Apr162012

Distressed sales cannot be excluded when analyzing the market

A common meme in the realtor community is that distressed sales, REO and short sales, are somehow not part of the market. It’s a common misconception shared by agents, sellers, and some misguided housing market analysts.

This idea emanates from the desire to see prices rise. Every seller wants to get a premium price, and agents are prone to pander to seller delusions to get listings. When the market moves the other way, agents have to explain to sellers why they couldn’t get their WTF asking prices, and rather than admit they pandered to a seller’s delusions, agents will blame those pesky distressed sales taking down the market. If not for those distressed sales, prices would be going up, right?

Bullshit.

Distressed sales are market sales

First, let’s be totally clear: distressed sales are market sales. Any property on the MLS which can be purchased with lender financing is a fair-market sale. Whether or not the sale was distressed is irrelevant.

In every real estate market there are distressed sales. Often these come from the three Ds: drugs, divorce, and death. An owner with a drug problem likely has other financial issues, and many have sold their houses to pay other debts or simply buy more drugs. People getting a divorce want to move on with their lives, and selling a house is often the final joint asset needing disposition. People getting a divorce are motivated to sell just to get on with the rest of their lives. When inheritors come into possession of real estate, it is found money. Inheritors often could care less about getting every penny out of a sale. They just want their money quickly so they can spend their windfall. With the collapse of the housing bubble, we could add a fourth D to the list: debt. Many sellers overburdened with debt find themselves underwater on their mortgage. Once they are underwater and unmotivated by obtaining maximum equity in a sale, they may come to care more about expediency than obtaining the highest price.

One thing all distressed sellers have in common is an increased motivation to sell and a decreased desire to get the highest possible resale price. As seller motivation increases, asking prices go down.

Ordinarily, the percentage of distressed sales in a housing market is relatively small. So small in fact that motivated sellers often don’t have to lower their prices to complete the sale. However, in today’s market characterized by fewer buyers with limited ability to raise their bids — and little desire to rise their bids due to falling prices — even a small number of distressed sellers will cause the market to shift as motivated sellers lower their bids to compete for the few active buyers. Since the current market is dominated by lenders liquidating REO, by definition a motivated seller, at least a third of all market sales will be distressed. With so many distresses sales, prices get pushed down below recent comps, and market prices fall.

In 2012, lenders made a concerted effort to keep REO off the market. The inventory that usually enters the market starting at the first of the year is notably absent. Lenders hope that by limiting supply, they can reverse the decline in prices and engineer another market bottom. However, just like the false bottom of 2009, an engineered bottom created by withholding supply is likely to prove ephemeral. The supply will eventually have to come back to the market, and when it does, they will again be motivated sellers willing to sell for less than recent comps if required to liquidate their holdings — and lower asking prices will be required, particularly at the high end where the absence of move-up equity means demand will be tepid for years.

So the next time you hear a realtor blather on about distressed sales not representing the market, remember they are clueless shills trying to explain why their rosy expectations of future appreciation didn’t come to pass. For example, consider this anecdote provide by Soylent Green is People last week: 

My Agent story of the week (c) falls into the theme of this story nicely. This agent (who says he’s a Real-aaa-tor, mispronouncing the designation) just had his refinance turned down by the bank. The reason: “That gd appraiser used the last two closed comparables in my tract in the report, but they were both short sales! One of the homes they practically gave away.That’s not fair to use these sales to compare to mine”.

The realtor community needs to recognize that the appraisers only use data provided to them by…. the realtor community to arrive at home values in their final reports. A short sale, last time I checked, is a sale, just as an REO is. An appraiser must use that sale if it’s setting the floor in the market. To not see this after years of being an established Real-aaa-tor tells me not much attention was paid during the testing to become one.

Distressed sales cannot be ignored. They are not an aberration due to disappear this spring. Distressed sales are going to be the major factor limiting appreciation for the next decade. Until shadow inventory is gone, lenders liquidations will be about a third of all sales. Even after shadow inventory is gone, if these homes were sold into REO-to-rental programs, the hedge funds will be liquidating for years thereafter. Hedge fund sellers may not be as aggressive as lenders, but they will certainly be more aggressive than discretionary sellers who want to get WTF sales prices.

