Explaining Foreclosures

This Windsor foreclosure sold last March, 2009 for $211,000

Explaining Foreclosures

Question: what are the two most confusing things about predicting which way the real estate market is headed?

Answer: apples & oranges.

The apples are the foreclosures and their close cousins, “short sales.” The oranges are conventional sales.

Foreclosures and short sales (when the home is worth less than it’s mortgage) are considered to be “distressed.” The seller is under pressure to sell at a price he or she would not normally accept. In contrast, the conventional owner is not under duress, and both buyer and seller can agree to an “arm’s length” deal at a price that satisfies both.

Yet when we read about “average” sale prices, or the total number of sales in any period of time, the figures we see include both apples and oranges mixed together!

Why the confusion? For starters, the way foreclosures are counted is not consistent. As a measure of foreclosure activity we usually hear about the number of foreclosure “notices” filed against properties. But those are just at the beginning of the pipeline. Before those properties pop out at the other end and fall into the basket of homes for sale, a number of other things can happen along the way…like giving the keys back to the bank in lieu of foreclosure. Like a short sale. Like an auction sale. Like a redemption. Like the place burns down (not recommended)!

Regardless of how a financial institution comes to own a house, the best measure of the impact of foreclosures on the rest of the market is the final number of such sales recorded by the county. How many were sold by a lender? How many were sold by individuals? That’s what’s going to tell us how many sold apples and oranges we had rolling around in the same basket.

Other than by the numbers, it’s difficult to compare the sale prices of apples versus oranges. That’s because we really don’t know what condition the homes were in when sold. Foreclosed homes are usually in worse shape than their conventional counterparts. Sure, there are some foreclosures in great shape and some conventionals in bad condition. But overall, the same sized home of the same age on the same block was probably in worse shape if it was owned by a bank. In addition, in order to get the mortgage off their books, the bank was likely willing to accept less than the price of an otherwise equivalent home. So there is no doubt that bank owned sales have dragged down the prices of other homes who must compete with them in the same marketplace.

EXAMPLE:

Weld County, 1st Qtr. 2009

There were 550 single family homes sold in the 1^st quarter (not counting land, attached, and modular homes). 53% were sold by financial institutions. 42% were sold by individuals, and 5% by other entities.*

Bank owned sales were concentrated in certain price ranges and specific locales. 50% of them were in the Greeley area; most selling for under $150,000. For all the bank owned properties in the county, 88% were under $200,000. None were over $500,000.

Considering that there were only 550 single family homes sold last quarter and that there were 2,215** such homes for sale over 30 days into the 2nd quarter, we’ve got a lot of catching up to do. Prices are nearing if not at their bottom; interest rates are at record lows, and buyers have their pick of an enormous inventory. We hate this cliché, but it applies: “Now is the best time to buy!”

*For a detailed city by city breakdown:

[ Bank Sales Table ] [ All Sales Table ]

**Source: www.coloproperty.com

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