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Far From Normal

Very Few Metro Areas Have REO Shares Close to Pre-Crisis Levels

Molly Boesel    |    Mortgage Performance

During the worst point of distress the housing crisis in 2009, real estate-owned (REO) sales made up 28 percent of total homes sold nationally. In some metropolitan areas, the REO share peaked at around 70 percent. As the housing market continues to heal, are we now able to say that REO sales are trending back to a more normal level? As of February 2015, the national REO sales share was 10 percent, compared to the pre-crisis share of about 2 percent. Few metro areas are close to pre-crisis levels, and many are still far off.

There are multiple benefits to having lower, or more normal, REO sales shares. REO sales sell at a discount to healthy sales (non-distressed resales), but when REO shares increase, the discount narrows. This saturation effect could be seen in the U.S. housing market during the housing crisis when the discount of REO prices to resale prices narrowed to about 30 percent from the pre-crisis discount of between 40 to 60 percent. Falling REO shares would most likely help local prices, not only because fewer REOs are selling at a discount, but also because the saturation effect should go away. REO sales can also serve as a substitute for new home sales. Many areas were overbuilt in the run-up to the housing crisis, therefore a lower REO share may boost homebuilding in some areas of the country.

Focusing on metropolitan areas1, we calculated the pre-crisis mean REO share (from 2000 to 2006) and compared it to the REO share2 as of February 2015. The histogram shows the number of metro areas by the difference of the February REO share to the pre-crisis REO share. The median distance from the pre-crisis rate was 6.2 percentage points. There are 16 metros with REO shares below their pre-crisis means, and while six of the metros had pre-crisis REO shares over 6 percent, they were most likely experiencing some housing market distress prior to 2006. The remaining metros with lower REO shares had pre-crisis shares between 1 to 6 percent and February 2015 shares between 0.2 to 4.3 percent. There were very few metros (14, or 3 percent) within 1 percentage point of their pre-crisis REO share, with the average February 2015 share of this group at 3.4 percent. The lowest metro was Fargo, N.D., with its February 2015 REO share equaling the pre-crisis share. On the high end, there were six metros (2 percent) that were more than 20 percent from their pre-crisis means, with Detroit-Dearborn-Livonia coming in 43 percentage points above the pre-crisis share of 5 percent.

The pre-crisis REO share isn’t a magic number, meaning that metro areas do not need to fall to this share for their housing markets to heal. However, comparing the February 2015 share to one from a more normal time period can help us gauge how far away the metros are from normalcy.

[1] Metropolitan areas are CBSAs with a population of 50,000 or more. The Office of Management and Budget defines 409 metropolitan areas, and this blog restricted this further to those areas that had at least 100 total home sales in the past year, resulting in 386 metro areas.
[2] REO shares were calculated using a six month sum of REO sales and total sales to reduce volatility in the results.

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