ERIC BELSKY ‘An understatement’
As foreclosure activity rips through Massachusetts, auctions are slicing about 13 percent off fair market home prices.
A statewide sampling of foreclosure sales that occurred in the last year revealed that the foreclosure price was typically 86.8 percent of the fair market price that the homes had fetched when they were sold within the prior three years, according to data from The Warren Group, Banker & Tradesman’s parent company.
“Foreclosures set the absolute bottom for the market,” said Edward J. Deak, a professor of economics at Fairfield University in Connecticut and a forecast manager for the New England Economic Partnership.
“It drags down the whole structure of pricing,” Deak added. “It also makes potential buyers very wary.”
The sales came during a period that saw home prices in Massachusetts escalate and then drop off as the housing market softened. The statewide median sales price for single-family homes jumped nearly 18 percent from $293,000 in 2003 to $345,000 in 2005, according to The Warren Group. But last year, the median home price fell to $325,000, a 5.8 percent decline from the prior year. The median price for homes sold through May of this year has eased to $313,000, which is 3.7 percent lower than the same period in 2006.
Some local appraisers said the difference between the foreclosure and fair market prices is to be expected. But one researcher said the difference actually should be greater given the strong price appreciation that occurred during the years when the properties traded pre-foreclosure.
“If anything, it’s an understatement of the average discount,” said Eric Belsky, executive director of Harvard University’s Joint Center for Housing Studies.
The Warren Group’s sample of foreclosure sales includes 711 single-family homes that were sold from June 2006 through May 2007. The median fair market price of those homes was $265,000, while the median foreclosure sale price was $230,000.
Foreclosed properties usually are sold by lenders at substantial discounts to market prices – as much as 25 percent – in order to move them, according to report by Mark Zandi, chief economist of Moody’s Economy.com.
Local appraisers said they generally don’t consider foreclosure sales when doing appraisals of neighboring properties.
“I don’t use those sales to do regular appraisals because it’s a sale under duress and it’s not what we call an arms-length transaction with a willing and able buyer and seller and with neither party under duress,” said Lorrie Beaumont, a Westwood-based appraiser.
No ‘Panic Mode’
Easton-based appraiser Shaun Fitzgerald said while it’s true that appraisers shouldn’t use foreclosures in their appraisals, foreclosure sales can become problematic when foreclosure activity spikes and such properties are competing with other homes on the market.
“When there’s an abundance of properties in foreclosure, then they truly do become competitive with what we call arms-length transactions,” said Fitzgerald, who is president of the Massachusetts Board of Real Estate Appraisers.
That could drag down overall home values.
A study by a Georgia Institute of Technology professor Dan Immergluck found that foreclosures can lower the property values of neighboring homes by about 1 percent per foreclosure.
In the Warren Group sample, the listed buyer of the foreclosed properties was a lending institution in most cases.
Fitzgerald said lenders often know that there won’t be bidders at auctions because there’s uncertainty about whether there are tax liens, title problems or other encumbrances associated with a home.
“They’re almost forced to buy back the property,” he said of lenders. As foreclosure activity picks up, lenders tend to form relationships with buyers or investors that can purchase properties with cash or large down payments, and then resell them, he added.
Linda Kody, a North Andover real estate broker who lists foreclosure properties for the Federal National Mortgage Association, or Fannie Mae, said most banks and lending institutions don’t want to hold onto the homes long.
“When a bank owns a property they’re a motivated seller. They’re going to sell that property. It’s your competition,” if you’re trying to sell a home, Kody said.
But Kody added that lenders don’t want to sell homes for steep discounts. “The banks don’t give the houses away. They want to get the absolute most money they can get for the property,” said Kody, of Kody & Co. in North Andover.
Declining home prices, along with the popularity of subprime, adjustable-rate and other types of exotic loans, have helped drive up foreclosure activity in Massachusetts. As low introductory mortgage interest rates are resetting to higher rates, some homeowners are saddled with hefty monthly mortgage payments.
Foreclosure auction notices in Massachusetts nearly tripled in the first half of the year compared to the same period in 2006. A total of 8,021 foreclosure auctions were advertised from January through June in Bay State newspapers, up from 2,821 a year ago, according to The Warren Group. In fact, the number exceeds the total number of foreclosure auction notices in all of 2006.
The number of petitions to foreclose, the first step in the foreclosure process when a borrower falls behind on mortgage payments, also has jumped dramatically. Some 11,594 petition to foreclose were filed in Massachusetts Land Court through mid-June. That’s a 53 percent increase from the foreclosure petitions filed during the first two quarters of 2006.
Nationwide, there were 900,000 foreclosures in 2006, and 1.3 million – a new high – is forecast for 2007, with another 1.3 million projected for 2008, according to Zandi’s report.
If the trend continues, there is a fear that the foreclosures could drastically affect the housing market.
“Probably the thing that is affecting the market the most is the people who used their home as an ATM. They pulled out all the equity in a rising market, with expectations that the market was going to rise and there would be no end to low interest rates and rising prices,” said Fitzgerald. “Those are the people we see getting hit the hardest.”
But Fitzgerald said while homeowners and real estate industry professionals are concerned, they’re not in “panic mode” yet. “We’re not experiencing a bust,” he noted.
Deak’s outlook is a little more cautious. He said the declining prices potentially could hit consumers in their wallets. As housing values flatten or decline – pressured by foreclosures and other below-market sales – consumers will have a tougher time refinancing and pulling equity out of their homes, he noted.
“That will limit the ability of consumers to spend at the pace they had previously,” Deak said.
