Foreclosures Explain Latest
Housing Price Drop

The most recent batch of housing statistics — from S&P/Case-Shiller and NAR — show that housing prices are continuing to fall nationally. Depending on how you slice and dice the market (sale pairs, top 20 markets vs. all markets, all homes vs. those under $417k, etc.), the year-over-year annual decline ranged from 13% to 18%. Nationally, the cumulative decline from the 2006 peak now is about 25%.

As a boots-on-the-ground realtor, mostly what I’m seeing is that the activity is at the low end of the market, specifically in foreclosures. Locally, lender-mediated transactions (foreclosures and short sales) now account for a staggering 40% of Twin Cities housing transactions.

What market-wide statistics obscure is that there’s a disconnect in the pricing of foreclosures, and “traditional” sales.

Depending on the condition, foreclosed properties can sell for discounts of as much as 50%-75% from what they’d fetch in “mint,” move-in condition. On top of run-of-the mill neglect and dated features, many foreclosed homes have freeze damage (busted pipes and radiators), no functioning heat, numerous code violations, and a trail of tax and third party liens. It’s also the case that they are overwhelmingly concentrated in what were already lower-priced neighborhoods to begin with.

Compounding matters further (if that’s possible), most banks won’t lend on condemned homes (automatic with no heat). That means that prospective Buyers must hunt for a bank that will, or pay cash. Then, they must figure out how to finance all the aforementioned repairs and updates.

When everything is said and done, the home’s purchase price can be little more than a down payment on all the post-closing expenses to come.

How much of a discount would you need to take on such a project??

At this point in the downturn, more and more transactions meeting the foregoing description are being mixed into — and driving — the housing statistics regularly being reported by the media.

If you separated the foreclosure sales from the non-foreclosure sales, you’d undoubtedly find that the former dropped much more than 17%, while the latter dropped much less.

P.S.: I discuss the “bifurcated market” phenomenon more fully in two other posts, “Housing’s Wal-Mart Effect” and “A Tale of Two Markets.”

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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