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Fewer and Fewer Distressed Property Sales

This article is more than 8 years old.

Distressed home sales reached their lowest point since the housing market crash nearly a decade ago, and look to all but disappear by this time next year. That is, sales of homes as the result of a foreclosure or in an underwater situation (where the mortgage debt amount was larger than the market price) comprised only 7% of the total in the latest data. That’s a marked improvement, considering the figure had been a third higher or more just a few years ago: 36% in 2009, 34 % in 2010, and 33% in 2011.

Because distressed property carries a hefty price discount in relation to non-distressed normal home sales, the diminishing trend of distressed sales will automatically lift median and average prices. In the latest month, for example, a short sale carried a 10% price discount and a foreclosure sale had a 15% discount in relation to a normal sale.  A few years ago in the midst of the crisis, deeper discounts of over 20% were quite common.

There are two key reasons as to why distressed property sales will soon be history. First, home prices are rising in nearly all metro markets with the national median price up 5.6 percent from one year ago to July.  Higher home prices automatically mean fewer underwater homes and hence lessen the need for a short sale bank approval. I project another 4% to 6% price gain next year for the simple reason that there will not be oversupplied conditions given the lack of new home construction, which is well below historical normal.

Second, the number of homeowners who are late on their mortgage payments has sharply shrunk. As of the second quarter of this year 3.95% of all mortgages were either in the foreclosure process or late in payment by over three months. To put it in perspective, at its worst, the bad mortgage figure was 9.7% in 2009.  Before the housing crisis, this figure was closer to 2%.  Things are not yet back to normal but are surely getting there as job creations lessen the chance of late payments and home price increases and the accompanying rise in housing equity provide an added incentive to make payments on time. In addition, the improvement in default rates is better than the percentage figures imply because there are fewer mortgages now than before.  A notably higher-than-normal number of home sales were occurring via all-cash sales in recent years. Putting it simply, there are 1.59 million mortgages in a bad or seriously late situation today compared to 1.98 million just one year ago and 4.30 million at its worst in 2009.

When analyzing at the state level, there are few worthy differences. Arizona and California suffered greatly during the housing market downturn with an over 30% price plunge and an unending vista of foreclosures in some neighborhoods. Yet, these two states carry one of the lowest numbers of bad mortgages. Arizona’s seriously delinquent and foreclosure rate is now only 1.88% and California at 2.08%, both essentially at half the rate of the national average. At the other end, the bad mortgages comprise 10.2% of total in New Jersey and 7.7% in New York. Policy differences had an impact. Homes were quickly foreclosed on and sold to investors or to first-time buyers in Arizona and California, while homes  were not foreclosed on for months and years on end in New Jersey and New York – presumably to give homeowners a chance to catch up. One direct impact of this divergent policy is that home price growths in these Western states are solid while home price growths have been much more limited in the said Northeastern states. Despite these examples, the overall national trend is for falling distressed property sales in upcoming months and into next year.