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Distressed homes, foreclosures and short sales, which are sold at a discount and depress home values, have fallen to the lowest levels since 2009 and are still dropping, according to the latest November market reports. Fewer discounted distressed sales contribute to forecasts of improving prices in the new year.

November Sales of Foreclosures and Short Sales Plunge to Lowest Level in Three Years

Distressed homes, foreclosures and short sales, which are sold at a discount and depress home values, have fallen to the lowest levels since 2009 and are still dropping, according to the latest November market reports. Fewer discounted distressed sales contribute to forecasts of improving prices in the new year.

Foreclosures and short sales accounted for 22 percent of November sales (12 percent were foreclosures and 10 percent were short sales), down from 24 percent in October and 29 percent in November 2011. Foreclosures sold for an average discount of 20 percent below market value in November, while short sales were discounted 16 percent, the National Association of Realtors reported yesterday.

Today the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey said that its HousingPulse Distressed Property Index dropped to its lowest level in three years in November. Just 33.7% of the home purchase transactions tracked last month involved distressed properties. This was down from 41.4 percent a year earlier and from a record-high of 45.6 percent in March 2011.big factor having a positive impact on the housing market, particularly home prices, is a continuing decline in distressed properties.

In California, the total of pre-foreclosures, properties in foreclosure that are scheduled for sale, and bank owned properties (REO)-fell 7.6 percent from October to November and is down 31.8 percent compared to last year. While the November decline in inventory is not an unusual event, the significant decline in foreclosure inventory over the past year has contributed to what some are calling an “inventory crisis” of total homes for sale, reported ForeclosureRadar.

NAR President Gary Thomas said yesterday that there’s been speculation of a rise in short sales before the end of the year with pending expiration of the Mortgage Forgiveness Debt Relief Act. “However, there’s been no movement in short sales, their market share is staying in a narrow range, and they’re still taking much longer to sell – typically three months,” he said.

“The fact remains it is extremely difficult to expedite a short sale, and banks’ response to client urgency is only starting to improve. However, we’re hopeful that the act will be extended before it expires on December 31 so sellers don’t have to pay taxes on forgiven mortgage debt, which would be unfairly treated as income for owners who are selling under duress,” Thomas said.

Most experts, like ForeclosureRadar’s Sean O’Toole, blame the scarcity of foreclosures on policies that continue to slow the processing of a huge backlog of 1.3 million foreclosures in the processing pipeline. “The policies of ‘extend and pretend’ continue to slow foreclosure activity while ensuring foreclosures will play an important role in our economy for years to come,” said Sean O’Toole.

Others, like NAR’s Lawrence Yun, see distressed sales continuing to diminish. “The market share of distressed property sales will fall into the teens next year based on a diminishing number of seriously delinquent mortgages,” Yun said yesterday.

Contributing to the demand for scarce supplied of distressed properties are several dozen well-funded hedge funds that have entered the REO-to-rental business in recent months, growing numbers of real estate investors and first-time buyers eager to find a bargain before prices rise even more.

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