As dark clouds gather on the horizon of the housing market, foreclosure-auction buyers remain bullish. Sixty-one percent of foreclosed properties on the Auction.com platform in first-quarter 2022 were sold to third-party buyers, up from 56% in the previous quarter and up from 59% in first-quarter 2021.
The 61% sales rate was the second-highest quarterly sales rate since this data began to be tracked in Q1 2012 — surpassed only by a 63% sales rate in Q2 2021. In the eight years prior to the pandemic, the quarterly sales rate averaged 41.2%. Indicative of strong demand, the elevated sales rate continued even as mortgage interest rates spiked (rising past a 5% average by April 2022, according to Freddie Mac).
Additionally, the supply of properties available for auction gradually increased after the phasing out of pandemic-triggered foreclosure protections. More than 7,800 foreclosed properties were placed on the Auction.com platform in Q1 2022, up 13% on a quarterly basis and up 60% year over year. Auction.com handles nearly 40% of all U.S. foreclosure auctions.
Despite reaching a new pandemic-era high, foreclosure-auction volume during the first three months of this year was still about half of the pre-pandemic level in Q1 2020, according to Auction.com data. The states with the highest foreclosure-auction volumes relative to Q1 2020 levels were Connecticut (325%), Louisiana (121.7%), Indiana (108.2%), South Dakota (100%) and Oklahoma (97.5%).
Distressed-property buyers not only purchased a higher share of properties available at foreclosure auction — they also purchased them at higher prices, both in nominal terms as well as relative to the credit bid. The credit bid is typically the total debt owed to the foreclosing lender or the estimated net value of the home, whichever is lower.
The average sales price for these properties ($193,597 in Q1 2022) was up 4% from the previous quarter and up 41% year over year — the third consecutive quarter with an annualized increase of more than 40%. On average, properties at foreclosure auction sold for 125% of the credit bid in Q1 2022. In the eight years prior to the pandemic, the average price-to-credit-bid ratio was 116%.
Strong demand from foreclosure-auction buyers — which is manifested in rising sales rates and prices — can provide a silver lining for people who lose their homes via foreclosure. A sale to a third-party buyer at auction represents the last chance for a distressed homeowner to cash in any equity in their home. But if a property reverts to the foreclosing lender as real estate-owned, the homeowner has no opportunity to recover their equity.
The rising price-to-credit-bid ratio for homes sold at foreclosure auction means that distressed homeowners have a better chance of receiving surplus funds generated by the sale. Auction.com data shows that 57% of all properties sold at foreclosure auction in Q1 2022 generated surplus funds, up from 52% in the previous quarter and a record since data began to be tracked 10 years earlier.
Foreclosure-auction buyers — most of whom are local developers who renovate and resell the homes to owner occupants — aren’t oblivious to the ominous signs in the housing market. Fifty-five percent of this group believes that their local housing market is overvalued and a correction is possible, according to an Auction.com survey conducted in March 2022. That’s up from 40% in a February 2021 survey. Seventeen percent of respondents expect flat or declining home prices in their local market in 2022, up from 12% last year.
Still, 86% of respondents expect to acquire as many or more properties this year compared to last. The cautious confidence of distressed-property buyers stems from an investment strategy that is not heavily reliant on price appreciation. Instead, these buyers add value to distressed properties through extensive renovations that create highly desirable and relatively affordable homes for owner occupants — often first-time homebuyers. Even in a scenario where rising mortgage rates dampen consumer demand, these renovated homes can be held as quality, affordable rentals until the owner-occupant market recovers. ●