Data show how foreclosures pull down Valley home values

This article describes how foreclosures are driving home value now in the Phoenix market. If you live in an area of high foreclosure it can cost you $20-40,000 if you need to sell:

In a normal housing market, most homes to go into foreclosure are sold at trustee-sale auctions. Since last fall, about 98 percent of all homes to go into foreclosure have instead been taken back by the lender.

What lenders resell foreclosure homes for now is driving home values, particularly in neighborhoods where a higher percentage of existing-home sales are foreclosure resales.
Foreclosure resales make up at least one-fourth of all sales in a many Valley neighborhoods now. In a few areas, the rate of foreclosure resale is much higher. In the El Mirage ZIP code 85335, there were more foreclosure resales than regular resales. The overall median home price in the area is $135,000. The foreclosure resale is $133,750. In most other Valley neighborhoods, the overall median price is $20,000 to $40,000 higher than the foreclosure resale.

"These foreclosure homes need to sell for the Valley's housing market to recover," said Brett Barry, a Phoenix real-estate agent with Realty Executives. "It's a good thing they are selling, but it's not going to make you happy if you are a homeowner in a neighborhood with a lot of these properties."

He said for buyers who are patient and will work with lenders, there are great deals in foreclosure resales.

Gloria Giroux recently bought a foreclosure-resale home from Deutsche Trust Bank. She paid $560,000 for a 3,400-square-foot Carefree home on a half-acre lot that had sold for $815,000 in 2005. "The pool was green. It needed work, and it was frustrating waiting for answers on my offers from the bank," Giroux said. "But I got it, and the house behind me is almost identical and sold for $839,000 in April of this year."

Gloria seems to have made $279,000 in equity (two or three years of hard labor for most) by putting up with a little frustration from the bank.

Link to full article

Foreclosure Effect on Home Prices May Be Small

I found some encouragement in this article -- home prices are "quite sticky"

September 5, 2008, 3:58 pm
Foreclosure Effect on Home Prices May Be Small
Even though data Friday from the Mortgage Bankers Association indicated that U.S. foreclosures hit a record in the second quarter, that won’t necessarily translate into big declines in home prices.
(Getty Images)
That appears to be the conclusion based on the findings of a trio of economists in a National Bureau of Economic Research paper.
“Even in the face of an extreme foreclosure wave such as that experienced in 2007, our evidence indicates that foreclosure shocks have relatively small effects on U.S. house prices,” the authors, Charles Calomiris of Columbia University and Stanley Longhofer and William Miles of Wichita State University wrote.
The authors’ model incorporated MBA foreclosure and Ofheo home price data from 1981 to 2007, and used home foreclosure forecasts for 2008 and 2009 from Economy.com. The model included data on employment, building permits and existing home sales. In their paper, the authors said the study was first to estimate the effect of foreclosures on home prices for all the U.S.
Even under an “extreme” foreclosure shock scenario, with foreclosures up 75% compared to the baseline in 2008 and 2009, U.S. home prices only decline about 5.5% between the the second quarter of 2007 to the end of 2009, the authors estimated.
Home prices, they wrote, “are quite sticky,” and “fears of a major fall in house prices, with all of its attendant negative macroeconomic consequences, typically are not warranted even in extreme foreclosure circumstances.”
“We conclude that a reasonable estimate of the future path of U.S. housing market prices is that they will remain essentially flat, on average, for the next two years notwithstanding the large predicted increase in foreclosures,” they wrote. –Brian Blackstone

http://www.courant.com/business/realestate/hc-homesales0829.artaug29,0,7234560.story

Click on the "Related Links" Decline in the House Graphic.

I think this graphic is useful in showing the relatively modest decline in CT housing prices in the last year relative to the 7 years of amazing growth (58.6%) that preceded it.

One might project (i.e. guess) that a plateau in this chart could develop around $260,000 during 2009 before we return to the modest 3.5% growth rate in 2010 similar to that we enjoyed in the year 2000 and then the whole 10 year cycle begins again.

But we must hasten to point out that if someone bought a median priced home in 2000 for $170,000 and they used a 10% deposit ($17,000). Their house would have grown to be valued to about $288,000 by 2007. (Little Side note: We bought ours for $180,000 in 1998 and got an appraisal of $360,000 in 2007). So the increase in equity during those seven years on the median priced house is a whopping $118,000. So their initial $17,000 investment grew to $118,000 in seven years which is 694% or almost 100% each of the seven years.

