Distressed Properties Create Artificial Housing Markets

by 11 Jul 2012

(TheNicheReport) -- Sales of distressed properties are fueling some regional housing markets, but some real estate observers and analysts think of this activity as mostly artificial and ripe for manipulation. Such is the belief of Mark Hanson, a mortgage banking analyst who recently spoke to CNBC about a report issued by real estate data firm Clear Capital.

Distressed properties are typically low-priced homes that have been repossessed by mortgage lenders through a process of foreclosure; these homes form part of a Real Estate Owned (REO) portfolio, but they are not the only troubled assets currently buoying real estate markets. Short sales and pre-foreclosure transactions are also taking place in significant numbers in some regions.

The Columbus Metropolitan Area in Ohio is one of the regions where home prices have risen along with foreclosure sales. Residential real estate listings in Columbus have seen their prices rise by 14 percent thanks to a substantial number -34 percent- of distressed property closings. A similar situation is seen in Minneapolis, where 35 percent of all real estate transactions involve foreclosures and prices are up by 13 percent.

The most emblematic region where this artificial price increase has been observed is in Phoenix, a metropolitan area that is notorious for having been one of the ground zero housing markets where the bursting of the housing bubble was most strongly felt. Home prices in Phoenix have increased 20 percent since last year, and foreclosure sales made up 34 percent of sales, but now that investors are looking for more distressed properties there aren't that many to be found. The Phoenix market has, at some point, seen up to 50 percent of its real estate transactions come from foreclosures.

In stable housing markets, increased home prices and sales are usually welcomed by analysts and economists, but in this case there is a concern that the distressed home supply is entirely in the hands of the banks. One of the reasons for the decline in foreclosure listings in Phoenix is that banks are now concentrating on home loan modifications as part of the National Mortgage Settlement Agreement signed earlier this year.

If real estate investors are only drawn to participate in regional housing markets when foreclosures are available, what will happen to those markets when the distressed property supply is low? Investing in low-priced REO listings and foreclosures creates an artificial market where prices can temporarily increase without adding any value to real estate.


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