The Skinny

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.

How Much Has Affordability Really Improved?

One of the chief causes of declining home sales in both the Twin Cities and national housing markets was the troubling affordability picture. As we've discussed countless times before, consumer income was outpaced in growth almost three-to-one from 1992 to 2005:

This is the the darker side of the boom-year housing price increases. To use formal economics terminology, home values got so crazy-out-of-wack with consumer income that the writing was already on the wall for our housing market far before the credit crunch and dampened consumer confidence added fuel to the downward trajectory. Those are just instances of adding insult to injury, really.

So it stands to reason, then, that if affordability were to improve then buyers would have reason to flock back en masse and restore a semblance of balance to the market proceedings. Right? Right (assuming they can now save for a down-payment and come to the table with good credit).

So it has been with great joy that we've watched our Housing Affordability Index (HAI) figures increase over the last two years, brought up to higher, healthier levels by falling home prices and relatively stable interest rates. The picture being painted was one of an attractive, low-cost environment with affordability levels unseen since 2003.

But let's think about this further.

After perfecting the foreclosure and short sale search methodology used in our recent report on the subject, we can parse out those types of properties from the general population. This gives us an important new layer to this picture.

The hearty price declines in our data that were so crucial to improving the affordability picture aren't being experienced uniformly. The increased market share of foreclosures and short sales has been dragging our overall median price down, all while the traditional, non-lender-mediated home has only seen a slight decline in value. Like this:

The major gains in affordability can be found in the foreclosure and short sale market. So perhaps a more accurate way to describe the current Twin Cities affordability picture is that a segment of the market has seen dramatic improvements in affordability.

If affordability is crucial to our market recovery, but is still a troubling issue in the traditional sales market, it could very easily mean further price declines are in-store for the non-bank-mediated market.

An alternative opinion is that the differences between the two property types are so severe that today's real estate consumer is willing to pay more for a traditional property than a lender-mediated one. I'm not sure I have the answer as of yet as to which theory sounds more compelling.

All we can say for certain right now is that the affordability picture is still a little more complex than we'd originally thought.