By AnnaMaria Andriotis
The most promising news for housing may not be rising sales, but falling foreclosures.
While sales of new single-family homes jumped 8% in May, according to data released by the Commerce Department Monday, experts say homeowners may benefit more from the shrinking number of distressed properties on the market. Some 1.3 million properties were in the foreclosure process or bank owned in May, according to the latest data from RealtyTrac.com. That’s down 25% from a year prior and 39% off its peak in December 2010.
Those selling both new or existing homes stand to gain when there are fewer distressed listings, say experts, because foreclosures and other distressed properties often get listed at such steep discounts that higher-priced new homes and non-distressed properties cannot compete.
Foreclosures also lower the value of nearby homes. On average, home property values drop about 1% when they’re within one-eighth of a mile from a residence that’s received a foreclosure filing, according to the Woodstock Institute, which researches foreclosures, and the Georgia Institute of Technology. When the distressed homes are sold, homes within a quarter mile lose up to around 4% of their value, according to a separate study in the Journal of Real Estate Finance and Economics. Homeowners will need between two and five years to recoup that loss.
The drop off in foreclosures could help sellers to unload their homes closer to their asking prices, experts say. Distressed properties accounted for 25% of all sales in May, down from 31% in the same month a year ago, according to the National Association of Realtors. Over the same period, the median sales price of existing homes rose 8% to $182,600.
To be sure, there’s a good chance foreclosures may spike again, experts say. “There are a lot of foreclosure properties to come,” says Leonard Baron, principal at LPB Services, a real estate consulting firm in San Diego, Calif. Lenders are holding on to roughly 450,000 foreclosed homes that they haven’t listed for sale yet, according to RealtyTrac.com. Separately, there are roughly 1.5 million homes described as “shadow inventory” – distressed properties that aren’t currently listed for sale , according April data (the latest) from CoreLogic.
In the meantime, the smaller number of foreclosure listings may even be a boon for some buyers. Before one can purchase a home, an appraiser will determine its value, often taking into account the price at which foreclosed homes nearby sold for. That will result in a lower appraised value for the home, which could make it harder for the buyer to get approved for a mortgage.