The Great Housing Liquidation – All Foreclosures Must Go!

In just the last few months we’ve seen Linens & Things and Circuit City go completely belly-up and Cost Plus World Market recently closed all their Minnesota stores as well.  When these stores closed, each ran a liquidation sale of their remaining inventory.  In a liquidation sale, prices are regularly reduced until the inventory is all sold… in many cases they sell the product displays, lights, etc right along with the merchandise.

Having been in each of these stores during different phases of their liquidations, I can summarize my experience like this:

10% Off
Buyers don’t see this as much of a sale, so there’s a lot of browsing and thinking, but most of the inventory stays put.  Products that are rarely on sale are likely to go though.

20% Off
This starts to grab buyers’ eyes.  While many products may have small sales, those often don’t get above 20% off so this makes it a threshold when I think buyers start to show interest.  After a couple weeks @ 20% off I felt like many of these stores had cleared out about 25% of their inventory.

30% Off
Ok, now we’re talking.  This is where if you buy 3, get 1 free.  Excitement grows as buyers start scooping up more necessities and also start to grab impulse items because they are “a good deal.”

40% Off
It’s almost 1/2 off!  That’s a deal you know.  More impulse buying ensues because when you’re at almost 1/2 off you can think of all the reasons why you really need that thing-a-ma-jig-do-dad.  At this point I think you’ve got at least half of the store’s inventory gone.

50% Off and More
From what I was looking at, once the store is at 50% off it is hard to find anything I really want.  Sure, there’s lots of crap I don’t need, but that crap is both what I don’t need AND don’t want.  This is when shopper’s remorse kicks in because I feel like I should have been here a week ago when they still had 5 of that thing-a-ma-jig-do-dad.

What does this have to do with real estate?

What has happened recently with retailers is also happening in the housing market.  Bank foreclosures are just like a bankrupt company’s product inventory-banks are looking to move that inventory quickly and will aggressively reduce their prices until their inventory sells.  We’ve seen strong examples of this throughout the metro in the last 6-9 months… especially in the areas hardest hit by foreclosures.

From the start of Quarter 4 2008 to the start of Quarter 1 2009 we saw 600 fewer lender mediated listings on the market (foreclosures and short sales) as inventory was picked up quicker by buyers than banks listed it.  This was the FIRST TIME that we saw a reduction in both new lender mediated listings come on the market and fewer total lender mediated listings available for sale, even though total sales of lender mediated listings fell about 200 units in the same time frame, likely due to seasonal demand softness.

What we’ve begun to see in earnest in the last 30 days or so is that the buyers are coming out in strong numbers (we’re up 20% in Pending Sales over the same time last year) and a shrinking supply of homes (down 13% from a year ago) and that’s leading to more houses, especially in the foreclosure and short sale category, receive multiple offers and sell quite quickly.  As the prices have moved from the 10%-20% off category closer to the 30% – 40% off category we’re seeing the homes priced at liquidation levels liquidate quickly… which is to be expected and is also a great sign for the market as a whole because it shows there are buyers out there if they perceive the value to be good enough.

With the approval of the $15,000 home buyer tax credit likely (even if I don’t like it) and the awesome mortgage rates around 5% I feel it is likely that we’ll see a further increase in demand for these properties and a reduction in available inventory in the coming months.  While I don’t expect all the inventory to “dry up” since foreclosures (and short sales) are still being listed in high numbers, the fact that they are clearing out quickly means that the best properties will be in short supply and buyers’ choices and negotiating power will be reduced over previous years.

Let’s recap what buyers have for opportunities today:

• Interest rates near ALL TIME LOWS with plenty of mortgage options still available
• Prices on foreclosures and short sales 30% – 50% off of their prices just a couple years ago
• $15,000 in FREE GOVERNMENT CASH (probably) to purchase a home

Add this all up and we get what could be the best situation for buyers to come along in their lifetime but as they say in the commercials: “this is a limited time offer” and the confluence of events that brought us to where we are today is not going to last forever.