This article is part of our 2022 – 2023 Housing Market Forecast series. After the series wraps, join us on February 6 for the HW+ Virtual 2023 Forecast Event. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the predictions for this year, along with a roundtable discussion on how these insights apply to your business. The event is exclusively for HW+ members, and you can go here to register.
Buyer behavior on the Auction.com platform provides one of the best barometers of the retail housing market because the success and livelihood of these buyers depend heavily on them accurately anticipating what the retail market will look like in the next six to 12 months.
These buyers are primarily local community developers who purchase distressed properties and then resell or rent those properties on the retail market following rehab — a process that typically takes six to 12 months.
Here’s what that buyer behavior in the second half of 2022 is telling us about two key retail market trends in 2023:
1. Home price correction likely nationwide and in majority of markets
Foreclosure auction buyers on the Auction.com platform purchased at an average discount of 29% below estimated “as-is” market value in the fourth quarter of 2022, up from 23% in the third quarter and up from a pandemic low of 9% in the first quarter of 2021. The 29% average purchase discount was also well above the pre-pandemic average of 22% between 2015 and 2019.
The rapidly rising average purchase discount indicates that local community developers are anticipating a rapid slowdown in home price appreciation in the next six to 12 months. The bigger discount provides them with a bigger cushion to hedge against this slowdown.
The fact that the average discount in Q4 2022 was seven percentage points higher than the pre-pandemic average suggests that buyers expect home price appreciation to go negative given that average home price appreciation between 2015 and 2019 was just 5.4 percent, according to ATTOM Data Solutions.
Nationwide, Auction.com buyer behavior is signaling a negative home price appreciation of less than 5% in 2023, but the risk of a more severe price correction in 2023 is higher in some local markets where the average foreclosure auction purchase discount in Q4 2022 was much higher than the pre-pandemic average.
Among 80 metro areas with sufficient data in the fourth quarter of 2022, those with the biggest increase in purchase discounts relative to their own pre-pandemic averages were Jacksonville, Fla.; Los Angeles; San Diego; Minneapolis-St. Paul; and Riverside, Calif. The average foreclosure auction purchase discount in these five markets was at least 19 percentage points above the pre-pandemic average.
Foreclosure auction buyer behavior is signaling a possible home price correction in 2023 in 50 of the 80 markets, but some notable exceptions include Chicago, Philadelphia, Virginia Beach, Va., Cincinnati and Miami.
2. Home sales bottoming out as sellers eventually capitulate on price
Auction.com buyers are demanding a deeper discount on distressed property purchases, and they’re willing to walk away from a deal when they can’t realize that deeper discount. This is evident in foreclosure auction sales rate data from the Auction.com platform. The sales rate — simply the percentage of properties available at foreclosure auction that end up selling — dropped quickly in the second half of 2022 after spiking earlier in the COVID-19 pandemic.
While still above pre-pandemic averages, this rapidly falling sales rate signals a paradigm shift from seller’s market to a buyer’s market. This paradigm shift is being mirrored in the retail market in the form of plummeting home sales, which had declined for 10 consecutive months through November 2022 — the longest string of consecutive declines on record, according to the National Association of Realtors (NAR) data going back to 1999.
The shift to a buyer’s market is driven primarily by rising mortgage rates. Assuming mortgage rates do not drop substantially in 2023, sellers will eventually need to capitulate on price to adjust to this new reality.
Retail sellers are typically slower to adjust pricing due to their emotional connection to the property, but distressed property sellers don’t have that emotional connection and are typically more responsive to market conditions. Sellers on the Auction.com platform are already showing some early signs of pro-active price adjustments, a trend that will likely be reflected in the retail market in 2023.
Foreclosure auction sellers set their credit bid — the minimum amount they will accept to sell the property — at 70% of estimated “as-is” market value on average in the fourth quarter of 2022, down from 73% in the previous quarter and down from a pandemic peak of 83% in the fourth quarter of 2020. The 70% average credit bid in Q4 2022 was the lowest level as far back as the Auction.com data is available, Q1 2012.
As retail sellers eventually follow the lead of distressed sellers and adjust their listing price lower in 2023, home sales will bottom out and begin rising again, most likely in the second half of the year.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]