Non-Distressed Property Sales Are Shrinking, Say the Numbers

The real estate market has had its share of ups and downs (mostly downs for homeowners) over the last decade, but now the housing market may actually be shrinking.

Numbers released yesterday reveal that nearly one-third of all home sales in the United States from April to June of this year were distressed properties, which are foreclosures and short sales stemming from either underwater homes or homeowners unable to pay for their mortgages. That number is down from the peak of 37.4% from two years ago, but is still far higher than what we should expect for a healthy market.

Of course, there is another facet to the numbers. According to the data, fewer non-distressed properties were sold overall, which means the housing market for non-distressed (or ‘traditional’) properties has gotten smaller.

One major reason for this is that fewer homeowners qualify for mortgage loans, predominantly because lenders have tougher lending requirements after the bursting of the housing bubble in 2007. Further complicating the issue is the stubborn 9.1% unemployment rate, coupled with the desire of many to pursue renting instead of dealing with the uncertainty that comes with buying a home in today’s market for living purposes.

The key to the puzzle is first-time homebuyer demand, made up of predominantly-young individuals and couples who are buying their first homes. They are choosing to rent instead, or are buying foreclosures, not traditional homes or new homes.

That, paired with the massive shadow inventory that still lingers and numbers in the millions, can lead one to see just how the traditional, non-distressed market is shrinking.

A healthy real estate market needs people to be able to buy traditional homes that are not in foreclosure or pre-foreclosure. One solution is to make buying foreclosures and short sales easier for investors, who can snap up properties easier and faster than couples looking for a home and put them back on the market with a greater overall home value.

This in turn would help to reduce the backlog while at the same time propping up home values, which would keep thousands of other homeowners who are underwater on their mortgages from selling their properties short or walking away from them altogether.

The traditional, non-distressed property market is shrinking, but a healthy dose of investor-led distressed property purchasing could reverse that trend in the near future.