The Bad News on Foreclosure Discounts


The bad news is that foreclosure prices are rising as much as you feared, inventories are just as thin as you thought and foreclosure discounts are shrinking like a wet cotton shirt on a fat man.

The good news is that all of the above is helping to make home prices pop and drive up property values, including any houses that you own.  Prices are rising enough to make homeownership a little less affordable, which might dissuade some of your renters from leaving.

FNC is one of the top sources of pricing data used by appraisers.  Its platform processes 450,000 appraisals per month, a sizeable chunk of all purchase mortgages and refinancings.  All this pricing and valuation data provide a rich harvest of the best available information on what’s going on.

FNC’s major drawback is that its data are two months old.  If you are in the market to buy REOs or pre-foreclosures, you can assume that things have not improved since the fourth quarter.

Highlights From an FNC Report Released Last Week:

Foreclosure price discounts have dropped to pre-foreclosure crisis levels (2009-2010).  At the height of the foreclosure crisis (2008 and 2009), foreclosed homes were typically sold at 25 percent below their estimated market value.

The average price discount was 12.2 percent in Q4 2012 vs.13.4 percent a year versus Q4 2011. Twelve percent may not seem so bad, but remember, that/s a national average.  It’s lower in foreclosure markets where demand is highest like Phoenix, Vegas, Florida, etc. and higher in the Clevelands and Milwaukees of the nation.

Low-tier properties (less than $250k) consistently accounted for the majority of foreclosure sales. In Q4 2012, the average foreclosure discount among lower-tier homes was 18.4 percent.

High-end properties (those initially purchased for more than $500k) were typically sold close to their market price.  The average price discount was only 0.4 percent in Q4 2012; many homes were sold above their estimated market value.

One of the greatest changes to the distress sales markets is geographic.  Entering 2012, Atlanta, Chicago, Detroit, Los Angeles, Phoenix, and Riverside were identified by the Federal Reserve Board as the nation’s largest REO-inventory markets. No more

Some of the markets are no longer on the list.  Phoenix is leading the nation in recovery with home prices on non-foreclosure sales are up 26.2 percent in 2012 and foreclosure sales down from 29 percent to 12 percent.  In Phoenix, foreclosed properties are often sold at a premium to estimated market value. In Los Angeles and Riverside, home prices in 2012 on non-foreclosure sales were up 5.5 percent and 9.5 percent respectively.  Foreclosure sales in Los Angeles fell from 26.6 percent to 14.8 percent during the year, and in Riverside from 41.7 percent to 20.6 percent.

Others may not be on the list much longer.  Atlanta is on an upswing and gaining traction. Home prices increased more than 6.9 percent during 2012 and foreclosure sales are down from 33 percent to 26 percent.  Foreclosure price discounts have dropped to pre-crisis levels.

Some Areas Remain Unchanged

Chicago and Detroit continue to under-perform the rest of the country. They show no significant declines in foreclosed sales or foreclosure price discounts in the last 12 months. In Detroit, REO and foreclosure sales continue to make up the majority of single-family home sales.  Chicago home prices are up only 1.0 percent in year-over-year growth compared to an average of 5.0 percent price growth among the nation’s largest cities.

“The fact that we are seeing a combination of rising home prices and a bottoming out of foreclosure prices is a very good sign the housing recovery is taking hold,” Mayer said. “This is the very first time in the long housing recession that the two are happening at the same time.” FNC Senior Research Economist, Dr. Yanling Mayer.

The pending end to the Foreclosure Era is good news indeed for most Americans, but not for the nation’s real estate investors who did more than any other group to bring about the housing recovery by creating a market for the plague of foreclosures that now are disappearing.


About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.

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