Blog: The Effect of Distressed Properties on the Housing Market

The increase in discounted properties coming up for sale will have a large impact on the housing market in the coming months. There are a good number of foreclosures that have been delayed by the court systems (remember robo-signing?) while the banks have been getting their paperwork in order. As this happens, more and more states are clearing the way for banks to resume repossessing these properties and get them into the marketplace.

As these properties make their way into the market, the prices of the non-distressed homes in the area will also be affected. The market will be negatively impacted in a couple of ways. First, there are only so many home buyers in any area.  And some of this finite number of buyers will purchase the distressed properties (short sales and foreclosures) instead of regular sales, because they can purchase them at discounted prices.

And as a result, as these discounted homes sell, they become comparable sales used by appraisers when establishing the value of all the other future home sales in the area. Since these properties sold at a discounted price, they have a negative impact on the appraisal values, and the home prices in the area go down.

But there is some good news. While the housing market won’t recover until we clear this backlog of distressed properties. And how long that recovery will take depends on the speed that these properties come to market and are sold. The latest report from S&P shows that this inventory is already decreasing. And the report also says that the number of families falling 90 days behind on their mortgages has decreased dramatically. This means that the number of distressed properties coming on the market, behind the current backlog, should be less. And this could be an indicator that the end of the housing crisis is finally in sight. 

But, as I mentioned in a previous blog, home prices are expected to continue to fall in the next 12 months. So if you need to sell and can't wait 18-24 months until we return to normal appreciation norms, you will probably get a higher price selling sooner rather than later. And if you are looking to buy, the next 12 months is going to be a great buyers’ market.