Auction.com, the nation’s largest online platform for distressed real estate sales, recently reported that demand for homes sold at auction began to decline late in the second quarter of 2024 even as the available supply of foreclosed homes also contracted.
Proprietary data from the California-based company, which accounts for nearly 50% of all U.S. properties sold at foreclosure auction, showed that this trend is being fueled by rising levels of inventory on the retail market. Data from Altos Research found that the inventory of single-family homes for sale was up 40% year over year at the end of July.
“The demand slippage in late Q2 could be an early indication that local community developers buying at auction are becoming increasingly wary of rising retail inventory, which represents competition for the renovated homes they sell or rent back into the retail market — typically within six months of buying at auction,” Daren Blomquist, vice president of market economics at Auction.com, said in the report. “If the demand pullback continues into Q3, it would also foreshadow a slowdown in retail home price appreciation.”
That statement is backed up by First American data released this week, which revealed that real house prices — adjusted for income levels and mortgage rates — dropped by 1.3% from May to June. On an annualized basis, five major U.S. markets (Raleigh; Austin; Portland, Oregon; Tampa; and Denver) saw prices decline by 2% to 7% in June.
Auction.com noted that while “one month’s data is not yet a trend,“ the bidding behavior of foreclosure-auction buyers tends to be a reliable indicator of future retail home price appreciation since these investors are estimating what market conditions will look like in three to six months.
Its data showed that overall demand among auction buyers grew between the first and second quarters of 2024, but there was a “clear downshift“ in June as properties saw fewer bids along with lower sales rates and lower price ratios compared to May.
For example, the average number of bids for properties sold through lender-owned (REO) auctions — which involve assets that were not sold through foreclosure — was down 17% month over month and down 3% year over year in June. And after reaching a two-year peak in May, the sales rate at foreclosure auctions (i.e., the share of properties that sold) dropped 4% in June.
Meanwhile, the bid-to-value ratios for both types of auctions declined from two-year high points in May. Winning bids at foreclosure auctions in June declined to an average of 58.7% of a property’s estimated after-repair value (ARV), while those at REO auctions averaged 58.6% of the ARV.
Foreclosure-auction bid-to-value ratios declined by at least 10% on a monthly and yearly basis in major markets like Miami, New Orleans, Tampa, Orlando and Denver. Auction.com noted that these metro areas tend to have high shares of “stale“ listings that have been on market for more than 30 days, according to Redfin data.
Lower levels of demand are also showing up in bid-to-ask spreads, i.e., what buyers are willing to pay versus what sellers are willing to take. In June, this spread rose to an average of 6 percentage points across foreclosure auctions and 11 percentage points across REO auctions.
“The widening bid-ask spread in June was not as much the result of increased pricing by sellers — primarily banks, nonbanks, mortgage servicers and government-sponsored entities,“ Auction.com explained in its report. “Instead, the widening bid-ask spread was mostly the result of the more dramatic downshift in price demanded by buyers between the beginning of the quarter in April and the end of the quarter in June.“
The supply of homes being brought to both types of auctions is declining and now stands at less than half of pre-pandemic levels, according to Auction.com. This ties into recent CoreLogic data which shows that the U.S. foreclosure rate is near its 25-year low point.
But distressed supply varies by location and some states — led by Connecticut, Alaska and Kentucky — had more homes being brought to foreclosure auction in Q2 2024 compared to Q1 2020 at the start of the COVID-19 pandemic. Conversely, states like Florida, Rhode Island and Nebraska have foreclosure-auction supplies at less than one-quarter of their pre-pandemic rates.
