Price is a huge factor for investors and hedge fund groups that are interested in real estate investing. For that reason, many investors turned to purchasing foreclosures in recent years—the properties were discounted, and many were in great locations that were previously cost prohibitive.
But as the number of investors snapping up distressed properties grew, and the inventory of foreclosures decreased, prices began to rise. Huge hedge fund groups that are spending billions of dollars on real estate now occupy many of the markets once considered hotbeds of foreclosure activity, including Las Vegas, Phoenix, and Miami, thus driving up prices. In some cases, REOs in these markets are actually selling for higher prices than non-distressed homes.
Following the finalization of the National Mortgage Settlement in April 2012, foreclosure inventory has slowly increased, rising to about 1.5 million properties as of the first quarter of 2013. That’s up roughly 12 percent from the five-year low reached in May 2012, and it’s up 9 percent from the first quarter of 2012.
The cumulative estimated market value of homes that are bank-owned or in foreclosure was $200 billion as of the first quarter of 2013, up 14 percent from the $175 billion cumulative estimated value in the first quarter of 2012.
The market has shifted
Once, four sand states—California, Arizona, Nevada, and Florida—accounted for more than half of the nation’s foreclosure activity (properties subjected to default notices, scheduled auctions, or bank repossessions). Today those states, with the possible exception of Florida, are well on their way to recovery.
Now the opportunities for investors are elsewhere—largely in the Midwest and Northeast, where most of the nation’s 23 judicial states are located. In judicial states, the foreclosure process must be handled through the state’s court system. This extends the timeline of the foreclosure process. It can also lead to a backlog of foreclosures—they can’t go on the market until that process is completed. Inventories also rise and fall by the speed with which lenders process backlogs.
Below are ten markets that are not normally considered among the national leaders in foreclosures but that are becoming increasingly attractive from a financial point of view. They all feature healthy foreclosure discounts—the difference between median foreclosure prices and median prices for all home sales in a market—which is critical in determining the profitability of a foreclosure investment, whether the property is resold or held and rented out.
The months’ supply of distressed sales for these markets is more than a year in every case, and in some metros, it’s over two years—which means there’s plenty of inventory. Little, if any, hedge fund activity is evident to date, so prices remain reasonable—though it’s hard to say how much longer it will take before investors discover these markets.
Ten New Foreclosure Markets
Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.
Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.