Auction Market Dispatch

KEY POINTS

• All key auction demand metrics turn lower nationwide in Q3 2024
• Price demanded turns lower in Q3 after hitting two-year high in Q2
• Foreclosure auction supply slips to lowest level in three years
• Auction bid-ask spread widens despite lower price supplied by sellers

OVERVIEW

Early signs of weakening demand for distressed properties sold at auction that showed up late in the second quarter continued throughout the third quarter of 2024, according to proprietary data from Auction.com, the nation’s largest distressed property marketplace that accounts for nearly half of all properties sold at foreclosure auction nationwide.

Weakening demand from the local community developers buying at auction suggests continued weakness in the retail housing market into early 2025 given that those local community developers are anticipating retail market conditions about six months into the future — the typical time it takes to renovate distressed properties purchased at auction and return them to the retail market as resales or rentals.

“Just waiting for the market to correct and find balance,” wrote one Auction.com buyer, in response to a survey regarding the impact of market conditions on bidding and purchasing behavior at auction. The survey was conducted between Sept. 25 and 27 and received responses from more than 140 people who have purchased properties on Auction.com.

Results from the survey show that more local community developers purchasing at auction view market conditions as a headwind working against them rather than as a tailwind working in their favor. This despite the prospect of falling mortgage rates stemming from the Federal Reserve’s 50 basis point reduction in the federal funds interest rate in September.

More than one-third (34 percent) of survey respondents — all active buyers on Auction.com — said market conditions in late September were making them less willing to buy compared to about one-fifth (21 percent) who said market conditions were making them more willing to buy. The remaining 45 percent said market conditions were not impacting their willingness to buy.

Unfavorable mortgage rates were cited as a market headwind by 30 percent of buyers surveyed, third highest behind higher acquisition costs (55 percent) and higher rehab costs (49 percent). Many buyers also mentioned uncertainty from the election as a reason for pulling back on purchasing.

“The upcoming election has the world for me on hold since I don’t know who will win the White House,” wrote one survey respondent, joining about 10 percent of buyers surveyed who mentioned the election outcome as a factor influencing their bidding and buying behavior in an open-ended question on the survey.

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DISTRESSED DEMAND

Broad-Based Drop in Demand

All the key auction demand metrics tracked for this report — both for foreclosure auctions and for bank-owned (REO) auctions — were down at the national level in the third quarter compared to the previous quarter and compared to a year ago, signaling a broad-based pullback in demand from buyers.

The average number of bidders per property sold at REO auction in Q3 2024 was down 10 percent from the previous quarter and down 8 percent from a year ago. This demand metric steadily decreased throughout the quarter, ending at a 23-month low in September. Despite this downward trend, demand at REO auction remains well above pre-pandemic levels, with the average number of bidders per REO sold in Q3 2024 still 24 percent above the 2019 average.

A similar demand trend played out on the foreclosure auction front. The sales rate at foreclosure auction (the share of properties available at auction that sold) was down 3 percent from the previous quarter and down 2 percent from a year ago, and the rate also decreased throughout the quarter to a nine-month low in September. Despite the recent drop, this demand metric was still 39 percent above the 2019 average.

“Banks are not willing to lend as much money, and the interest rates on distressed properties are 10 percent,” wrote one survey respondent, explaining why he is bidding on fewer properties.

That buyer’s perspective aligned with 55 percent of buyers surveyed who identified higher acquisitions costs (prices or financing) as a factor making them less willing to buy at auction. That was the highest percentage among six market factors presented to survey respondents.

 

Demand by Market

Although there was a broad-based decrease in foreclosure auction demand at the national level, more than four in 10 markets bucked the national trend, according to an analysis of the top 65 metropolitan statistical areas in terms of volume of foreclosure auctions in Q3 2024.

Twenty-nine of those 65 markets (45 percent) posted an increase in sales rate in Q3 2024 compared to a year ago, including Pittsburgh, Buffalo, Portland, Oregon, Tulsa and Milwaukee.

In contrast, 36 of the 65 markets (55 percent) posted a decrease in sales rate in Q3 2024 compared to a year ago, including Riverside-San Bernardino in Southern California, Alexandrea, Louisiana, Austin, Charlotte and Las Vegas.

In general, demand increased in the Midwest and Northeast while demand tended to decrease in the Southeast and West.

“I was going to stay out of the market, but really low prices on properties is keeping me in,” said one survey respondent, reflecting the minority view that is helping to boost demand in markets with lower-priced distressed inventory.

 

Price Demand Down from Two-Year High

Price demand — the amount buyers at auction are willing to pay relative to estimated after-repair value — was also down in the third quarter for both REO auctions and foreclosure auctions, although some intra-quarter trends point to a possible change in that trend in the fourth quarter.

Winning bidders at REO auction in Q3 2024 were willing to pay 54.4 percent of estimated after-repair value on average, down nearly five percentage points from a two-year high of 59.3 percent in the previous quarter and down from 57.3 percent in the third quarter of 2023. The winning bid-to-value ratio at REO auction in Q3 2024 was also five points below the 2019 average of 59.7 percent.

