Like black markets that spring up in ravaged cities during wartime, there’s something inherently unhealthy about the existence of a two-tiered housing market, one for “normal” sales and one for “distressed” sales.
Distressed sales are defined as bank-owned properties (REOs) and short sales. Normal sales are the remainder of existing homes plus new homes. In local housing markets where large numbers of foreclosures are taking place, distressed sales create a second, cheaper market within a market. A study by RealtyTrac last year fond that most adults expect a 25 percent discount, and some as much as 50 percent, when buying a foreclosure. Some 80 percent of U.S. adults are concerned with hidden costs, risky buying process, the home losing value and the stigma of living in a foreclosed home. To compensate for perceived risks, consumers expect hefty discounts.
Unfortunately, the housing market is only partly schizophrenic. When it comes to valuation, there is no Chinese wall separating “normal” from “distressed” sales. Internet AVMs don’t look at how a property was sold and the use of foreclosures as comps is one of the issues in the current dust-up between real estate agents and appraisers. Distress discounts lower values across the board and make it even more difficult for “normal” sellers to move their properties.
Never before have we witnessed such a prolonged and sizeable schizophrenic housing market, but there is hope. Existing home sales are rising, up for the fourth month in a row, spurred undoubtedly by distress discounts and the overall drop of about one-third in home values since 2006. The distressed market share seems to be shrinking. At the first of the year, distressed sales totaled nearly half existing home sales. Now they are down to about 31 percent.
With unemployment still rampant and rumors of delayed, it’s impossible to know if a new wave of foreclosures will set us back on heels and breathe new life into the distressed market. Restoring the market to unity and health won’t happen overnight…but it will happen.