Foreclosure Action Brings Higher Sales and Lower Prices

May 20 — The National Association of Realtors announced that home prices slid over 7% in the first quarter of 2008 compared to the year earlier period. Although sales volume is down as most buyers continue to stay on the sidelines, there is one category of sale that is hot right now – foreclosures.

In Southern California almost 38 percent of overall sales in April were from foreclosures. These increased sales will probably benefit the overall real estate market, including homes in active adult communities. The sales gains are clearly coming from lower prices – as banks take action to get non-performing assets off their books, prices go down. In fact there are reports that certain funds are taking big positions in buying foreclosed properties, often for cents on the dollar.

All of this foreclosure activity, while painful in the short term, is probably good in the long term for the market. For one thing, lower prices are getting buyers into the market again. For another, prices still have yet to go below the inflated levels of 2004 and 2005 in many markets. As foreclosed sales set the baseline for what properties are worth, unwilling sellers will finally have to take their medicine and adjust prices to the new reality. According to Ned Davis Research, prices are still 15-20% higher than what they should be when measured against consumers’ income levels. Consensus of many experts is that the market still has to get a little bit worse before it can get better – perhaps in 2009.

The NAR’s figures show the worst price decreases in what were often 2005-6’s hottest markets – Sacramento (-29%), Riverside/San Bernadino (-27%), Fort Myers (-17%), and Phoenix (-14%). Binghamton (NY), Peoria (IL), and Spartanburg (SC) however, actually showed over 10% price increases, showing that real estate really is local.