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Monday, February 11, 2008

The black hole of real estate…

Is the growing pool of foreclosed houses on the market becoming like a black hole, sucking all other houses down into a pricing abyss? It sure feels that way. Foreclosed homes make up only about 1% of the total housing market, but they can be 15-20% of a local market of listed homes and that’s enough to have a big negative impact on pricing. That's especially true if they are the houses that are actually selling. In the little, four-township area around Milford that I statistically track, foreclosed houses make up over 50% of the houses that have sold so far in February (Note: For the month of January, 2008, foreclosures represented 1/3 of the sold homes). So, they are having a heavy impact on the average and median sold price statistics.

I do a lot of Comparative Market Analysis (CMA) work for potential home sellers and lately the foreclosed homes have had an inordinate negative impact on the recommended prices that result. After all, the market doesn’t do a lot of detailed analysis; it’s mainly oriented to “what houses have sold recently and for what average price” and “what houses are active right now for what average price.” There’s just no way to evaluate “condition” in any of the widely used CMA programs. Programs used by pricing web sites like Zillow are really blind to condition and any other local factors, so they are almost always low on price. That's why I always ask the owners to allow me to visit the home before I can give them a valid price recommendation - I need to see the condition to be able to position the house relative to the active market.

Once you throw in 20-30-40% of the houses in either the sold or active category that are (were) priced to dump by the banks that own them, all of a sudden you’ve got buyer expectations being set that are well below what the non-distressed home seller wants for his/her house. But, the fact is, what they can get for their house is largely being dictated by this foreclosure market. Almost everyone who bought in Michigan in the last 3-4 years is upside-down on their houses right now (they owe more on their mortgage than the house is worth on the market today).

A couple of years ago you could take the SEV value that is on the books in almost any area and double it to get close to what the market would bear for the house. Lately, as I’ve been tracking this figure in the little five township area that I focus upon the SEV multiplier is not anywhere near 2. It is more likely to be about 1.3 or 1.4 and in some cases lately is creeping down towards 1.0. We see stories in the news about homes in this area losing up to 25% of their value, but I see homes selling for just a little over ½ of the “value” that is on the books – most of them foreclosure houses. I've even recorded some that sold for under their SEV values. Likely they were "stripped and trashed" foreclosure houses.

So, I guess, to answer my own question; yes, foreclosures are acting like a giant black hole for real estate and they are pulling down everything with them. What can you do if you’re selling? For one, get as competitive as you can on price. And, two, beat the foreclosure houses by offering a better product for the money. Fix-up, de-clutter and clean your house so that someone who looks at your place and 2-3 foreclosed homes can clearly see why your home is really the better buy. Most foreclosed homes have issues – many have been stripped and most were left in (or have deteriorated into) a dirty condition (some even have gone all the way into nasty condition). If your home is to justify the $10-15-20K or more than the foreclosures houses prices, then it has to be “move-in-ready.” That’s the edge that you need to give your house in order to compete.

Foreclosures are a black hole in our market, but they needn’t drag you and your house into the abyss. Call me and I’ll help you with advice on what you need to do to position your home to compete in today’s market.

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