Here is how the annual increase looks in a spreadsheet:



Median Price
$170,000 The year 2000 Price
$12,750 (yearly increase)
$182,750 The year 2001 Price
$13,706 (yearly increase)
$196,456 The year 2002 Price
$14,734 etc.
$211,190
$15,839
$227,030
$17,027
$244,057
$18,304
$262,361
$19,677
$282,038 The year 2007 Price

Notice that the compounding effect of this 90% leveraged position allowed the homeowner to get an average of about 100% return ($17,000) on their initial investment each and every year for the seven years of expansion.

The key to having a great investment is being invested in the house during the period of expansion which may not be as easy to determine in advance. So the advice would be to buy and hold real estate to take advantage of these surges when they take place realizing that during a typical 10 year time horizon you will do just fine.

OIL-RICH FUND EYEING FORECLOSED US HOMES

This interesting article is very believable. This would be one more sign that the market is getting ready for a transition. When we read ... "Hanson is now willing to pay 50 cents to 60 cents on the dollar for a collection of California REOs worth at least $500 million " we may be reaching the bottom of the market.


http://www.nypost.com/seven/08102008/business/lost_sovereignity_123879.htm

Interest Statistic Worthy of Reflection -- Meditation

"Until the current downturn, median home prices had declined more than two months in a row only once, in 1990. But the decline now has lasted 22 straight months."

From this fact, I conclude:

1) Median home prices don't decline very often
2) Our current decline which began in late spring 2006 has been an unprecendently long one
3) Over the past 18 years real estate has been a great investment
4) This might be the best time to purchase real estate in 18 years.

Real Estate Prices Rise for Four Straight Months - Is Anyone Noticing?

RISMEDIA, July 14, 2008-Amidst the gloom on Wall Street about housing someone forgot to check the stats. The National Association of Realtors® has now reported four straight months of rising housing prices, but it seems no one is listening.
According to NAR statistics, the median home price has fallen from a high of $230,200 in July 2006 to a low in February 2008 at $195,600, a drop of 15%. Since February, however, it has risen steadily every month. By May the index (which will be revised on July 24) had risen to $208,600, up $13,000 and a full 6.6%. Another indicator, the mean home price (otherwise known as the average home price), has also shown strength and has risen from a low of $242,000 also in February of this year to $253,100, a rise of $11,100 or 4.5%. It, too, has risen every month since February of this year.
“I just don’t know where Wall Street’s brains are today,” said David Michonski, CEO of Coldwell Banker Hunt Kennedy in New York City. “Everyone on the Street is wringing their hands over housing when in fact the average American has been out this spring buying homes and pushing the median price higher. This has got to go down as one of Wall Street and Main Street’s biggest disconnects in history.”
In addition, on an annualized basis the volume of home sales has also risen somewhat from a low of 4,890,000 homes in January to 4,990,000 in May.
“Rising prices on expanding volume should not a crisis make on Wall Street,” says Michonski.
So why the crisis?
“They say that there are bulls and bears on Wall Street but there are also pigs. Pigs try not just to profit from a crisis but create one to profit from. Today there are just so many people who have positioned themselves to profit from a crisis that they refuse to admit the reality of what is happening on Main Street. It might hurt their positions.”
Is this the bottom?
“No one can know for sure, but the hard data is clear. The median price has risen four straight months. The average American is out there taking advantage of bargains in their local real estate market. They are not listening to Wall Street but following their own belief that the best time to buy is when no one else is, and they are out there buying. If this keeps up, February may prove to have been the low in prices.”
“It is possible that it will not be Hank Paulson or Ben Bernanke who will pull this country out of a housing recession, but the good common sense of the average American whose affordability to buy a home is at a five year high and is acting on it.”

"The froth has been completely blown away"

Quote of the Day
"We've covered a lot of territory in terms of restoring balance in the housing market. The froth has been completely blown away." - National City's chief economist, Richard DeKaser. DeKaser says the drastic declines in home price values have brought equilibrium back to many previously unaffordable U.S. housing markets. (CNN Money, June 2nd)