Housing Prices Still Impacted by Foreclosures

There are signs of hope in the American economy in 2012 so far – unemployment is down and the economy is still growing, to name two – but in terms of the domestic real estate market, foreclosures are still having an impact on housing prices.

Data released recently indicate that the sale of foreclosure listings went for lower prices in the third quarter of 2011 than they did for 2010, with steep discounts coming for bank-owned REO properties versus other properties (like short sales) in the foreclosure pipeline. In fact, the average discount for an REO property was 42% below market value compared to a traditional, non-distressed home sale – compared with an average 24% discount for pre-foreclosures.

Foreclosures, since they sell for less than what they would fetch on a fair market during a normal sales process, tend to drag down the values of surrounding homes, since buyers can obtain similar properties for less by buying foreclosures than turning to other existing homes.  On average, non-distressed properties are discounted by 4% nationwide. In some parts of the country with lower foreclosure rates, like North Dakota, South Dakota, the discount is lower; in other areas, though, the discount is much higher.

Trenton, NJ, for example, reported in with the highest average foreclosure discount – a staggering 68% below traditional, market value prices of non-distressed homes.  Other metro areas in the South, Midwest and East Coast – places like St. Louis, Milwaukee, New Haven and Bridgeport, CT, Atlanta, and Memphis – all reported discounts of 50% or greater.

In these areas, the average home price for properties in neighborhoods heavily impacted by foreclosures is much lower than the national average, showing a direct relationship between foreclosures in a given area and home prices in the same region.

Homebuyers and investors alike have known of this trend for the past few years, of course; the only real question is whether or not the market has hit a price bottom. At the moment, sales figures would suggest that no bottom is here (although finding a bottom is always a function of hindsight several months after the bottom has been reached). Plus, foreclosure rates continue to remain high, especially considering foreclosure sales as a percentage of all residential purchases. Nevada, for example, saw foreclosure sales account for a staggering 57% of all residential sales from June to September of 2011.

At any rate, an improvement in the unemployment rate – as well as heavy loan modification – seem to be the only things that can reverse today’s dominant pricing trend.