Zillow: Foreclosures “make the market look worse”?
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
An interesting new analysis from Zillow.com, the online real estate information service, today. It contends that the Case-Shiller home price index may overstate home price declines by not adjusting for sales of previously foreclosed homes, which make up the majority of properties sold now in areas like Los Angeles and San Francisco.
The foreclosures ‘make it look like the market is in worse trouble than it is (sic),’ says the company’s news release.
Zillow finds that the median sale price of previously foreclosed homes in Los Angeles was 59% that of homes that had not been foreclosed. In San Francisco, the median sale price of foreclosed homes was 47% of the median sale price of a non-foreclosed home.
Stan Humphries, Zillow’s data master, says combining foreclosures and other houses in one index causes ‘underestimating the decline in value of foreclosed homes and overestimating the decline in value in non-foreclosure homes.’
In other words, foreclosure prices are falling faster than the index, but other house prices aren’t dropping as much.
Saying this distorts the overall market picture, however, is also imprecise. Sure, in Los Angeles 55% of sales are foreclosures, according to Zillow. But does that mean their sales prices are distortions?
Could be, but one can also argue that the foreclosure discount is a more accurate true market value than the higher non-foreclosure prices. The reasoning here would be that foreclosures are dominating sales because they are priced correctly -- that’s why more of them are selling. Many of the properties may be damaged or in disrepair, but the banks also have no emotional stake in the properties, they just need to move them.
Higher prices for homes sold by solvent individuals are likely in better shape and thus worth more. But those sellers may also be asking too much.
If the foreclosures were somehow removed from the market, the median price wouldn’t automatically shoot up to the median for non-foreclosed houses. Some buyers might be compelled to pay more for non-foreclosed houses, but they could also just stay out of the market. Sellers would have to either hold out themselves or cut their prices further to meet what buyers are willing or able to pay.
-- Peter Y. Hong