August 1, 2014
Recent news about the state of the housing market is good, but not great. One big, positive takeaway, though, is the sharp decrease in foreclosures and, correspondingly, in “distressed” housing sales.
As recently as 2011, distressed sales made up a full 30 percent of all housing sales. By 2013, that number had been cut in half to 15 percent, and in the month of June it rested at just 11. While the steep decline in distressed sales has caused overall sales numbers to dip, traditional or non-distressed property sales have risen over the last year, marking a noticeable recovery in the market.
How Distressed Sales Hurt the Market
Any drop in foreclosures is obviously good for consumers. A decrease in foreclosures means that, as a whole, consumers have been better able to keep up with their mortgage payments in recent years, and better able to hold on to their homes. Beyond that bit of good news, though, there are other positives to a decrease in distressed home sales.
Most notably, distressed home sales drag housing values down. Homes that have been foreclosed upon tend to have less work put into them before market, and the banks that conduct these sales are more interested in quickly recouping some of their losses rather than getting full value. Accordingly, foreclosed homes tend to sell for much cheaper than homes that have gone on the market in a more typical way, and ordinary sellers are undercut by the differing imperatives of banks. With fewer distressed sales on the market, ordinary sellers are more likely to get better value out of their homes.
In addition, traditional sales can often lead to new construction, new jobs and new growth. A plethora of cheap and existing housing on the market dampens the demand for new construction that can grow the economy. In the absence of so many foreclosed homes, the market presents more of an impetus to build.
Other Market Indicators
The housing market has seen a few straight months of increased sales in existing homes. Couple increased sales with a 5.5 percent rise in average home prices between May 2013 and 2014, and the market seems to be on the road to improvement.
Overall, the market has seen fewer existing home sales in the first half of 2014 than it did in 2013. However, in retrospect, it looks like 2013’s numbers were heavily driven by a rush in the sale of foreclosed homes. This year, which has seen a steep fall in foreclosures accompanied by a modest growth in other existing home sales, probably represents a more durable model for the future. Rather than feasting off the remains of underwater mortgages, the housing market is now back to a more traditional model of growth.
Mike Goldstein is a Content Writer at Credit Karma. Since joining the team in June 2013, he’s been delivering the financial know-how on the daily. When away from work, you can find Mike watching hockey, Twittering for hours and frequenting trivia nights.