CoreLogic February Home Price Index Reports Month-Over-Month Increase, When Excluding Distressed Sales

April 04, 2012, Santa Ana, Calif. –

––Year-Over-Year Declines Continue at a Decreasing Rate––

CoreLogic® (NYSE: CLGX), a leading provider of information, analytics and business services, today released its February Home Price Index (HPI) report, the most current and comprehensive source of home prices available today. Excluding distressed sales, month-over-month prices increased 0.7 percent in February from January.  The CoreLogic HPI® also showed that year-over-year prices declined by 0.8 percent in February 2012 compared to February 2011. Distressed sales include short sales and real estate owned (REO) transactions.

Think about how foolish this analysis is. It’s like saying “prices are going up if you exclude those sales where prices went down.” No kidding.

I shot three under par on my last round of golf if you exclude all those bogeys and doubles. If I didn’t have to count those, I would be a good player.

The report also shows national home prices, including distressed sales, declined on a year-over-year basis by 2.0 percent in February 2012 and by 0.8 percent compared to January 2012, the seventh consecutive monthly decline.

House prices, based on data through February, continue to decline, but at a decreasing rate.  The deceleration in the pace of decline is a first step toward ultimately growing again,” said Mark Fleming, chief economist for CoreLogic.   “Excluding distressed sales, we already see modest price appreciation month over month in January and February.”

That is really putting lipstick on a pig, isn’t it? All the news is bad, but it’s getting less bad, so that must be good?

“The continued strength of sales activity and tightening inventories in many markets are early and hopeful signs that prices will continue to stabilize and improve in the coming months.  In fact, non-distressed home sale prices, which represent two-thirds of all sales, have appreciated by just over 1.0 percent since the beginning of the year,” said Anand Nallathambi, president and CEO of CoreLogic.

Why do we need to look for hopeful signs? Why not simply report the market is in the toilet and let it be what it is?

Highlights as of February 2012

  • Including distressed sales, the five states with the highest appreciation were:  West Virginia (+8.6 percent), Michigan (+5.8 percent), Florida (+4.7 percent), Arizona (+4.5 percent) and South Dakota (+4.1 percent).
  • Including distressed sales, the five states with the greatest depreciation were: Delaware (-11.2 percent), Connecticut (-7.9 percent), Rhode Island (-7.8 percent), Illinois (-7.1 percent) and Georgia (-6.6 percent).
  • Excluding distressed sales, the five states with the highest appreciation were: South Dakota (+5.9 percent), West Virginia (+5.6 percent), Maine (+4.5 percent), Utah (+3.7 percent) and Montana (+3.6 percent).
  • Excluding distressed sales, the five states with the greatest depreciation were: Delaware (-8.7 percent), Connecticut (-4.9 percent), Nevada (-4.6 percent), Vermont (-4.0 percent) and Minnesota (-3.3 percent).
  • Including distressed transactions, the peak-to-current change in the national HPI (from April 2006 to February 2012) was -34.4 percent.  Excluding distressed transactions, the peak-to-current change in the HPI for the same period was -24.6 percent.
  • The five states with the largest peak-to-current declines including distressed transactions are Nevada (-60.2 percent), Arizona (-49.8 percent), Florida (-48.6 percent), Michigan (-44.0 percent) and California (-43.7 percent).
  • Of the top 100 Core Based Statistical Areas (CBSAs) measured by population, 67 are showing year-over-year declines in February, nine fewer than in January.

Full-month February 2012 national, state-level and top CBSA-level data can be found at http://www.corelogic.com/HPIFebruary2012.

Does all real estate reporting need to be bullishly biased?

Notice that CoreLogic perpetuates the fallacious distinction between distressed and non-distressed sales. Why do they do that? I will give them the benefit of the doubt and assume they know better. The only reason to make this distinction is to provide bullish spin useful to realtors, and lately to politicians.

Why can’t data purveyors simply provide truthful and accurate data? Does society benefit from the grand conspiracy to dupe hapless buyers into overpaying for real estate?

Lenders benefit.

Realtors benefit.

Politicians benefit.

Buyers get screwed.

Does that seem right to you?

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