Yesterday I wrote about how truer home appraisals are being requested by mortgage lenders before they will dispense a loan. Today I will write about how two major things right now are directly affecting your appraisal value: foreclosures and short sales.
For a few months, pending home sales in the Twin Cities
have gone up and the excessive inventory of unsold homes has been slowly going down. However, the local real estate market, and markets in the nation at large, still faces some opposition. Growing unemployment, wilting wage growth, higher down-payment prerequisites, and stringent mortgage qualifications are all contributing to tumbling real estate prices. Furthermore, the increasing number of foreclosures sales and short-sales taking place are hitting home sellers hard in particular.
An abrupt increase in foreclosures
across the nation is being blamed for dives in home prices that have stunned the economy. The foreclosure crisis has moved lenders and the government to launch broad efforts to keep people in their homes, even if it means renegotiating the terms for thousands of loans and in some circumstances, banks taking a loss. Most troublesome, the high foreclosure rate has translated into home sellers cutting their asking prices just to compete with short sales and foreclosure sales.
While it is true that about one-third of all home sales in the metro area during the July-September quarter were "lender-mediated" transactions, not all communities have been hit in the same way, according to data compiled by the Minneapolis Area Association of Realtors. In Brooklyn Center, for example, 64% of home sales so far this year have been lender-mediated, while in Edina only 8.3% were. Regardless of what city or neighborhood you live in, if there are foreclosures or short sales happening on your block and you’re trying to sell a house, they will ultimately affect your sale price.
There is a specific reason why foreclosures have struck some vicinities harder than others. Foreclosures tend to be clustered in areas with a large population of first-time and low-income mortgagees, as they are more likely to have subprime loans. These mortgages are by nature more likely to go into default. Some statistics indicate subprime borrowers at over six times as likely as prime borrowers to end up in foreclosure.
Communities experiencing increases in foreclosure sales also tend to see sharp declines in the median sale price. In the Regional Multiple Listing Service district that includes north Minneapolis
, 67.2% of the sales were lender-mediated. As of October, the median sale price of houses in that district fell 70% in two years. In Edina
, where foreclosures include a small number of upscale homes but make up a low proportion of the total sales, the median sale price has fallen just 1.2%.
Despite these trends, not all areas are experiencing the same sort of downturn. Even within cities where foreclosures have made an apparent impact on prices, like in Brooklyn Center and Brooklyn Park, parts of residential areas are maintaining their property values.
There are ample buyers, even real estate investors with cash in hand interested in picking up lender-owned properties at a bargain. But many are unwilling to wait through the lengthy and complex process of buying a short sale home or foreclosure home. Because of the enormous number of foreclosures occurring, it can take 90 to 120 days just to get a reply to an offer from a lender. By that time, many buyers have found a more immediately available home. The lender is then compelled to reduce the price extra to generate more interest in the property, and pushing the prices of nearby seller-owned homes down even to stay competitive.
Those consecutive price reductions can cause trouble in other communities, other houses that are in a similar price range or condition. That’s because foreclosures often become comparisons for appraisals. Because bank-owned houses are going to be priced below market value to move them rapidly, the appraisal values of seller-owned listings will drop.
There is for even more concern. As more homeowners descend into foreclosure because of increases in their adjustable-rate mortgages instead of job loss or other economic misfortune, a growing number of short-sale and foreclosure homes are well maintained, making it more likely to be used as comparables for traditional home sales.
If you’re a home owner thinking about moving up to a larger or more up-scale house, don’t be afraid of putting your house on the market. Even if as a seller you lose some money on the home you’re leaving, as a buyer you'll pay less for the house you're moving up to.