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:

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:

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.