Purchases of foreclosed homes at auctions jumped last month as banks benefited from surging prices and shunned approvals of sales by homeowners dumping their dwellings at a loss.
In October, about 20 percent of repossessed properties sold at U.S. auctions compared with 15 percent in July, said Daren Blomquist, vice president of Irvine, Calif.-based RealtyTrac. Auction deals accounted for 2.5 percent of all U.S. sales in October, almost doubling from a year earlier. Short sales, in which banks agree to accept less than is owed on the property, constituted 5.3 percent of purchases, falling from 11 percent, data company RealtyTrac said in a report Tuesday.
“Banks are starting to get the prices they want on the auction block, so they’re less willing to lock in their losses with a short sale,” Blomquist said. Some homes are being sold for amounts that almost match the values of their defaulted loans. “That means banks are getting close to recouping some of their losses,” Blomquist said.
Investors, including hedge funds and private equity firms, which acquire the lion’s share of homes at auctions, have raised about $20 billion to purchase as many as 200,000 homes to rent. Their purchases are spurring a rebound in property prices after the housing bust shaved as much as 35 percent off real estate values nationally. The median home price gained 12.8 percent in October from a year ago, just shy of August’s 13.4 percent gain — the highest since the peak of the property boom in 2005, the National Association of Realtors reported last week.
“Speculative demand is what’s driving the market,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “That’s giving banks the chance to get foreclosures off their books.”
Investors have emerged as major landlords in Atlanta, Las Vegas and Phoenix — cities hit hardest by the housing meltdown, where property values plummeted by as much as 50 percent. Since then, rising demand for rentals has given investors annual returns similar to those produced by equity markets, said Frank Pallotta, managing partner at Loan Value Group, a mortgage consulting firm in Rumson, N.J.
Stringent mortgage standards, a legacy from the financial crisis, have deterred people from buying homes because they can’t produce the down payments. The more than 5 million foreclosures since 2006 have forced former owners to rent after their credit scores were ruined during the crash. The rental vacancy rate that tracks empty homes for lease dropped to a 12-year low at the end of the second quarter, the Department of Commerce said.
“The companies buying up single-family homes are doing well on their rental rolls,” Pallotta said. “They need to rent these properties in the short term until they reach their long-term plan of selling them when home prices reach the levels they want.”
Banks use short sales to mitigate losses. The number of such sales in the United States declined in September to 332,000 at an annual pace — the lowest level in seven months, according to CoreLogic Inc., a mortgage data firm.
“Short sales were good for banks when values were dropping because it gave them a way to cut their losses,” RealtyTrac’s Blomquist said. “Now the market is beginning to work against them.”
Banks have reduced their collection of repossessed homes by 26 percent to $7 billion from a year earlier, according to the Federal Deposit Insurance Corp. That’s 50 percent of the level they held at the height of the foreclosure crisis at the end of 2010. Firms are motivated to sell these dwellings because they have to pay monthly outlays for maintenance and insurance, said Jason Arnold, an analyst with RBC Capital Markets in San Francisco.