The $95,000 Question

Over the past two years, lender-mediated foreclosure and short sale properties have seen massive declines in their sales prices as banks slash prices to spur demand and move these declining assets (or are they liabilities?) from their balance sheets.

Over the same time period, traditional home sellers haven't seen their property values decline at the same rate, despite a growing number of foreclosures.

The November median sales price for lender-mediated foreclosures and short sales was $130,881. This is a 20.2 percent decline from November 2007.

The November median sales price for traditional properties was $225,420. This is only a 2.0 percent decline from November 2007.

The difference between these two numbers is $94,539.

Assuming a 30-Year Fixed Rate Mortgage with a 5 percent down-payment at the prevailing 4.75% interest rate, the monthly payments on these two hypothetical properties look like this:

Traditional Property: $1,429 per month, $17,153 per year.
Lender-Mediated Property: $786 per month, $9,432 per year.

That $95,000 difference in sales price amounts to a pretty hefty difference in the cost burdens felt by the home buyer over the course of the 30-year loan. While we know that lender-mediated properties are more likely to need considerable repairs, have a far more complicated purchase process that sometimes leads to canceled sales, and can in general be a more tenuous purchase than traditional sales, $95,000 is still a big gap, all things considered.

So here's the $95,000 question: is this gap sustainable?

Are consumers willing to pay that much more for quality, "turnkey" properties that are ready to move in? Or will traditional sellers need to drop their prices further to compete with these bargain-priced foreclosures and short sales?

We earnestly want to hear from you on this. What do you think and why? Leave your thoughts in the comments section below.

Comments

[Aaron Petty]

I pick the latter.

[Todd]

I'll take the 95k difference and use it to bring the foreclosure up to par. Is a turnkey property worth 95k more? Context is key in this argument. I think there's value but how much? Depends on the buyer's circumstances and financial flexibility.

[Matt]

Most still don't want to deal with contractors and hassle. 95k is a big diff but there is alot of effort to bring the depressed home up to par or better.

Winners of the gap are new, risk taking homeowners, contractors, and banks selling depressed properties.

Losers are existing home owners near depressed homes (value of new home is still relative to appraisal and if a flipper happens, it establishes new selling price for comps) and new home owners not willing to take on risk (but happy with fully functioning home).

One questions: How many of the available properties are non-lender mediated? If small or smaller % than last year (which I believe it is), then this lack of traditional supply is propping up higher prices hence making this gap sustainable until there are fewer traditional buyers or more traditional homes available. I believe this trend will last much longer, better for me ;)

[Jeff Allen]

Great comments, all. Keep 'em coming!

Matt -- you are correct that traditional inventory has declined considerably in the last two years as home sellers pull back on listing. In the past year, the number has dropped roughly 25-30%.

[John]

The bottom line is the $95k can be financed, and budgeted for. Most don't have the time, desire, nor cash, to fix a repo. Fixing a repo can take several months, meaning several months of two house payments, PLUS the cash to perform the repairs.

I know many people who would like to jump on the repo bandwagon, but simply can't make it work.

[Aaron Dickinson - Edina Realty]

When 60% of the inventory selling today is a foreclosure or short sale, I think there's plenty of buyers out there willing to put the $$$ and effort into properties is marginal condition. I do believe though that as time goes on we're going to see traditional sellers reduce their prices further. If you look at housing affordability on just the traditional listings, pricing is still out of line for where it should be for a healthy, sustainable market. Lender mediated listings, on the other hand, have priced reduced to the point that many of them are selling with multiple offers, which to me suggests that their affordability is back!

Only time will tell but this is what my crystal ball is saying!

[Jessica]

A key factor few are discussing is that the median home price, even when segmented into Lender Mediated & Traditional, does not account for location. Many Lender Mediated homes are clustered and as a result, reflect the dynamics of smaller communities, as well as drag each other still lower. Labeling price points "unsustainable" is hazardous - like any other general assumption - without more detailed evidence.

[Christine]

Another factor not yet discussed as a part of this posting are issues of functionality of the lender mediated homes. I have seen an abundance of poor floor plans and/or locations and/or poorly conceived remodeling that have contributed to the reasons the home did not sell as a "traditional" type sale -- assuming the seller tried sell at a higher price to begin with. Those types of errors, whether a part of the original home or a remodel, are costly to fix -- and may well take more than the "$95K" difference to rectify.

[Chuck Heubach]

Could it be that good old "supply and demand" is driving lender mediated prices down? The demand is weakening for lender mediated homes. Good people with good credit want to live in nice homes.

[Aaron Dickinson - Edina Realty]

Chuck,

I don't think that it's a lack of demand for the lender mediated properties. The sales (in units) for these properties has increased dramatically in recent months and is currently more than 1/2 of the sales in the market. I know many "good people" that have great credit that have bought foreclosures because the value is just too good to pass up.

[MAAR]

Jessica's point about the importance of location and the proximity of other foreclosures is right on.

Keep the comments coming!

[Mary Leizinger]

Are we comparing apples to apples or apples to oranges? What are the bedroom, bath, garage and square footage differences between lender mediated and "traditional" homes? Aaron's point on location differences is insightful as well. I'd bet that if adjustments were made for these differences, the $95,000 gap would shrink a bit. That being said, it's awfully hard for "traditional" sellers to compete out there. And with so many first time buyers snapping up foreclosure "deals", our move up market has been hugely impacted.

[Todd Shipman]

Great comments, but I want to see what happens with sales at the top of the market. I look at the number of homes in the west burbs that are available and we know they are lender owned, how long will the upper bracket buyer wait until they see the value of living on the lake in new construction at 1/3 or 1/2 off the price they would have paid three years ago? Some of these homes still need finishing and to a upper bracket buyer that is OK! I have already been speaking to clients about the huge opportunity that this presents. The $95,000 question is a $300,000 opportunity in some places.

[Chuck Heubach]

Aaron,
Then the divergent trends are an anomaly? I think not. If you state that 50+ % are lender mediated, then 40+ % are traditional, enough of a sampling to ascertain a trend in both categories.
Since the trends are divergent, there must be an explanation. I stand by my statement that there is buyer fatigue in the lender mediated marketplace.
I would accept that the trend may have additional explanations than what I stated in my earlier post, as everyone loves a bargain. I did not intend and would not intentionally try to characterize either sector’s buyers, nor would I ignore the classic “supply and demand” as the most likely cause of lender mediated price decreases, since it is economics 101.
The intricacies involved in purchasing, remodeling, and refinancing are skills taken for granted on this forum (most being experienced REALTORS) but are not skills widely held in the general population.
Many of the persons with these skills have already purchased lender mediated properties, and that buyer pool is reaching saturation. Those that purchased for personal use are no longer in the market, and those that are investors are happy to watch lender mediated prices dropping.