Another Focus On REO's

Back when I did my first "Focus On..." post on REO activity - January 27th - I pointed out how much these sales dominated our market last year. No surprise, that domination continues. So far this year, REO's account for 65% of our sold units and 69% of our pending units. The interesting thing is, they've only accounted for about 45% of the listings that have come on the market since 11/1/08. Once again, we see that price rules.

One of the things I also pointed out was the enormous discrepancy in last year's median price between REO and Non-REO sales. As you may recall, that number was $217,500 vs. $319,000. I said at the time that I'd have to chew on it, and chew on it I did. One of my first thoughts was that there must be a big discrepancy in the types of homes that each of these market segments represents. That's true to a certain extent - if you look at our higher end homes, Mesa Oaks and the Country Club, only 1 out of the 20 homes sold in those areas last year was an REO. So that does account for part of that spread.

But when I started looking at these two segments comparing apples to apples, I still saw a very significant spread in values. I searched for sold units in North & Central Lompoc and narrowed it down to houses between 1100 to 1500 square feet, built between 1955 and 1965. This is the "bread & butter" house in this market, where I'm most likely to get enough data points to be useful. What I saw here was still pretty incredible. Non-REO homes had a median sale price of $250,000, while REO homes had a median price of $207,500. That's a 17% difference for similar properties. Granted, REO properties tend to be in worse condition overall than "normal" homes, but that can vary a lot, and condition isn't enough to account for this.

I'd been somewhat baffled for several months as to why our values had dropped as much as they did in the face of shrinking inventory and increased demand. It just completely ran counter to what we learned in Economics 101 about supply and demand. But over the past several weeks, I've come to a realization: The law of supply and demand presupposes that buyers and sellers always look out for their own best interests. Quite frankly, I don't think that REO sellers are holding up their end of the bargain. For the most part, they are much more interested in getting rid of the property quickly than they are in getting market value for it. So they keep pricing things below the last comp, and the next guy does the same, and so on... Thus the 7-8% per quarter drop in overall values. The early numbers for this quarter would seem to indicate that we'll see prices pretty close to last quarter, but we'll have to wait and see if that holds true, and if it is a trend.

The last point I want to cover has to do with what we have coming up over the next several months. I've written ad nauseum in the past few weeks about how small our inventory has become. There's been a lot of speculation that we're going to see a big influx of foreclosures later this year, and I've been somewhat skeptical of that happening in our market.

A few weeks ago, Diane and I purchased a service that provides a very detailed and comprehensive look at foreclosure numbers anywhere in the state. When I look at what we have in our market, I'm convinced that we aren't going to see a "tidal wave" of foreclosures here anytime soon. We might get an increase over what we have now, but I doubt that we'll see a return to last year's inventory levels any time this year.

Right now, I can account for around 50 foreclosed homes in the Lompoc Valley that haven't hit the market yet. There's always going to be some backlog here for various reasons, and I don't have enough background information to know if this number has grown or shrunk over the past few months - but I can and will monitor it going forward. What I can tell you is this: If we had half of those homes shake loose and hit the market in the next two weeks (not going to happen), they'd get absorbed by the demand we have in the market today.

Looking down the line, I can identify 71 properties with unresolved Notices of Sale on them. Some of those are going to go back to the bank, but not all of them. My best guess from looking at what we have out there right now - our inventory is likely to go up into the 130-150 range this summer, and we'll have close to the same demand level that we've had for the past year. It's not going to be that bad, folks, and let me tell you something - if you're looking for a home purchase and you find the right fit for you, buy it. Don't hang around and wait for the big wave of foreclosures to see if you can get a better deal. It ain't coming.