This one could be a tough sell.
According to a report from CoreLogic via a Housingwire article, distressed home sales will soon be on the rise.
The research firm reports that government stimulus in the form of the first time homebuyer tax credits caused distressed home sales to dip from just over 30 percent of all home sales in January of 2010 to their current level of 24 percent of all home sales. This is a seven month low. CoreLogic anticipates this percentage will rise in the absence of government intervention. An excerpt from the article:
“Home equity has been traditionally the largest source of wealth and equity is a homeowner’s foundation of economic mobility and financial security,” according to CoreLogic. “Since the peak in home sales in 2005, non- distressed sales have dramatically declined and there is a clear relationship between the decline in non-distressed sales and the level of negative equity.”
An increase in distressed home sales will not be good for home values in the short-term. According to an MIT study, foreclosure reduces the sale price of a home by 27 percent. The kicker is they also reduces the value of neighboring homes by 1 percent simply be being nearby. It also forces non-distressed homes that are for sale to reduce their prices in order to compete with the lower priced foreclosures or short sales.
Again, this will cause great pain in the near term, especially for those who purchased homes at the peak of the market. In the long run, it will be healthy for the housing market. Only after prices have truly hit a bottom will we start clearing the massive inventory of available homes (presently there is 12.5 months of housing supply, compared to 6 in a normal market). Once the overhang is cleared and pricing is more in line with demand and historical home prices, recovery can begin (this of course assumes that the labor market improves at some point).
Ultimately, this process must happen and will happen one way or the other. It may happen relatively quickly (within the next year or two) or it could be prolonged by another economic downturn or continued government intervention in the housing market. In the meantime, buckle your seatbelts, because it could be a bumpy ride.
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