Danbury - Nearly five years into the crisis,
just how badly are foreclosures still hurting the housing market?
A whopping 46% of homes sold in November were either short sales or REOs
-- as homes foreclosed on and repossessed by lenders are called,
according to a survey by Campbell/Inside Mortgage Finance released
Tuesday. "The huge glut of distressed properties coming to market is why
there will be no home price rebound this coming year and maybe into
2013," said Guy Cecala of Inside Mortgage Finance, a publisher of
mortgage information and news.
One problem: Distressed homes sell for a lot less than homes sold by conventional sellers. The average price for a short sale (when borrowers owe the bank more than their homes are worth) was $209,000 in November. For a regular sale, the average is about $259,000.
The numbers are even worse for REOs, which averaged about $190,000 for properties in move-in condition.
"Distressed properties have the lowest prices for any category of home sold," said Cecala. "To a large extent, that's why we've seen continuous home price drops over the past three years and why those drops are likely to go on."
There is no shortage of distressed properties: More than 6 million borrowers are delinquent 30 or more days, according to LPS Applied Analytics. Two million are already in the foreclosure process, and most of these homes will be repossessed or sold as short sales.
House hunters have gotten accustomed to shopping for homes in foreclosure and any stigma that may have attached to REOs or short sales in the past has diminished. But many of these properties have been damaged, making them hard to sell and depressing their prices.
Indeed, the average price for a damaged REO was just $99,000 in November -- 62% less than conventional sales, the survey found.
After all, some buyers don't want to do major repairs and others are turned off by homes in poor condition.
Plus, getting financing for REOs in poor shape can be difficult, according to Cecala. Lenders don't like to issue mortgages for homes in need of extensive repairs. Underwriters don't want to wind up with houses worth less than their loan balances.
And in an insidious twist, as distressed properties are sold, they can also bring down the price of homes that aren't in trouble. That's because mortgage appraisers assessing a regular home's value typically compare it to short sales and REOs in the area.
Since distressed properties sell for so much less, using them as comparables drags the appraised values of regular homes way down.
Imagine a buyer agrees to pay $220,000 for a home. If the house is appraised for only $200,000, the buyer will only be able to get a mortgage for $160,000, since lenders generally will finance just 80% of the sale price. In that case, to make the deal, the sellers would either have to reduce their price by $20,000, the buyers would have to come up with more cash or they'd have to pursue a combination of both.
Sometimes, that just can't be done. If the sellers stick to their price and the buyers can't or won't come up with the extra cash, the transactions die.