Are expanded First Look auctions putting more distressed properties into the hands of nonprofits and owner-occupants as intended? That’s an important topic that Urban Insititute’s Laurie Goodman, Institute Fellow, and Jung Hyun Choi, Principal Research Associate, tackled in an interview with Auction.com’s Daren Blomquist, VP of Market Economics.
Daren: Lori, I just wanted to start out with you to give us a little bit of an overview of what First Look auctions are and the recent expansion that caused you to want to look into the impact?
Laurie: Thanks very much for the question. First Look auctions give owner-occupants and non-profits an exclusive right to shop and bid on properties that have been through the foreclosure process for a period of time before the properties become available for investors. While these First Look policies have been on the books since 2009, they were expanded in 2022 as part of the Biden Housing Supply Plan. In particular, in 2022, the Department of Housing and Urban Development introduced a 30-day exclusive period for formerly insured FHA properties, and the GSEs expanded their exclusive period from 20 days to 30 days. So, we wanted to assess the effectiveness of these expanded policies. Auction.com, the nation’s largest online auction site [for distressed properties], was willing to partner with us and share their data to examine this important issue. We are very, very grateful for that.
Daren: And we’re grateful for your participation in this and being willing to look at the data because it’s something we were definitely very curious about as well. So, what’s the headline, what’s the takeaway, the high-level takeaway from what you found with this research?
Laurie: Well, we found that First Look policies are indeed effective in raising the share of owner-occupants that buy these properties. And this is important because the properties that sell at auction, often referred to as ‘distressed sales’ tend to sell at a lower price than is available on the non-distressed home sales market, which gives new homeowners a greater opportunity to build wealth.
Daren: Great, which is really showing that they are doing what they were intended to do, at least to a certain extent. So, Jung, I wanted to turn to you because I know you were really digging into the data, neck-deep in the data. Could you first just explain to us exactly the nature of the data you were looking at for this research?
Jung: Yes. So, the data we examined was completed foreclosures — distressed properties that were brought to auction on Auction.com between August 2022 and August 2023. So, this is the period after the policy change mentioned by Laurie. Among the 13,000 properties we looked into, about 56 percent of these properties went through First Look, and the remaining 44 percent didn’t. So, we compared the share of these properties that were sold to owner-occupants between those that went through First Look and those that did not.
Daren: And then what did you find in the data that supported this overall finding that Laurie mentioned? That First Look auctions actually did have a positive impact in improving the number of owner-occupants that were buying?
Jung: Yes. So, of the distressed sales we found that went through First Look about 10 percent were sold to owner-occupants compared to 6 percent that did not go through First Look. And note that not all properties that go through auction eventually end up selling. So, if we actually compare those properties that were sold, we actually see a greater gap in the share of occupancy between those that went through First Look and those that did not. For example, we found that about 31 percent of the properties that went through First Look were sold to owner-occupants compared to 14 percent of properties that did not go through First Look. So, this difference reflects the fact that First Look properties had the lower sales rate, partially because they had the higher share of occupied properties, and these properties are typically more difficult to purchase, especially for owner-occupants because they are not familiar with the process of evicting a tenant.
Daren: Yeah, that’s really interesting and kind of speaks to the fact that some of these distressed properties are a better fit for owner-occupant buyers than others. And that’s something that we’ve observed for a while. And it seems like part of the finding here is that we want to make sure we’re matching the most appropriate distressed properties with owner-occupant buyers as much as possible.
Daren: One of the other things that surprised me about the research is that there was a relatively high percentage of properties that were not in the First Look program or were outside of the First Look window that actually did end up selling to owner-occupants. And it surprised me because it didn’t rely on the First Look program to do that. Laurie, I wanted to ask you if that’s something that surprised you, and if so, what do you think is happening here?
Laurie: So, when I first saw the numbers, I was surprised. As I started thinking about it more, I was less surprised. Low supply in the retail market is attracting more owner-occupants. In addition, the very sharp increase in home prices from 2019 to 2022 sent many potential buyers looking for bargains, and of course the auction process represents a bargain. Finally, there was a large increase in mortgage rates beginning in early 2022; and this increase was substantially larger than the increase in Treasury rates. This made potential homeowners more willing to pull every possible dollar from savings, as the mortgage rates were much higher than what they were earning on their deposits and fixed income investments, as well as borrowing from relatives.
Daren: Great, thank you so much. And thanks to both of you for taking the time to share your findings from this research with us.
For more information about First Look, visit Auction.com/FirstLook or https://www.urban.org/urban-wire/new-first-look-policies-have-helped-owner-occupants-purchase-lower-cost-homes.