Foreclosure Auction Bidding Behavior Shows Emerging Risk of Double-Dip in Home Prices

Foreclosure supply continues to plateau at close to half of pre-pandemic levels

Fresh data from the Auction.com marketplace in the third quarter of 2023 shows emerging signs of a possible double-dip in retail home prices in the next six to 12 months even as the supply of distressed properties continues to plateau at close to half of pre-pandemic levels.

Local community developers buying distressed properties at foreclosure auctions and bank-owned (REO) auctions pulled back on the price they were willing to pay relative to estimated “after-repair” market value in the third quarter. That indicates these local community developers are expecting retail home price appreciation to slow or even turn negative in the next six to 12 months it typically takes them to renovate distressed properties and return them to the retail market as resales or rentals.

The average winning bid at foreclosure auction in the third quarter was 58.6 percent of estimated after-repair value in the third quarter, down from 59.2 percent in the second quarter and well below the pandemic peak of 66.3 percent in the third quarter of 2021.

This downward trend in winning bid-to-value ratio bears out in the monthly data as well, with the September ratio of 57.8 percent at the lowest monthly level for the quarter.

Local community developers purchasing distressed properties are still bidding more aggressively than they were a year ago, when mortgage rates were skyrocketing. After climbing to as high as 66.8 percent in February of 2022, the bid-to-value ratio dropped for nine consecutive months, bottoming out at 51.8 percent in November and December of 2022.

Foreshadowing Retail Price Trends

That nine-month pullback in pricing at foreclosure auction foreshadowed the correction in retail home prices that occurred in early 2023. According to data from the National Association of Realtors, median home prices nationwide decreased on a year-over-year basis for five consecutive months, from February 2023 to June 2023.

Meanwhile, local community developers bidding at foreclosure auction were already anticipating at least a mini-boom in the retail market in early 2023, with the bid-to-value ratio rebounding for six consecutive months to a peak of 60.0 percent in June 2023. The retail rebound anticipated by distressed property buyers is now playing out, with retail home price appreciation turning positive in July and August.

Based on the Q3 2023 foreclosure auction bidding behavior, that retail rebound is shaping up to be more of a mini-boom rather than a sustained rebound — especially if the downward trend in bid-to-value ratio at foreclosure auction continues in Q4 2023.

The bid-to-value ratio at foreclosure auction of 58.6 percent in Q3 2023 was also lower than the 2019 average of 60.5 percent in 2019 — when annual retail home price appreciation was averaging about 5 percent a month, according to the NAR data.

Double-Dip Risk by Market

Markets most susceptible to a double-dip — or in some cases a first dip — in retail home prices are those where the bid-to-value ratio at foreclosure auction dropped in Q3 2023 compared to a year ago. Among 46 ?states with sufficient data, there were only six states where that was the case: Rhode Island, Kentucky, Mississippi, Hawaii, Florida and Utah.

A much broader group of states — 29 in total — had bid-to-value ratios in Q3 2023 that were below the 2019 average. These states are likely to see home price appreciation in the low single digits over the next six to 12 months, assuming that the bid-to-value ratio at foreclosure auction does not continue to trend lower. If it does continue to trend lower, those states could also be at risk for a future dip in home prices.

Foreclosure Volume Continues to Plateau

The more conservative bidding on the part of local community developers in the third quarter of 2023 somewhat surprising given the continued dearth of distressed inventory available at foreclosure and REO auction.

Data from the Auction.com marketplace — which accounts for more than 40 percent of all properties brought to foreclosure auction nationwide — shows that the volume of properties brought to foreclosure auction in the third quarter of 2023 was 54 percent of the volume in the first quarter of 2020, immediately prior to the pandemic.

That 54 percent was down from 57 percent in the previous quarter and down from 60 percent in the third quarter of 2022. Completed foreclosure auction volume has hovered between 50 percent and 60 percent of pre-pandemic levels for the last seven quarters after gradually rising off its pandemic-era low of 5 percent in Q2 2020.

Foreclosure Demand Still Strong

Although local community developers are bidding more conservatively in terms of price, their bidding behavior still demonstrates strong demand for distressed properties. The sales rate at foreclosure auction increased to 54.1 percent in the third quarter of 2023, according to Auction.com data. That was up from 53.6 percent in the previous quarter and up from 47.3 percent in Q3 2022.

The sales rate increase is also a reflection of pricing adjustments made by sellers on Auction.com platform. The bid-ask spread between the average credit bid set by sellers as a percentage estimated after-repair value and the winning bid-to-value ratio dropped to 3 percentage points in the second quarter of 2023 — half of the 6-point spread in the first quarter. The spread stayed flat at 3 points in the third quarter.