Financial analysts are now predicting that 25% of all U.S. mortgage holders have faced or will face foreclosure by the end of 2012.
Since banks are not in the business of owning property, these bank-owned homes have been and will be offered for sale. And while getting those properties to market has been slow due to paperwork backlogs, once they’re listed, the banks want them sold and they’ll drop prices to get it done. In fact, with each month that a bank-owned home stays on the market, the price is almost automatically reduced.
Now rumor has it that banks are lowering their minimum price threshold on these homes – and will go as low as needed to get them off the books. That’s not good news for the real estate market.
These bank owned homes (REO’s) have a negative effect on the housing market for three reasons:
• Their condition and lack of exterior maintenance make nearby homes less desirable, and thus lower their values.
• Buyers, seeing the lower prices and overlooking the differences in condition, expect to pay “REO prices” on well-maintained homes.
• The low selling prices of bank-owned homes become the “comparables” used when appraising nearby homes.
This last item is the most dangerous, especially combined with reports coming in from appraisers working in the field.
Some underwriters are now refusing to accept appraisals that come in higher than the most recent selling prices of nearby homes – even if they were bank-owned homes in poor repair. Appraisers who point out the important value differences in maintenance and condition are told to disregard that difference.
Thus, some banks seem to be working both sides of the issue to further deepen the housing crisis and create even more downward pressure on home prices.
We can see a frightening long term affect as homeowners who must relocate join the ranks of underwater homeowners who either short sell or walk away. Those who aren’t forced to sell may well try to ride out the crisis – removing their well-maintained homes from the market.
Let’s hope that those underwriters who wish to keep prices down are in a minority, and that home prices are once again allowed to appreciate normally.
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