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For the first time ever, sales of properties in some stage of foreclosure (largely short sales) outnumbered sales of bank-owned properties (REO) in the third quarter, as short sales continue to gain market share at the expense of REO and sales of completed foreclosures at auction.

Short Sales Overtook REO Sales in Q3

For the first time ever, sales of properties in some stage of foreclosure (pre-foreclosure sales) outnumbered sales of bank-owned properties (REO) in the third quarter, as short sales continue to gain market share at the expense of REO and sales of completed foreclosures at auction.

Pre-foreclosure sales, largely short sales, increased 22 percent from the second quarter and were also up 22 percent from the third quarter of 2011, while the average sales price decreased 3 percent from the previous quarter and was down 5 percent from a year ago, according to RealtyTrac. A total of 98,125 pre-foreclosure sales occurred during the quarter compared to a total of 94,934 REO sales.

By contrast, REO sales increased 19 percent from the previous quarter but were still down 20 percent from the third quarter of 2011. A total of 193,059 U.S. properties in some stage of foreclosure or bank-owned (REO) were sold during the third quarter, an increase of 21 percent from the previous quarter, but still down 3 percent from the third quarter of 2011. Foreclosure-related sales accounted for 19 percent of all U.S. residential sales during the third quarter – down from 20 percent in the previous quarter but the same level as in the third quarter of 2011.

Pre-foreclosure properties sold for an average price of $191,025 in the third quarter, down 3 percent from the second quarter and down 5 percent from the third quarter of 2011. The average sales price of a pre-foreclosure residential property in the third quarter was 27 percent below the average sales price of a non-foreclosure residential property, up from a 25 percent discount in the previous quarter and a 19 percent discount in the third quarter of 2011.

The average REO sales price decreased 7 percent from the previous quarter but was still up 7 percent from the third quarter of 2011. REOs sold for an average price of $161,954 in the third quarter, down 7 percent from the second quarter but up 7 percent from the third quarter of 2011. The average sales price of a bank-owned home in the third quarter was 38 percent below the average price of a non-foreclosure home, up from a 33 percent discount in the second quarter but down from a 39 percent discount in the third quarter of 2011.

Homes in foreclosure or bank owned sold at an average price that was 32 percent below the average price of a home not in foreclosure, up from a 29 percent discount in the second quarter and a 31 percent discount in the third quarter of 2011.

Short sales of properties not in the foreclosure process increased 15 percent from the previous quarter and were up 17 percent from the third quarter of 2011. These non-foreclosure short sales accounted for an estimated 22 percent of all residential sales, bringing the total distressed sale share to an estimated 41 percent for the quarter. Non-foreclosure short sales prices in the third quarter fell short of the total amount of loans outstanding by an average of $82,312 per short sale. For all short sales, including non-foreclosure and in-foreclosure properties, the sales price was short of combined loan amounts by average of $94,896 per short sale.

“The shift toward earlier disposition of distressed properties continued in the third quarter as both lenders and at-risk homeowners are realizing that short sales are often a better alternative than foreclosure,” said Daren Blomquist, vice president of RealtyTrac. “However, the scheduled expiration of the Mortgage Forgiveness Debt Relief Act at the end of this year could stifle this trend toward short sales. If that law expires as scheduled, homeowners who agree to a short sale could see their income tax jump significantly because the portion of the unpaid loan balance not covered by the short sale proceeds will be considered taxable income in many cases.

Pre-foreclosure homes that sold in the third quarter took an average of 359 days to sell after starting the foreclosure process, up from an average of 319 days in the previous quarter and up from an average of 318 days in the third quarter of 2011.

Third parties purchased a total of 94,934 bank-owned (REO) residential properties in the third quarter, an increase of 19 percent from the previous quarter but down 20 percent from the third quarter of 2011. REO sales accounted for 10 percent of all residential sales during the quarter, the same as in the second quarter but down from 11 percent of sales in the third quarter of 2011.

Separately, Lender Processing Services reported yesterday that foreclosure starts declined significantly foreclosure starts over the last two months – down 21.9 percent in October and almost 48 percent on a year-over-year basis – leading to a nearly 7 percent drop in overall foreclosure inventory.

“LPS observed a drop-off in foreclosure starts in September that accelerated in October,” Blecher said. “This decline coincided with the implementation of new procedural changes outlined in the National Mortgage Settlement, which requires, among other things, that mortgage servicers provide written notice to borrowers 14 days prior to referring a delinquent loan to a foreclosure attorney. This has resulted in what is likely a temporary slowdown in foreclosure starts that we do not believe is indicative of a longer-term trend. However, we will continue to monitor this activity closely in the coming months.”

The LPS Mortgage Monitor reported that September loan originations were down, likely due to the shortened number of business days in the month. However, prepayment speeds (historically a good indicator of refinance activity) rebounded in October, and as such, LPS expects to see overall origination numbers pick up for that month. LPS also found that mortgage spreads remain elevated, averaging 197 basis points above the 10-Year Treasury rates, with interest rates consistent across all product types.

One comment

  1. People gotta live somewhere, I guess. Instead of “buy and hold”, the oatpmil strategy considers that the longer you hold the house, the more money you lose. So the choices are now “throw your money away on equity” or “throw your money away on rent”. Buy now if the price is low enough and you put enough money down so you can afford to dump it when the time comes (or put nothing down and pay the FHA premium to be able to walk away).This is an object lesson on people who clamor for “equality”, particularly equality of outcomes. Equality can mean everyone has equally sh!tty results, too.Back in 2002 we had an infant and a cat. It was hard enough to find a good rental with a cat in tow, forget about a cat and an infant. When we lived in Huntingotn, LI I think I had to write checks for nearly $8K just to rent an $1800/month house (and that was back in ’97 when $1800 was worth a lot more). I was sure in 2002 that the RE market would eventually fall, but we need some place to live that we couldn’t get kicked out of. I think my mortgage broker pre-approved for a $675K mortgage. That scared the sh!te out of me, no way was I taking on that much debt. We put $90K down on a $260K 2BR condo with high ceilings and fireplace, because I wanted a McDonalds mortgage, one that I could pay even if I had to work at McDonalds. $90K down because I always wanted to have enough equity that we could sell at any time in any market without bringing money to the closing table. Now we have two kids (luckily both girls) in the same 2BR and we’re down to paying off the last $100K on our place. Our taxes are ridiculously low and our services in Boston are ridiculously wonderful. On top of that, Boston shaves $1500 or so off our $3500 tax bill which brings it down to $2000K for the year because we owner-occupy. When we moved in I couldn’t stop laughing at our tax bill. It was $2K with a $1200 reduction for owner-occupying, $800 for the year. I joked with my wife back then that when we paid the house off our cable TV would be our largest monthly expense. Now that I’m 51, our place is so cheap that I can put 90% of my income into my 401K and the $22k banged in before we reach our coldest temps in February and I’m done for the year. Luckily I have a spouse who also likes to live way below our means, but I couldn’t take any chances, we lived together for 10 years before I proposed in 2000;-)

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