Is the distressed property era over? In Portland, the answer appears to be, “yes” but keep reading as to why that’s not entirely true. “Distressed Properties” are those that are either short sales or bank owned (also know as REO- Real Estate Owned) In October 2011, I wrote that 20% of all active listings in Portland were listed as short sales. Today, it’s down to 4.8%! There are 2412 active listings and only 116 short sales. There are only 46 bank owned properties showing “active” status (2% of the market).
In February 2011, I wrote:
Searching RMLS for residential property this morning there are 4208 Active listings in Portland. Of those, 441 (10.4%) are bank owned… 750 (17.8%) are listed as short sales.
In 2011, 28% of our market was made up of distressed property sales. Today it’s 7%! Let’s look at some potential reasons:
- The market has increased around 12% in the last year. As the market goes up, the number of houses “underwater” goes down. There are fewer homes with negative equity. With the Case Shiller Index at 154 in June 2013 (latest available report). The yellow line shows 93 months of negative equity compared to just 41 months today above the red line. Restated: In March 2012, you were underwater if you bought a home between July 2004 and then (93 months). In today’s market only those homes purchased between August 2005 and January 2009 are underwater (41 months). This does not take into account the cost of selling a property.
- Banks have, until very recently, were filing few foreclosures as they waited for the Oregon Supreme Court to rule on a couple of key cases. The banks won those cases and filings have increased but these properties have not reached the market yet. I expect that we will see an increase in bank owned properties listed for sale in 2014. This speaks against the end of the distressed property era.
- Many people have been able to refinance. Ironically, the people who would benefited most, were unable to refinance because they were underwater.
- Seasonally, we typically see a drop in the market. We didn’t see that last year as the rapid real estate rise more than countered seasonality. If we see a drop this year, the pool of underwater properties will increase.
- We’re hearing more rumors that banks are less willing to go the short sale route as they would rather foreclose. That runs counter to what legislators are trying to do. New laws have gone into effect in an attempt to curtail foreclosures. Previous legislation didn’t work. Will it this time?
- Are rapid market increases sustainable? That’s a concerning question. The past proved that the market corrects drastically when inflated. Four to five percent annual increases would be much more comforting and we won’t be able to tell if today’s market is a true reflection of where it should be or an over-correction.
- Interest rates are rising. As properties come out of negative equity there may be less benefits from refinancing. Buyer’s have significantly less buying power as rates rise which will shrink the buyer pool.
It’s clear that the market has improved but it’s too early to say that everything is peachy. There are a lot of factors that could push the market down but I don’t think we’ll see a perfect storm that will decimate the market like it did previously. As a long term investment, the market is more than 50% up from 2000.
