More Housing Trouble as Banks Seek to Sell Foreclosed Inventory

Any home sale is a good one in the current market, but banks’ sales of foreclosed properties bring down prices. These sales are still a major part of the market. According to RealtyTrac, “sales of homes that were in some stage of foreclosure or bank owned accounted for 31 percent of all U.S. residential sales in the second quarter of 2011, down from nearly 36 percent of all sales in the first quarter but up from 24 percent of all sales in the second quarter of 2010.” The year-over-year trend is concerning. The first half of last year was a time when the economy was in deep trouble — as though that is not so now.

Prices have at least become more affordable, although that is a mixed blessing. “The average sales price of homes in foreclosure or bank owned was $164,217 in the second quarter, down less than 1 percent from the first quarter and down nearly 5 percent from the second quarter of 2010,” RealtyTrac reported. The data is misleading. Mortgages are hard to come by because banks fear credit risk. Many potential buyers will not enter the market at any price because they fear home prices will continue to fall.

“With average prices on distressed real estate trending down and average discounts trending up, this report is clearly good news for well-positioned buyers and investors looking for bargain real estate that will build them wealth in the long term and often cash flow as rental real estate in the short term,” said James Saccacio, chief executive officer of RealtyTrac. The numbers can lie, or at least mislead. Long-term value is in the eye of the beholder. There are estimates that home values in many markets will not rebound to current levels for two or three years. In some, they may never make it back to the levels of the housing bubble.

The fact that banks have so many homes to sell at all is a signal that real estate troubles continue to worsen. Homes sold from foreclosed inventory are usually sold at depressed prices. That lowers the value of homes in the neighborhoods where foreclosed homes are for sale. That, in turn, puts more mortgages underwater.

It is not good news that banks have started to clear foreclosed inventory. It is only a dent in the number of homes they hold now, and those which they add to their pools every day.

Douglas A. McIntyre