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Foreclosure slowdown pushing home prices higher

Joe Klamar / AFP - Getty Images

The Goldrush estates are seen in Las Vegas, which has long had the dubious distinction of being America's foreclosure capital. As foreclosures decline, home prices are slowly rising in many markets.

Home buyers looking for bargains on foreclosed houses are having a harder time finding them.

When the housing market crashed in 2007, a wave of foreclosures accelerated the plunge in prices, which lopped roughly a third off the median price of a home.

Now with the pace of new foreclosures slowing, mortgage rates falling and home sales perking up, those once-in-a-lifetime bargains are fading from the market.

“Deeply discounted existing homes have been subject to strong demand from cash buyers and investors looking to lock into housing’s attractive income returns,” said Paul Diggle, a housing economist at Capital Economics, in a recent research note. “The supply of such homes, meanwhile, has been dwindling. That has bid up existing house prices, particularly at the lower end of the price spectrum."

Nationwide, the median price of a new home was up by 17 percent in August compared to a year ago. For existing homes, the median price was 9.5 percent higher. 

During the depths of the housing bust, markets under the greatest price pressure had the highest concentrations of “distressed” sales. Those include bank-owned homes seized in foreclosures and “short sales,” in which lenders allow underwater homeowners to sell their home for less than the outstanding mortgage balance.

These distressed properties sold at deep discounts to the “normal” market. But as the backlog of foreclosures has eased, those discounts are drying up. 

The foreclosure slowdown continued last month, according to the latest data from research firm RealtyTrac, which showed new filings hit a five-year low.


Foreclosure starts fell in 31 states, with the biggest drops in California, Arizona, Michigan, Georgia and Texas. Those are among the so-called non-judicial states, in which court approval isn't required for foreclosures. In some states where court approval is required, concerns about sloppy paperwork processing by lenders has prompted tougher reviews of home seizures.

Fewer new foreclosures means fewer unsold homes on the market. As the pace of sales has picked up and the volume of unsold inventory has fallen, so has the backlog of houses for sale. The supply of listings has fallen from an average 9.4-month supply in 2010 to 6.1 months in August, the latest data available from the National Association of Realtors.

“There is a shortage of inventory -- as crazy as it sounds to say that,” said Daren Blomquist, a RealtyTrac spokesman. “In a lot of market there's less inventory of foreclosed properties than there is demand. You’re hearing about multiple bids for these properties.”

At the same time, demand for foreclosed homes has risen during the housing bust, in part because the stigma once associated with bank-owned properties has faded somewhat.

“Many real estate agent who would have never wanted to deal with a foreclosure in the past decided to get on the bandwagon,” said Blomquist. “Some now specialize in those properties.”

To be sure, foreclosed properties in some markets still being sold at deep discounts. Though the volume of foreclosures has slowed nationwide, the pace is still strong in Florida, where one in every 117 households in some stage of foreclosure last month, according to RealtyTrac.  Arizona, California, Illinois and Georgia also were among the top five states with the highest foreclosure rates in September.

With demand up and supply falling, prices have perked up. After falling by roughly a third after the 2006 peak, home prices have begun inching higher this year. After several false starts, the housing market began finding a footing earlier this year, and most analysts are convinced the worst is over in most parts of the country.

The latest evidence came this week with the Federal Reserve’s “Beige Book” report on regional economic conditions, which showed the housing recovery picking up steam in some districts.

After the bubble burst, bargain-priced homes were available on both new and existing houses. One measure of the “foreclosure discount” is the difference between the median price of existing and newly-built homes.

Since 1966, existing homes have sold, on average, for about 13 percent less than new homes, according to Diggle’s research. During the housing bust, the discount widened to as much as one-third less than the price of a new home. The discount has been falling this year.

Prices are still heavily discounted on properties in bad repair, including that that have been unoccupied and poorly maintained.  

Foreclosure discounts fade

As the pace of foreclosures has slowed, the discount on existing homes has narrowed compared to newly built houses. (Price in dollars)

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