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62 Vegas, Arizona, and Florida will be hit." More conservative bidding behavior at foreclosure auction is putting downward pressure on the sales rate, but pro-active servicers are already adjusting pricing downward to maintain a sales rate close to 50%. at 50% foreclosure sales rate threshold has proven to produce the best disposition outcomes—not only for servicers in terms of lower loss severity and REO risk, but also for distressed homeowners in terms of equity protection and for surrounding communities in terms of higher homeownership rates, higher property values, and quality, affordable housing. PRICE APPRECIATION A HEADWIND IN REO Maintaining an elevated foreclosure sales rate— at least compared to pre-pandemic levels—of about 50% will also help servicers pro-actively adjust to the second disposition trend emerging in a cooling retail housing market: home price appreciation switching from a tailwind to a headwind for properties held as real estate-owned (REO) inventory. An elevated foreclosure sales rate helps mitigate the risk that holding REO inventory will be akin to catching a falling knife in markets where home prices turn negative. Instead, more of that risk can be transferred to the local community developer buyers purchasing properties at foreclosure auction and REO auction. Given their proximity to the frontlines their local markets, these local community developers are well-equipped to manage that risk and most efficiently convert distressed homes into quality, affordable housing for owner- occupants—even in a slowing market. e likelihood of a home price correction is growing, particularly at a local market level. Home value forecast data from Zillow shows home values decreasing in the three-month period between August and November in 552 out of 896 metropolitan statistical areas nationwide (61%), including New York, Los Angeles, Chicago, Dallas, and Houston. e same forecast data has home values decreasing over the next year in 259 of the 896 markets (29%), including New York, Los Angeles, Chicago, Washington D.C., and Boston. In late 2020 and 2021, heady home price appreciation averaging 17% annually—and much more in some local markets—helped cushion the negative impacts of holding and maintenance costs associated REO inventory. As price appreciation reverts to more historically normal levels—or even turns negative in some markets— time in REO inventory joins holding costs and maintenance costs as a headwind against lower loss severity for distressed dispositions. is again points to foreclosure auction as the ideal disposition channel in a slowing housing market. A property sold at foreclosure auction spends zero days in REO inventory. But not all properties are good candidates for selling at foreclosure auction given that venue's limitations—a one-and-done auction with no interior inspection available. For those properties, an immediate post-foreclosure REO auction (known as Day 1 REO) provides the best opportunity to keep days in REO inventory to a minimum and thereby minimize the impact of the home price appreciation headwind. A SHIFT TO ESTABLISHED LOCAL BUYERS e growing likelihood of a home price correction in more local markets also represents a growing risk for distressed property buyers— especially to the extent that pro-active servicers transfer the risk to these buyers in the form of earlier dispositions at foreclosure auction or REO auction. A rising risk profile for distressed property deals will likely sideline some newer and less established distressed property buyers who have a lower risk tolerance. ose buyers have less margin to absorb losses. On the other hand, this environment will likely attract more action from well-established local buyers who have weathered previous down cycles in the real estate market. Early evidence of this trend is showing up in Auction.com buyer data. In the first seven months of 2022, 80% of Auction.com buyers purchased just one property on the platform. ose buyers represented 53% of purchases in that timeframe. is is down from the first seven months of 2021, when 86% of buyers purchased just one property and those one-property buyers represented 64% of all purchases. Conversely, buyers purchasing between two MORE CONSERVATIVE BUYERS = DOWNWARD PRESSURE ON SALES RATES HOME VALUE FORECAST BY METRO Home Value Forecast by Metro Feature By: Daren Blomquist