Are Homes that Sell at Auction in Financial Trouble?

Anyone who has worked in the auction industry has heard the question. It's driven by a misconception that the only reason someone would elect to auction a property is because they are in trouble. There have admittedly been times -- the Great Depression, the Savings and Loan Crisis, and Farm Crisis – when auctions grew as a result of widespread financial distress. But those periods have long passed. And the recent strong real estate market has provided clear evidence that auctions are not a product of distress.

According to the Wall Street Journal there have only been two other times in the past 50 years in which the unemployment rate was as low as the current rate of 3.8%: for several years in the late 60s and for one month in 2000. That strong labor market, coupled with optimism about the American economy, have contributed to a robust real estate market.

Indeed, by almost every measure, the real estate market is as strong as it has been in recent history. Sales of both new and existing homes have climbed to record numbers. According to the National Association of Home Builders and USA Today, new home sales are expected to hit 910,000 in 2018—a significant rise from the 851,000 new homes sold in 2017. And new homes sales in 2019 are forecasted to be about 1.3 million.

Existing homes sales are similarly strong. The National Association of Realtors reports that, at a national level, inventory continues to lag behind demand with the average days on the market for listings declining to 26 days as of May, 2018. Locally, through May of this year both the total number of sales and the average sales price are up over last year’s record breaking numbers. And lack of inventory, and the ensuing competition driven by that lack of inventory, have continued to drive home prices up. Locally, the average sales price in June of 2018 is up 5.2% compared to June of last year.

Rising home prices coupled with a strong labor market have also helped create equity for homeowners. Nationwide, there has been an increase in “tappable” home equity of more than $820 billion in the last 12 months.

And distressed existing homes sales are at their lowest level since 2008 according to the National Association of Realtors. In April of this year, only 3.5% of transactions nationwide contained some element of distress. At the local level, the number of foreclosures and sheriff’s sales continue to decline—mirroring the national trend.

If the old perception – that auctions are driven by distress – were true, it would be logical to assume that auction sales are trailing off in light of the strong real estate market. In reality, however, the exact opposite is true. The National Auctioneers Association reports that real estate auctions represent the fastest growing segment of the auction industry. Local data illustrates the trend. According to the South Central Kansas MLS, auction sales represented less than 3% of the total sales volume of all real estate sold in 2010. That number was 4% in 2015. By 2017, auctions made up just over 6% of total sales volume. Put another way, as the market recovered, the total number of auctions not only grew, auctions gained market share against traditional listings.

There are likely several reasons for the continued growth of real estate auctions. The competitive bidding environment, transparent sales process, quick turn-around time, and contingency free transactions all offer sellers some striking advantages over the traditional listing method. But one thing is clear: auctions are not driven by distress. As the real estate market has soared, auctions have not only persisted, they have thrived. The data demonstrates that auction growth may be attributable to the auction method’s unique ability to leverage a strong real estate market for the benefit of sellers. In short, auction sellers are not in trouble, they select the auction method of sale for a much simpler reason: auctions work.

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