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Foreclosure sales flood market

Homeowners are likely to feel the impact of a nearby foreclosure on their own property values.

By MSN Money Partner Mar 7, 2012 10:50AM

This post comes from AnnaMaria Andriotis at partner site SmartMoney.


SmartMoney on MSN MoneyForeclosures and other distressed properties account for more than a third of all home sales, and data released Tuesday suggests that figure may soon grow even bigger.


Lenders in January took back nearly 91,100 distressed properties, up 29% from the previous month, according to data released by LPS Applied Analytics, which tracks mortgage performance. In the next few months, experts say those homes will make their way back to the market to join the already high percentage of distressed homes being snatched up by buyers. (Post continues below.)

That addition of distressed properties will likely lead to further drops in home prices, says Tom Popik, research director at Campbell Surveys, a real-estate research firm. Foreclosures and short sales accounted for roughly 35% of total existing home sales in January -- up 16% from June, according to the National Association of Realtors. Over that period, the median home price fell 8.5% to $154,700. "Prices are going to continue to go down for a long time," says Popik.


To be sure, distressed properties tend to make up a greater share of overall sales in the winter when investors are the predominant buyers, says Walter Molony, a spokesman for the National Association of Realtors. Families typically purchase a home in the spring or summer, before the new school year begins. And because families tend to avoid buying foreclosures, distressed properties make up a smaller market share of home sales during that time, he says.


Still, as banks reclaim more foreclosed properties and put them back on the market, experts say homeowners are likely to feel the impact of a nearby foreclosure on their own property values. On average, home property values drop about 1% when they're within one-eighth of a mile of a residence that has received a foreclosure filing, according to the Woodstock Institute, which researches foreclosures, and the Georgia Institute of Technology.


When the home is sold -- whether in an auction or taken back by the lender -- homes within a quarter-mile lose up to about 4% of their value, which they'll need between two and five years to recoup, according to a separate study in the Journal of Real Estate Finance and Economics.


For homeowners, more foreclosure sales in their neighborhood can lead to losing home equity at a time when millions already owe more on their home than it's worth. Less equity will make it harder to borrow against a home for renovations, repairs or other purposes, says Spencer Cowan, vice president at the Woodstock Institute.


Real-estate pros say those who want to sell will likely end up getting less for their property than they expected. That's because they'll be competing with foreclosed homes that sell at an average 29%, according to RealtyTrac.


Of course, these homes may stand out to buyers who prefer to buy a move-in ready home or at least one that doesn't require extensive repairs, as most foreclosures do.


What's bad news for sellers, of course, is good news for buyers. In particular, experts say the spike in foreclosures means buyers have more leverage to negotiate a price on a non-distressed sale if it's in a market where a significant number of homes are in foreclosure. They may also be able to purchase a foreclosed home at a relatively low price (though they'll likely have to pump money into it for repairs).


During the last quarter of 2011, foreclosure sales in Las Vegas accounted for 59% of all home sales -- among the highest in the country -- according to RealtyTrac. Those homes sold for an average discount of 19%. In Sacramento, Calif., foreclosures made up 50% of all sales and sold at a 25% discount.


But while they may get a deal, buyers shouldn't count on turning a profit quickly, especially if foreclosures continue to rise in the area, dragging property prices down further.


More on MSN Money:

Mar 7, 2012 3:49PM
Debt is the problem and we have more of it now. Nothing has been fixed. Greece is the poster child of the crisis. But Greece is just tip of the iceberg. If they can't pay, cost of insuring debt will skyrocket causing deflation of credit. The problem is too big to fix. Great Depression is going to pale compared to the coming crash. Great Depression was a once in 100 year event. This one is once in 400 year collapse. Google for DEFLATIONARY CRASH to understand the problem.
Mar 7, 2012 7:11PM
It is disgusting, that  Americans have been deceived about home foreclosures! So sad, Government no longer cares about American's lives! Very sad! Speak up America!
Mar 7, 2012 12:53PM
Lets see almost all the foreclosed homes had PMI insurance ! Guess what folks ? Its the tax payers money because the US government is PMI insurance so the banks have lost nothing! So all the homes they are selling at 2000 dollars at auction is killing Americans wealth! Most of our wealth in in our homes ! NOT NO MORE ! So all the banks who took the bailouts and NEVER PAID BACK !!! Are killing your average American who has done everything right like me and never been late on their mortgage !!! Thanks to the Best Congress Money can buy ! Where is a law that says banks cannot sell a home that was foreclosed on for less than 10% of the buying price it sold for in that mortgage!!!! That would save home values and thus saving the TAX BASE too for that city , state, counties and so on ! I don't see a MITT ROMMNEY talking about that ?????  The only programs out there are for screw-up's and walk always ! And they do have the money to pay but just don't! Only in the USA BABY....
Mar 7, 2012 7:58PM



I'm shopping for an investment property and watching prices drop 5-10k a month.




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