Auction.com, the leading online platform for distressed real estate sales in the United States, recently stated that demand for homes sold at auction started to decrease towards the end of the second quarter of 2024, despite a reduction in the available supply of foreclosed homes.
Exclusive data from the California-based company, which represents almost half of all U.S. properties sold at foreclosure auction, indicated that this shift is driven by the increasing inventory in the retail market. Data from Altos Research revealed a 40% year-over-year rise in the inventory of single-family homes for sale by the end of July.
Daren Blomquist, Vice President of Market Economics at Auction.com, explained in the report, “The decrease in demand in late Q2 could suggest that local developers purchasing at auction are becoming more cautious due to the rising retail inventory, which poses competition for the refurbished homes they sell or rent out in the retail market within six months of purchase.” He also warned that a continued decline in demand in Q3 could signal a slowdown in retail home price appreciation.
Supporting this statement, data from First American released recently showed a 1.3% decrease in real house prices from May to June when adjusted for income levels and mortgage rates. In June, five major U.S. markets (Raleigh, Austin, Portland, Oregon, Tampa, and Denver) experienced price declines ranging from 2% to 7% on an annualized basis.
Auction.com emphasized that while one month’s data is not enough to establish a trend, the bidding behavior of foreclosure-auction buyers is a reliable indicator of future retail home price appreciation, as these investors forecast market conditions three to six months ahead.
The data revealed a growth in overall demand among auction buyers between the first and second quarters of 2024, but a noticeable slowdown in June, with properties receiving fewer bids, lower sales rates, and reduced price ratios compared to May.
For instance, the average number of bids for properties sold at lender-owned (REO) auctions dropped by 17% month-over-month and 3% year-over-year in June. Following a peak in May, the sales rate at foreclosure auctions decreased by 4% in June.
Simultaneously, bid-to-value ratios for both types of auctions declined from their two-year highs in May. Winning bids at foreclosure auctions averaged 58.7% of a property’s estimated after-repair value (ARV) in June, while REO auctions averaged 58.6% of the ARV.
Foreclosure-auction bid-to-value ratios saw at least a 10% decline on a monthly and yearly basis in major markets like Miami, New Orleans, Tampa, Orlando, and Denver. According to Redfin data, these metro areas have a high proportion of listings that have been on the market for more than 30 days.
Lower demand levels are also evident in bid-to-ask spreads, indicating the discrepancy between buyer and seller expectations. In June, this spread averaged 6 percentage points for foreclosure auctions and 11 percentage points for REO auctions.
Auction.com clarified in its report, “The widening bid-ask spread in June was not primarily due to increased pricing by sellers, but rather the significant decrease in price demanded by buyers from April to June.”
The supply of homes being brought to both types of auctions has decreased and is now less than half of pre-pandemic levels, as indicated by Auction.com. This aligns with recent CoreLogic data showing that the U.S. foreclosure rate is nearing a 25-year low.
However, the distressed supply varies across locations, with some states such as Connecticut, Alaska, and Kentucky seeing more homes 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 levels.