(Bloomberg News) Demand for distressed properties is driving up prices for the first time in two years as investors from Blackstone Group LP to Colony Capital LLC chase shrinking inventory.
The average sales price on homes in the process of foreclosure or already owned by banks rose 7 percent in the second quarter from a year earlier, the biggest annual increase since 2006, RealtyTrac Inc. reported today. The number of those deals dropped 22 percent, the most since 2010, the Irvine, California-based data provider said in a statement.
"There's virtually no supply in a lot of markets right now," Michael Krein, president of the National REO Brokers Association said in a telephone interview. "What we're finding nationally is that 50 percent of all purchasers are investors because they can outbid the owner occupant buyers. Investors are bidding up anywhere from 5 to 25 percent over the list prices."
Investors are taking advantage of home prices that are about 31 percent below the 2006 peak and growing demand for rentals from people with damaged credit, limited savings or lack of confidence in owning a house. Firms including Blackstone, Colony and Oaktree Capital Group LLC plan to spend about $8 billion buying single-family homes to rent, according to company statements and interviews.
Investment in rentals, most of which is coming from small groups rather than Wall Street funds, is filling vacant homes and improving rundown properties while spurring demand for construction jobs, said Tom Shapiro, chairman of GTIS Partners, a New York-based investment fund that plans to spend $1 billion in the next five years on rental housing.
"The housing market is turning around," Shapiro said. "Maybe the silver bullet for housing is the single-family-for- rent, because it's underpinning the market. It's sopping up the excess."
Government-controlled mortgage guarantors Fannie Mae and Freddie Mac have been slow to unload foreclosed homes, also known as real estate owned or REOs, through bulk sales. That has limited the number of properties available for private-equity firms, hedge funds and pension systems to purchase.
Krein said he receives about 20 phone calls a week from large investors and hedge funds interested in Nevada properties.
"There's almost no product left to buy right now," he said. "A couple of years ago you might have had four or five major players that would bid on non-performing loans and REO pools. Now there are probably 50 or 60 that can bid on these."
Compounding the shortage is fewer bank-owned homes coming to market as lenders comply with terms of a $25 billion February settlement with state and federal regulators to resolve allegations with the five-largest home lenders over faulty practices. In the first quarter, foreclosure filings in the U.S. fell to the lowest level since 2007, RealtyTrac said in April.
Banks increasingly approve transactions for less than the amount owed on the mortgage, known as a short sale, or modify loans for borrowers struggling to keep up payments, including by reducing the principle owed.
The gap between short sale prices and prices obtained by banks selling seized properties narrowed to the smallest in almost five years, RealtyTrac said today.
"The shift we've been seeing in the last few quarters that continued in the second quarter is short sales are catching up with bank-owned sales," said Daren Blomquist, a RealtyTrac spokesman.
The five largest U.S. mortgage servicers say they have provided about $10.6 billion in relief to borrowers under terms of the settlement, according to a court-appointed monitor.
Most of that aid, $8.7 billion, came in the form of short sales, the Office of Mortgage Settlement Oversight said yesterday in a progress report on implementation of the accord. Lenders including JPMorgan Chase & Co. and Wells Fargo & Co. also forgave $749.4 million in mortgage debt, according to the report.
Bank of America Corp., the second-largest U.S. lender by assets, had $5.8 billion in short sales completed as of Aug. 21, $596 million in first-lien loan modifications finished and $1.7 billion in forgiveness on home-equity lines of credit, according to Dan Frahm, a spokesman for the Charlotte, North Carolina- based company.
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, last week adjusted its guidelines for short sales to expedite the process and permit the transactions for borrowers who are up to date on mortgage payments if they demonstrate a "hardship," according to an Aug. 21 statement. The guidelines take effect on Nov. 1.
Homes in default or scheduled for auction, often sold through short sales, went for an average price of $185,062 in the second quarter, a 5 percent increase from the previous three months and 1 percent decline from a year earlier, according to RealtyTrac.
"We had a very high inventory of short sales over the last 18 months," said Curtis Darragh, a principal broker at Poughkeepsie, New York-based Legacy Land & Homes LLC. "There are fewer foreclosures on the market than there were and there's a lot more competition."
In the past month, one or two foreclosed properties with prices below the market value have come for sale and each saw five or more offers, Darragh said.
The S&P/Case-Shiller index of home prices in 20 U.S. cities rose 0.5 percent in June, the first year-over-year increase since a tax credit boosted sales in 2010, according to an Aug. 28 report.
Thirteen of the 20 cities in the index showed a year-over- year gain, led by a 14 percent increase in Phoenix. Atlanta had the biggest year-over-year drop, with prices falling 12 percent.
Investor demand for foreclosed homes in Phoenix and Los Angeles has driven up prices to the point that it's no longer economical to buy them as rentals, said Shapiro of GTIS Partners. In Atlanta, there are still a lot of opportunities, he said, adding that he finished a home shopping visit to the Georgia city yesterday. A typical deal there involves buying a house for $72,000, about half the sale price of 10 years ago, and renting the property for $1,250, he said.
"We'll buy 50 houses in Atlanta this month," he said. "We're taking the sniper approach, picking off individual houses in the market."