A recent decline in the number of foreclosed properties is potentially good news for anyone selling a home. Making the most of that good news depends on how well you can relate this macro-economic trend to the specifics of your situation.
Foreclosed properties have been a drag on home prices ever since the housing bubble burst. Now, with foreclosed properties subsiding to pre-crisis levels, prices should be more stable. One caution though: conditions vary greatly from one area to another, so it helps for sellers to know what to look for before deciding on a pricing strategy.
Foreclosures Ease to 2007 Levels
The Mortgage Bankers Association recently reported that the inventory of properties in foreclosure had dropped to 2.39 percent, having fallen by 10 basis points (1/10th of one percent) in the most recent quarter and by 69 basis points year-over-year. That put the foreclosure inventory at the lowest level since the fourth quarter of 2007 -- a significant time period, because that was just before the housing crisis got into full swing and created a surge in foreclosures.
And there's more good news: the Mortgage Bankers Association reported that the mortgage delinquency rate has declined -- again, to the lowest rate since the fourth quarter of 2007! Delinquencies are mortgages with at least one payment overdue but not yet in foreclosure, so you can think of them as an earlier stage of trouble than foreclosure. A falling delinquency rate probably points to fewer foreclosures in the future.
How Foreclosures Disrupt Prices
The decline in foreclosures is a key development for anyone selling a home, because too many foreclosures can seriously disrupt your pricing strategy in several ways:
- Source of excess supply. Foreclosures put properties on the market that would not normally be for sale. When foreclosures are above normal, it interferes with the balance of supply and demand in the housing market. Creating an oversupply tends to weaken prices.
- Cause of distressed sales. Foreclosures don't just create extra supply, but they create a particularly toxic kind of supply. Mortgage companies holding foreclosed properties are often anxious to sell those properties to replace the lost cash flow from bad mortgages. This means there aren't just extra properties on the market, but often these properties are priced for quick sale. Bargain hunters gravitate towards foreclosure sales, knowing they can expect to negotiate with especially receptive sellers.
- A reason for vacancies. If a mortgage lender finds itself with a large number of foreclosed properties on its hands, it may not dump them all on the market at once. However, if this leads to properties sitting empty, that can be a red flag for potential buyers in the neighborhood. Vacant properties may be poorly maintained, and can look almost haunted.
- A sign of economic weakness. A high concentration of foreclosures is generally an indicator of broader economic weakness in the area. This can be another deterrent to people looking to buy a home.
People selling a home over the past few years have had to deal with these obstacles. Fortunately, things are getting better across the country in general, but of course, real estate is very much about local conditions. The key question, then, is are they getting better in your area?
What to Look for in Your Area
Here are some of the things to look for to determine whether foreclosures might still be a factor in selling a home in your area:
- Take note of the number of homes for sale. Think of other homes for sale as your competition. Having one or two nearby is not necessarily a bad thing - it might even help draw buying traffic to the area. However, if you look down the street and see that almost every second or third property is for sale, you can expect it to weaken your pricing power.
- Determine how many sales are foreclosures. If other houses for sale are your competitors, foreclosed properties are like dollar stores out to undercut you on price. In other words, expect foreclosed properties to undermine your pricing power even more than other homes for sale.
- Note the time on market of local properties. People generally look at the price of recent of comparable sales to determine property values in the area, but it is also important to note how long these properties are taking to sell. By overwhelming the market with supply, foreclosures can effectively dry up local buying demand, causing properties to take longer to sell.
- Keep an eye on vacancies. Even if they are not yet for sale, take note if there are an unusual number of vacant homes in your neighborhood. These may simply be foreclosure sales in waiting, and this is another indication that supply-and-demand conditions are not in your favor.
If any of the above indicators show that foreclosures are still a factor in your local housing market, you may have to set a lower price than you would normally, and be more open to concessions in negotiating with a qualified buyer. If these signs of foreclosures are evident, you may want to delay putting your house on the market until your area joins the national trend towards a smaller foreclosure inventory.