A similar price demand story played out on the foreclosure auction front, with winning bidders willing to pay 56.6 percent of after-repair value on average in the third quarter of 2024, down from a two-year high of 59.7 percent in the previous quarter and down from 58.7 percent in Q3 2023. The Q3 2024 price-to-value ratio at foreclosure auction was also below the 2019 average of 60.3 percent.

Monthly data shows possible signs of price demand bottoming out in the third quarter. The average price-to-value ratio at REO auction ticked up to 54.7 percent in both August and September after hitting an eight-month low of 53.7 percent in July, and the average price-to-value ratio at foreclosure auction increased to 56.8 percent in September after dropping to an 18-month low of 56.1 percent in August.

“(The) market has softened but I do see a change coming in the New Year,” wrote one survey respondent who said he has been bidding lower relative to after-repair value in the last 90 days due to market conditions.

 

Price Demand by Market

Price demand trends varied by market, with 28 of the 65 metro areas analyzed (43 percent) posting year-over-year increases in the average winning bid-to-value ratio in the third quarter of 2024. Those markets were led by Davenport, Iowa, Baton Rouge, Louisiana, New Haven, Connecticut, Milwaukee, and Columbia, South Carolina.

The 57 percent of markets posting year-over-year decreases in the average winning bid-to-value ratio were led by San Francisco, Akron, Ohio, Pittsburgh, Portland, Oregon, and Tampa.

“Not much inventory, higher prices,” wrote one survey respondent who said she is bidding lower relative to after-repair value in response to market conditions even though she is still planning to increase her auction acquisitions in the next three months.

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DISTRESSED SUPPLY

Constrained Supply

The weakening demand at distressed property auctions in Q3 2024 came even with continued constrained supply.

The number of properties brought to foreclosure auction in the third quarter was at 44 percent of the pre-pandemic level in the first quarter of 2020, down from 46 percent in the previous quarter and down from 53 percent in Q3 2023 to the lowest level since Q3 2021, when the pandemic-triggered nationwide foreclosure moratorium on government-insured mortgages was still in effect.

REO auction supply followed a similar trend, albeit at a lower level: the number of properties brought to REO auction in the third quarter was at 37 percent of the pre-pandemic level in the first quarter of 2020, up slightly from a two-year low of 36 percent in the previous quarter but still down from 40 percent a year ago.

“Not much changed, just trying to get more inventory,” wrote one survey respondent who said the market has not impacted his willingness to buy at auction.

 

Supply by State

Supply continued to vary widely by state. States with the most supply of properties brought to foreclosure auction relative to the pre-pandemic (Q1 2020) level were Connecticut, Louisiana, Oklahoma, Alaska and Colorado. Foreclosure auction volume in all five of those states was at 90 percent or higher of its pre-pandemic level in the third quarter of 2024, with volumes in Connecticut, Louisiana and Oklahoma all registering above the pre-pandemic level.

States with the lowest supply of properties brought to foreclosure auction relative to the pre-pandemic level were Georgia, New Jersey, Florida, Virginia and Nebraska. Foreclosure auction volume in all five of those states was at less than 30 percent of its pre-pandemic level in the third quarter of 2024.

“Need to keep my workers working,” said one survey respondent, explaining why he is bidding on more auction properties despite constrained supply in his market.

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DISTRESSED PRICING

Bid-Ask Spread Widens Despite Lower Seller Pricing

The bid-ask spread between what bidders were willing to pay and what sellers were willing to take for distressed properties at auction widened in the third quarter of 2024, both for foreclosure auctions and REO auctions.

The REO auction bid-ask spread jumped to 14 percentage points in Q3 2024, meaning that the average seller reserve-to-after repair value ratio was 14 points higher than the average winning bid-to-after repair value ratio. The 14-point spread was up from 10 points in the previous quarter and up from 12 points in the third quarter of 2023 to the biggest spread since Q4 2022.

The foreclosure auction bid-ask spread increased to 6 percentage points in Q3 2024, up from 4 points in the previous quarter and up from 3 points a year ago, also to the highest level since Q4 2022.

The widening bid-ask spreads came despite lower pricing by sellers in the third quarter compared to the second quarter. The average reserve-to-value ratio for REO auctions was down 1 point on a quarterly and annual basis, and the average credit bid-to-value ratio for foreclosure auctions was down 2 points on a quarterly basis, although it was unchanged from a year ago. But those decreases in seller pricing lagged the more significant decreases in what buyers were willing to pay in the third quarter.

Monthly bid-ask data indicate that sellers began to adjust pricing more aggressively throughout the third quarter. The bid-ask spread for REO auctions narrowed from a 20-month high of 15 points in July to 13 points in August and September. The bid-ask spread for foreclosure auctions hit a 19-month high at the end of the second quarter, in June, and gradually declined each month during the third quarter to 5.5 points in September.