More Foreclose Sales Will Drive Down Prices

An incredible 248,534 U.S. homes in some stage of foreclosure were sold in the second quarter, according to information compiled by RealtyTrac. That's 4.9% higher than in the first quarter, but 20.2% lower than in the second quarter of 2009. Last quarter's sales of homes in some stage of foreclosure accounted for a massive 24.2% portion of all the total homes sold during the period. Considering this data in conjunction with how weak home sales have been since the quarter ended, it's pretty easy to assume that bank repossessions will increase and home prices will decline in coming months.

Before talking about the future, it's worth taking a moment to look at some of the mind-boggling statistics provided by RealtyTrac on foreclosure sales for the 10 states with the highest percentage of sales coming from homes in some stage of foreclosure:

foreclosure sales 2010-Q2 v2.png

The above chart is pretty self-explanatory except for the last two columns. Those split up the average price discount for homes in some stage of foreclosure between bank repossessed properties (REO) and those purchased before that stage -- while in default or at auction.

Check out the "% of Sales" column, which shows the foreclosure sales portion of all sales. In Nevada, more than half of all homes sold were in some stage of foreclosure. Arizona and California weren't far from that, with their foreclosure sales still over 40%.

One peculiar observation from this chart is how little discount there was on Nevada properties. Despite the incredibly high percentage of sales in some stage of foreclosure, the discount provided was far smaller than in other states on this list. You can also see pretty clearly that after a bank repossesses a home, a deeper discount is generally provided than in earlier stages of foreclosure.

So what does this tell us about the future? First, it's pretty easy to predict is that bank repossessions will continue to increase. That's a clear trend we're already seeing. Sales have fallen considerably since the buyer credit expired, but foreclosure activity hasn't declined by nearly as much. As a result, if you assume fewer sales, but the same proportions of sales from each stage of foreclosure going forward, then more defaults will go to auction and more auctions will fail and end up repossessed by banks.

Second, if bank repossessions continue to grow, then prices will fall more aggressively. This is clear through the chart above. The U.S. average discount for bank repossessions was 34.5%, but the average discount for earlier stages of foreclosure is just 13.0%. More bank repossessions means that more buyers will be able to take advantage of those bigger discounts. And if more buyers buy homes for cheaper, then prices will fall.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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