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House Prices: What Impact Will Foreclosures Have?

Foreclosures have had a major impact on house prices over the last several years. The next six months will again see a flood of distressed property inventory coming to the market. Will this cause a ‘double dip’ in home values as some are predicting? We want to take a very objective look at this issue and try our best to help explain the impact foreclosures and short sales will have on home prices as we move forward this year into next.

Do foreclosures really impact prices?

The Wall Street Journal in an article on September 13th reported:

The speed at which house prices fall over the next few months could depend less on mortgage rates and Americans’ appetite for home buying than on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future. Unlike home owners, banks often are much quicker to slash prices to unload properties quickly. The upshot is that, the more homes being sold by lenders, the faster prices tend to fall.

And the WSJ is not the only one concerned about the flow of distressed properties to the market. Last week, Bloomberg reported: that Rick Sharga, RealtyTrac’s senior vice president said:

“If the market is left to fend for itself, you may see more serious price depreciation. Whether things fall precipitously depends on government and lenders controlling the inflow of new foreclosure actions.”

Is this foreclosure inventory growing?

Rather dramatically. According to an article in Housing Wire last week:

As the approximate 2.5 million homes in foreclosure complete the process, national delinquencies will fall, and REO inventory and short sales are expected to trend upward, according to a report released today by John Burns Real Estate Consulting.

In the article mentioned above, Bloomberg states:

U.S. home seizures reached a record for the third time in five months in August as lenders completed the foreclosure process for thousands of delinquent owners, according to RealtyTrac Inc.

Bank repossessions climbed 25 percent from a year earlier to 95,364, the most since the Irvine, California-based data provider began keeping records in 2005.

“We’re on track for a record year for homes in foreclosure and repossessions,” Sharga, said in a telephone interview. “There is no improvement in the underlying economic conditions.”

Ivy Zelman, chief executive of research firm Zelman & Associates and one of the first to warn of trouble five years ago was quoted in the WSJ article as saying:

“We see the perfect storm brewing with rising supply and falling demand.”

She estimated that distressed sales could account for half of the market by year-end if traditional sales didn’t rebound.

What will this mean to house prices?

Celia Chen, of Moody’s Analytics, in a September 16th article explained the impact foreclosures will have on home prices going forward

Prices, which rebounded more strongly than expected in the second quarter, will head south again. Prices will begin to fall outright as a growing number of highly discounted distressed homes hit the market at the same time that non-distress sales decline. Prices will descend until distress sales represent a smaller share of total home sales.

As we have forecast for some time, house prices will be the last measure of housing to improve, but the timing of the bottom has been moved from the first quarter of 2011 to the third quarter…the decline still to come has increased from 5% to 8%.

Distressed properties will keep prices descending. By 2013, enough excess supply—in the form of distressed inventory—will have been removed from the market to allow for strong price appreciation.

Bottom Line

Home values will continue to fall as more distressed properties come to market at discounted prices. Ms. Chen says this may continue through 2012. If you are considering selling in the near future, DO IT NOW!

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2 replies
  1. Alex Cortez
    Alex Cortez says:

    There are so many indicators that a double dip is more of a reality than a theory. Foreclosures are sure to put downward pressure on prices so until the shadow inventory slows down, stability in prices is unlikely. Thanks for the report.


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