Is the Real Estate Rebound Here?

Jul 21, 2010 Michael Cook

Real Estate Turnaround - ClaritaDespite the rise in foreclosures, lower interest rates and depressed prices seem to be drawing buyers back to the market.

Over the past six months, real estate foreclosures have continued along at a blistering pace. In addition, the number of bank owned homes is also swelling. Until recently, banks appeared to be unwilling to accept losses in to their real estate portfolio. Short sales proved to be very tough to execute and very few foreclosed properties were actively in the market. The tide appears to be shifting.

Bank Real Estate Owned (REO) Properties

While the average home sales price continuing to decline, sellers can take solace in the fact that volume seems to be turning. After the government tax break ended, there was a stiff drop off in the number of home sales. However, over the past month or two, volume appears to have stabilized, albeit at lower price points.

Buyers have banks to thank for the increased volume. Banks are beginning to show a willingness to deal their trouble properties to the highest bidders. Banks faced a major concern of selling too early at lower prices than they may have gotten by waiting. It would appear that the waiting game is over and many institutions believe the markets have bottomed out.

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Do Hybrid REITs Really Diversify?
Hybrid REITs are designed to provide investors exposure to the mortgage and equity side of the real estate market. But do they actually provide diversification benefits? All real estate is local of course, so it might take a bit longer for the smaller markets in Florida and Las Vegas to experience a rise in the volume of sales, but rest assured its coming. If the economy can avoid a second recession and begin to add jobs, expect residential real estate sales to come back in a big way.

Real Estate Sales Volume vs. Price
While a volume resurgence might be a few months off, a price rebound is at least a year away. The same force driving volume back up is pushing prices down. Every sale of property is recorded the same way, rather it be a foreclosed sale or a sale by an individual. Appraisers and buyers have no way of knowing what sales were foreclosures and what were not. As such, the average sales price will always be deflated in markets with a large amount of foreclosed properties.

On average foreclosures sell for 30 – 40% less than non-foreclosed homes. If half the sales are foreclosures, the market price will decline by 20% more than if all of those homes had been sells by individual owners. The same dynamic that contributes to the volume increase will likely accelerate the price deflation. Assuming buyers can maintain their cool, expect prices in the hardest hit areas to remain below their historical averages for at least one more year.