Despite solid demand for home purchases overall, a glut of distressed properties is continuing to put downward pressure on home prices, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.
Distressed properties accounted for a hefty 46.1 percent of home purchase transactions in November as reported in the HousingPulse Distressed Property Index (DPI), using a three-month rolling average. Significantly, November marked the 23rd month in a row that the DPI has been above 40 percent.
At the same time, however, homebuyer demand for housing appears surprisingly strong, especially for lower-priced foreclosed properties or real estate owned (REO). Time on market for move-in ready REO was just 10.1 weeks in November, the lowest in 15 months, according to HousingPulse. Time on market for damaged REO was even lower at 9.0 weeks in November, also the lowest in 15 months.
Short sales were the largest segment of the distressed property market during the month of November, accounting for 17.6% of total home purchase transactions tracked in the HousingPulse survey. Move-in ready REO was the next largest group of distressed properties with a 15.2% share, followed by damaged REO with a 13.3% share of total transactions. Non-distressed home purchases accounted for the remaining 53.9% of home purchases in November.
Average pricing for distressed property was substantially lower than for non-distressed property. The average short sale sold for $209,200 in November, while the average move-in ready REO sold for $189,700. Damaged REO sold for far lower at $98,600. At the same time, non-distressed properties sold for $258,900.
Real estate agents responding to this month’s HousingPulse survey commented on the appraisal system and how the low prices for distressed properties impact overall home prices. “The foreclosure/short sale markets are making it difficult to get non-distressed homes to appraise. This is holding off a market comeback in my area,” reported an agent in Maryland.
“We could sell the homes for more but the appraisals are an issue since they are using short sales and foreclosures as comps,” explained an agent in Florida. “Given the multiple offers and the short time on the market, one would expect that prices would be on the increase; however, appraisal guidelines are holding it back,” complained an agent located in Michigan.
The appraisal system for mortgage originations uses comparative values from both distressed and non-distressed properties, with appraisers often not knowing the interior condition of foreclosed homes or the special circumstances of short sales. Prices agreed-to in purchase and sales contracts are sometimes not being supported by appraisals for mortgage financing that use faulty comparative values. These properties then sell to cash buyers for less, causing declines in average home prices.