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Foreclosures and Short Sales Don't Matter to House Prices

While foreclosures and short sales continue to be around 40% of our sales, when looking at housing prices I believe they should be completely ignored.

When looking at all Twin Cities housing sales, here is how the Median Sales Price stacks up:

median sales price - all properties - twin cities real estate

 

When we split it out to look at Foreclosures, Short Sales and Traditional Sales, we see that Traditional Seller prices have not fallen nearly as much as the composite number suggests:

median sales prices for foreclosures & short sales - twin cities homes

 

Why we should ignore foreclosure and short sale sales data

If we go back to 2005 and before, the Twin Cities had almost no foreclosures or short sales… something between 1%-2%.  The Traditional Seller market was the market just 6 years ago and once we clear the current housing downturn they will be the market again.

Still, today when Foreclosures and Short Sales account for 2 of every 5 sales, why should we ignore them?  After giving this a lot of thought the answer seems almost obvious now but certainly wasn’t before:  Foreclosures and Short Sales already affect Traditional Sales’ prices.

Today every seller is competing against all other homes on the market, including bank owned and short sale homes.  Each Traditional Seller that successfully sells their home had to go through the pricing and competition gauntlet to secure a buyer at the price and terms of the sale.  While some Traditional Sellers have stronger motivation to sell than others, they don’t have nearly the motivation to sell as a bank.  Whether a foreclosure or a short sale, the bank ultimately determines the sales price and they’re far more motivated to unload properties at whatever price they can get.  This is similar to a wholesale auction versus a retail sale.  One must also take into account that most foreclosures and short sales typically need money for repairs as well, which further decreases their value at time of sale.

So since Traditional Sales already sell at prices that take into account the competition from Foreclosures and Short Sales, by including them in sales price averages we are effectively double-counting the impact from these distressed properties.  Consequently the truest measure of where our housing market was, is and will be is found by looking at the prices that non-distressed sellers are getting in this market.

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8 comments
Aaron Dickinson
Aaron Dickinson

You bet - but in the case of identical properties in a condo building with just different types of distress, a Traditional Sale that closes most definitely competed on condition and terms of sale to arrive at the price. Some buildings are all/nearly all distressed but many more have just some foreclosures. I've got new construction condos in New Hope in a building with no foreclosures but we've had to reprice several times over the last couple years to compete with foreclosures, but not at a dollar-for-dollar level. I've sold 2 of the remaining 4 units in just the last 2 weeks.

Ed Kohler
Ed Kohler

@Ryanl, I'm not suggesting it's rational. But it does appear to be the reality we live in. As I understand it, (Aaron probably knows) the multi-tier gap lessens in situations where there is simply no denying that the two properties are identical, such as in condos. Good luck getting a good price for a condo in a building full of identical foreclosures or shorts.

Ryanl
Ryanl

Ed we (my wife and Aaron) looked in south mpls we ended up buying a short sale three? years ago. When I traded my car they dIdnt use blue book - that's a sham they called down to the auction to see the real market price. I got some baseball cards and a becketts magazine- anybody want to buy some Ken Griffey junior cards?

Ed Kohler
Ed Kohler

@ryanl, let's use my house in the Cooper neighborhood of Minneapolis as an example. Were I trying to sell today, my target market would be people considering buying a move-in ready house in a stable neighborhood like this where there are few foreclosures. That group of buyers isn't likely to consider looking at non-traditional listings, which is part of what causes the disparity in average sales prices.

Aaron Dickinson
Aaron Dickinson

Ryan, always enjoy your perspective! Foreclosures and short sales are really a different product... and a product that in 4-5 years will likely be very small again. Given that the traditional product is still selling and thus competing with the foreclosure & short sale product on value already, then when considering all the homes that are not foreclosures or bank owned, their value is best established by comparing them to the same. Kelly Blue Book reports different values for the same vehicle based on condition and whether it is a private party sale or a retail (dealer) sale. Looking at Median Sales Price across all sales is the same as counting all Ford Explorer prices the same regardless of condition or who sells it under what situation. What you will also find is that in areas where there have been the most foreclosures, Traditional Seller prices have also fallen the furthest - so the pricing influence of foreclosures is very strong!

Aaron Dickinson
Aaron Dickinson

Ryan, always enjoy your perspective! Foreclosures and short sales are really a different product... and a product that in 4-5 years will likely be very small again. Given that the traditional product is still selling and thus competing with the foreclosure & short sale product on value already, then when considering all the homes that are not foreclosures or bank owned, their value is best established by comparing them to the same. Kelly Blue Book reports different values for the same vehicle based on condition and whether it is a private party sale or a retail (dealer) sale. Looking at Median Sales Price across all sales is the same as counting all Ford Explorer prices the same regardless of condition or who sells it under what situation. What you will also find is that in areas where there have been the most foreclosures, Traditional Seller prices have also fallen the furthest - so the pricing influence of foreclosures is very strong!

Ryanl
Ryanl

I like this Rosie market where we just ignore the parts we don't like...do economists have a name for it? I am all for throwing away the outliers but when it's 40? Some percent it's hard to believe that's an outlier an not The norm.

Ed Kohler
Ed Kohler

Good point on the double counting. It makes sense that traditional home sales are already feeling some pull from non-trad transactions.

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TwinCitiesRealEstateBlog.com is not a Multiple Listing Service MLS, nor does it offer MLS access.
This website is a service of Aaron Dickinson of Edina Realty, a broker Participant of the Regional Multiple Listing Service of Minnesota, Inc.