (-7.8%), the South (-7.3%), and the Northeast (-2.9%).

The Real Estate Owned (REO) saturation rate declined nationally to 28.7 percent at the end of the recent quarter compared to 33.7 percent at the end of the previous quarter.

“Building off last month’s minimal quarterly gains, prices continue to correct from winter’s extended declines,” said Dr. Alex Villacorta, director of research and analytics at Clear Capital. “Although this is encouraging, many markets are still near, or at record lows as REO saturation remains a significant proportion of all sales activity.”

There continues to be a strong correlation between distressed sales activities and home prices in the highest and lowest performing markets. The higher the REO saturation rate, the lower home prices fall.

In the highest performing markets, 4 of the 15 markets experienced year-over-year price gains and extremely low REO saturation rates. Rochester posted a year-over-year price gain of 2.2 percent with an REO saturation rate of only 3.6 percent, Pittsburgh posted a price gain of 2.1 percent and a saturation rate of 7.7 percent, Washington D.C. posted a 2.7 percent price gain with a saturation rate of 14.8 percent, and New York posted price gains of 1.5 percent with a saturation rate of 8.4 percent.

The average saturation rate in the 15 highest performing markets was 22.7 percent.

Conversely, in the lowest performing markets, large year-over-year price declines were posted in areas with the highest REO saturation rates. Detroit posted a year-over-year price decline of 24.3 percent with an REO saturation rate of 56.1 percent, Columbus posted a price decline of 21.6 percent and a saturation rate of 39.1 percent, Tucson posted a price decline of 15.9 percent and a saturation rate of 38.8 percent, and Jacksonville posted a price decline of 12.7 percent and a saturation rate of 35.5 percent.

The average REO saturation rate in the lowest performing markets was 33.3 percent

“Economic fundamentals have been re-defined in this post crash marketplace to not only include the traditional measures such as employment and consumer confidence, but also the inescapable presence of distressed activity which is defining many of the markets. Here, distressed activity has formed a divide that separates markets,” the report says.

Tags: Clear Capital, housing prices, price declines, REO, saturation rate, consumer demand, metropolitan areas

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