Fewer Foreclosures Means Higher Home Prices

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If you’re searching for a good deal on a distressed property, time may be running out. According to a recent article from NBC News, foreclosure rates are trending down, which has given a much-needed boost to home prices nationwide.

In the midst of the financial crisis, foreclosures seemed to come in waves as homeowners struggled to make their monthly mortgage payments and many more owners couldn’t afford to refinance. Back in the 2007-2008 years, the substantial amount of foreclosed homes (which were offered at highly discounted prices) caused the average home price in the US to drop by about a third. Now it appears the housing market has gained a foothold and is not only stabilizing, it’s actually recovering.

A major signifier of this recovery process is the increase in home prices across the U.S., which is directly influenced by the decrease in foreclosure activity. The slowed pace of foreclosures, coupled with historically low mortgage rates and a jump in home sales, offers a promising future for the market. The only down side (depending on how you look at it) would be the dwindling inventory of sharply discounted properties – which may come to the chagrin of investors hoping to turn a quick profit by flipping.

“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.”

Where Foreclosure Rates are Falling

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Foreclosure starts fell in 31 states, with the most significant drops in California, Arizona, Michigan, Georgia and Texas. These states are among the so-called non-judicial states, where court approval is not required for processing foreclosures. NBC reports that in some states where court approval is required, concerns about haphazard paperwork processing by lenders has prompted stricter reviews of home seizures.

As foreclosure rates fell, home prices began to revitalize. According to the NBC article, 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. A few years ago, it wasn’t uncommon to see discounted properties in both new and existing inventory. In many cases, new homes would be built, only to sit empty as the market continued to plummet.

The difference between the median price of existing homes and newly-built homes is one measure of the “foreclosure discount.” Since the mid 1960s, existing homes sold for roughly 13 percent less than new homes, on average. During the housing crisis, the discount grew to as much as one third less than the price of a new home. Now, thankfully, the discount appears to be falling as home prices climb.

The current price jumps present long-awaited opportunities for homeowners who’ve been wanting to sell, but the time may be over for buyers who want to snag a low price. If you’re considering buying or selling a home this year, talk to an experienced real estate agent who is familiar with your area’s market. He or she can offer the best advice and plan a course of action for your real estate deal.


Nat Criss is one of the owners of ForTheBestRate.com. Nat has an extensive background in mortgage finance, real estate, and online marketing. Nat was previously the Marketing Director for AAXA Discount Mortgage, a mortgage company which conducted business in 26 states, and currently helps run CMG Equities, LLC and ILM Marketing. My Google Profile+

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