Real Estate & Mortgage Insights

2013 Percentage of Distressed Properties Sales Hit Three-Year High

Even as the number of foreclosures coming on to the market declined in 2013, the share of short sales and foreclosure purchases rose last year, eclipsing the percentage of such sales in both 2012 and 2011.

According to the RealtyTrac 2013 U.S. Residential & Foreclosure Sales Report, sales of all distressed properties - including short sales, foreclosure auctions and bank-owned homes - made up 16.2 percent of all home sales last year, an increase from 14.5 percent in 2012 and 15.2 percent in 2011.

What makes that statistic strange is that during the same time fewer homes were going into foreclosure as homeowners did a better job of staying current on their mortgages.

"It may surprise some to see distressed sales rising in 2013 given that foreclosure starts dropped to a seven-year low for the year," said Daren Blomquist, vice president at RealtyTrac. Part of the reason, he says, is that inventory of non-distressed properties has been so limited, "helping to keep the distressed share of sales at a stubbornly high level."

Blomquist added that "while short sales did trend lower in the second half of the year, there are still more than 1.2 million properties in the foreclosure process or bank-owned, providing a sizable pool of inventory that the housing market is in the process of absorbing." With few traditional properties on the market, buyers were often forced to consider less-expensive options. The RealtyTrac report found that in December 2013 the median price for foreclosures and bank-owned properties was 38 percent lower than the median price of non-distressed homes.

Of course, a good portion of 2013's distressed property sales went to investors. Last year investors accounted for 7.3 percent of all home sales, an increase from 5.1 percent in 2012. Those investors included many institutional investment groups buying up large quantities of properties for their portfolios. The number of investors is one reason that the percentage of homes paid for in cash rose so high - to 29.1 percent in 2013 from just 19.4 percent the previous year and 20.6 percent two years earlier.

The number of all-cash purchases were certainly higher towards the end of the year. In December, 42.1 percent of all U.S. home sales were made in cash, up from 38.1 percent in November. And the data is also skewed higher in certain states. In Florida, for example, 62.5 percent of December sales were all-cash.

Going forward, the percentage of short sales and foreclosures should wane as home prices continue to increase. This will help struggling home owners gain more equity in their homes, allowing them to sell instead of defaulting on their mortgages. And banks will have less incentive to agree to short sales; they will earn greater profits by foreclosing on borrowers and re-selling their properties. Additionally, as prices keep rising, more homeowners will be enticed to finally put their homes on the market, increasing inventory and giving buyers more choices. Hopefully 2014 will sound the death knell for record-breaking percentages of distressed property sales, getting the housing market back into more stable territory.

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