There has always been a gap between the prices that foreclosed houses are bringing on the market verses the prices that normal, owner-occupied homes bring. That gaps has served almost like a black hole in astronomy dragging everything down into that abyss. I wondered recently what that gap really is right now, so I looked closely at the data that I collect every week for my little market.
I track all of the sold homes in a five-township area around Milford, Michigan. I record and report on the listed price the sold price, the percentage of sold to listed and then on the percentage of sold to the SEV (State Equalized Value), which is an left over vestige of better times and which supposedly represents ½ of the value that the assessors say the property is worth. In the “good ole days” you could multiple the SEV by 2 or 2.1 to get a reasonable approximation of your homes worth. These days sold prices for non-foreclosed homes is running about 1.6 to 1.7 times the SEV and the SEV values are dropping everywhere (thought not fast enough for most taxpayers). There are some areas that are now down to the 1.5 times SEV level for normal sales.
But what of the foreclosed homes? What is their average SEV multiplier? I had to go back and do some detailed analysis of my own data. Not to be too anal about this, I just looked at the May 2009 data (See http://www.movetomilford.com/sold_homes.html to view the data that I used). We had been running about 70% foreclosed homes as a share of all sold homes, but in May that shifted down to 62%, which means that more owner-occupied homes have been selling – maybe better data upon which to base the comparison. Now I must tell you that a majority of foreclosed homes are currently selling for below the SEV, which is less than half of the assessed values. I used the data from 51 foreclosure sales in May to arrive at the figure 1.0004. That is the current average SEV multiplier for foreclosed homes in this area.
Basically that means that foreclosed homes are selling for their SEV value locally and that would put the average difference in sales prices between them and normal sales at about .6 to .7 of SEV, quite a gap. That says that a buyer who is bidding $100,000 on a normal, owner-occupied home that is assessed at $160,000, could take that same $100,000 and buy a home that is assessed at $200,000 or more. Believe me when I tell you that there will be big differences in the houses themselves with that much of a price gap. That large difference is also why there is so much pressure on owner-occupied home prices. Buyers are seeing that difference and reacting to it by “low-balling” normal homes to try to get them down into the same ballpark.
Now, admittedly there are also risks involved with bidding upon foreclosed homes and many of them have sustained damage from vandalism or theft. The really bad foreclosed homes are selling for less than half of SEV or ¼ of their assessed value. Still, if the house is structurally sound and the mechanicals haven’t been stripped out, it’s hard to pass on such a bargain. Most foreclosed homes in this area are selling well below their replacement costs and many are selling for less than what the land alone would have sold for a few years back.
So how wide is the foreclosure gap? It’s huge! It is probably one of the main contributing reasons for the slow market for owner-occupied homes right now. We work with sellers to get their homes in great shape so that we can position the normal homes on the market as “move-in ready”, for those buyers who just don’t want to hustle with repairs and remodeling. But, for many buyers the perceived value gap is just too tempting to pass up. What is the gap between foreclosed and owner-occupied homes in your area? What are you doing to combat this problem?
I track all of the sold homes in a five-township area around Milford, Michigan. I record and report on the listed price the sold price, the percentage of sold to listed and then on the percentage of sold to the SEV (State Equalized Value), which is an left over vestige of better times and which supposedly represents ½ of the value that the assessors say the property is worth. In the “good ole days” you could multiple the SEV by 2 or 2.1 to get a reasonable approximation of your homes worth. These days sold prices for non-foreclosed homes is running about 1.6 to 1.7 times the SEV and the SEV values are dropping everywhere (thought not fast enough for most taxpayers). There are some areas that are now down to the 1.5 times SEV level for normal sales.
But what of the foreclosed homes? What is their average SEV multiplier? I had to go back and do some detailed analysis of my own data. Not to be too anal about this, I just looked at the May 2009 data (See http://www.movetomilford.com/sold_homes.html to view the data that I used). We had been running about 70% foreclosed homes as a share of all sold homes, but in May that shifted down to 62%, which means that more owner-occupied homes have been selling – maybe better data upon which to base the comparison. Now I must tell you that a majority of foreclosed homes are currently selling for below the SEV, which is less than half of the assessed values. I used the data from 51 foreclosure sales in May to arrive at the figure 1.0004. That is the current average SEV multiplier for foreclosed homes in this area.
Basically that means that foreclosed homes are selling for their SEV value locally and that would put the average difference in sales prices between them and normal sales at about .6 to .7 of SEV, quite a gap. That says that a buyer who is bidding $100,000 on a normal, owner-occupied home that is assessed at $160,000, could take that same $100,000 and buy a home that is assessed at $200,000 or more. Believe me when I tell you that there will be big differences in the houses themselves with that much of a price gap. That large difference is also why there is so much pressure on owner-occupied home prices. Buyers are seeing that difference and reacting to it by “low-balling” normal homes to try to get them down into the same ballpark.
Now, admittedly there are also risks involved with bidding upon foreclosed homes and many of them have sustained damage from vandalism or theft. The really bad foreclosed homes are selling for less than half of SEV or ¼ of their assessed value. Still, if the house is structurally sound and the mechanicals haven’t been stripped out, it’s hard to pass on such a bargain. Most foreclosed homes in this area are selling well below their replacement costs and many are selling for less than what the land alone would have sold for a few years back.
So how wide is the foreclosure gap? It’s huge! It is probably one of the main contributing reasons for the slow market for owner-occupied homes right now. We work with sellers to get their homes in great shape so that we can position the normal homes on the market as “move-in ready”, for those buyers who just don’t want to hustle with repairs and remodeling. But, for many buyers the perceived value gap is just too tempting to pass up. What is the gap between foreclosed and owner-occupied homes in your area? What are you doing to combat this problem?
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