Nearly halfway through 2012, the real estate industry is making headway in finding prescriptive solutions to return to some state of stability. An improving economy and increased government involvement in modulating anti-foreclosure programs has caused many real estate pundits to declare the housing crisis near its end. And while these factors play a pivotal role in restoring equilibrium to the market, what could be the most significant indication that the” light at the end of the tunnel” is not just a myth is the slow and steady erosion of the inventory of distressed properties on the market.
It’s no secret that the saturation of distressed assets on the market has driven home values down, underwriting standards for new mortgages higher, and prospective buyers out of the market during the first years of the housing downturn. As the dust of 2011 settled, however, we saw the emergence of certain forces continuing into this year that are helping to shrink the numbers of distressed assets. Lower distressed home values gave rise to the all-cash investor with a voracious appetite and deep pockets for bargains. The government even stole a page from the investor playbook by piloting a bulk REO to Rentals program in 2012. Investors are enjoying healthy returns as a result of the popularity of single-family residential housing over multifamily housing, and are on the lookout for more deals.
Ironically, the banks themselves proved the next major force that emerged as a key factor in reducing distressed inventories. Or more accurately stated -- a shift in bank policy toward previously-disdained workout solutions. Banks finally did the math that everyone else did and realized it was cheaper to accept a lower value through short sales than let a property languish on its asset sheets. Banks not only embraced short sales, they proactively reached out to distressed borrowers to consider short sales as a way out with huge incentives in store for them if they sold. Moreover, other workout solutions such as deed-in-lieu or “cash-for-keys” programs gained favor with lenders as they sought more drastic solutions to reduce existing inventories. One lender is even experimenting with a long-overdue twist to the deed-in-lieu solution by taking back title and renting the property back to the distressed homeowner at a rate lower than their mortgage payment.
The combination of private investors and lender initiatives, with a healthy dash of regulatory pressure has resulted in such an alarming decrease in housing inventory that values on non-distressed properties have not only bottomed out, but risen in select markets. And while not nearly approaching the volume of the housing boom in the last decade, multiple offers on properties have returned. Shrinking foreclosure inventories coupled with other key indicators such as falling mortgage delinquencies and more promising employment statistics seem to reflect a healthier real estate sector.
What does this mean for real estate professionals? Agents, brokers, and other ancillary real estate service providers should see increased activity compared to 2010 and 2011, but to make the most of new opportunities must be able to handle complex transactions involving distressed assets. Any investors that have been sitting on the fence waiting for a true bottom to hit to find even more bargains may miss their window of opportunity if they don’t throw their hat into the ring now as the availability of discounted properties as investment vehicles will become harder to find. And as conditions improve, more sellers will be enticed to bring their homes to market demanding (and holding out for) a higher asking price. While a renewed sellers’ market with stronger pricing would of course be the best scenario for housing, investors will have to shift their strategy to take advantage of the market.
There’s indeed reason for renewed optimism that the worst of the real estate downturn is in the rear view mirror. The road ahead for real estate should prove less treacherous in the next cycle if travelled with a cautious strategy that includes finding more ways to liquidate distressed assets from the marketplace.
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