What Foreclosure Sales Say About Home Price Trends

On Wednesday, we learned that the median sale price of an existing home fell to a level not seen since April 2002. The National Association of Realtors blamed recent price declines on deep discounts on rising distressed property sales, rather home values falling broadly. Today, we can begin to test this logic with the release of the foreclosure sales data for fourth quarter from foreclosure tracker RealtyTrac. Are distressed properties really to blame for price declines?

Recall the median home sale price according to NAR had declined by 3.7% in January year-over-year, and 1.0% in December year-over-year. Here's the explanation provided by its President Ron Phipps:

Unprecedented levels of all-cash purchases, primarily of distressed homes sold at deep discounts, undoubtedly pulls the median price downward. Given the levels of inventory we see today, we believe that traditional homes in good condition have held their value.

All-cash purchases, which have risen moderately, don't necessarily indicate more distressed properties being sold at even deeper discounts, however. That's where the RealtyTrac data can help.

First, let's get straight just what RealtyTrac is tracking in its foreclosure sales report. It defines a foreclosure sale as the sale of a property that is bank-owned, at auction, or defaulted. The broadly-defined category should account for the vast majority of distressed property sales, and certainly those providing the deepest discounts. Unfortunately, its data only goes through December, but that's enough to do some analysis.

Here's a chart showing how some key metrics have changed over the past year:

The first row shows foreclosure sales as a percentage of total sales. You can see that, other than in the first quarter of 2010, the portion of distressed sales has remained pretty constant at around one-fourth of total sales. As it turns out, for the January price decline, NAR is blaming a steep jump in year-over-year all-cash purchases (26% to 32%) for the sales price decline. Yet that was the quarter last year when foreclosure sales peaked.

So unless foreclosure sales are spiking to even higher this year, the NAR's reasoning doesn't hold up. Considering that all-cash purchases only rose from 29% in December to 32% in January, that doesn't seem particularly plausible, as the portion of foreclosure sales was only 26.5% last quarter. They would have to jump quite incredibly to rise above 31.0%, the proportion in Q1-2009.

Even without foreclosure sales spiking, they could still be responsible for the decline in foreclosure prices were falling and discounts were rising. The data we have doesn't really support this possibility either, however. In fact, the average foreclosure sales price has been surprisingly stable since the fourth quarter of 2009. According to RealtyTrac, prices dipped in the third quarter and the discount deepened. But then prices rebounded and the discount fell.

From this analysis, it doesn't seem particularly plausible that "unprecedented levels" of foreclosure sales at deepening discounts driving the home sale price declines. Instead, it's more likely that slightly rising foreclosure sales paired with non-distressed home value declines are pushing down home sale prices. There are a few parting caveats, however.

First, as just alluded to, there is likely some effect being felt from foreclosure sales, as they have increased a little in the final quarter 2010 compared to the prior two periods. The discount also remains relatively deep. But there doesn't appear to be any unprecedented spike here.

Second, the data above does not go through January. So it is theoretically possible that January 2011 was suddenly very different from what we have seen throughout 2010. There's little reason to believe that's the case, however. Although all-cash purchases rose a little, a dramatic shift would seem particularly implausible considering that foreclosure inventory had been declining throughout the latter part of 2010, so deep discounts and sales should not have been easier to obtain moving into 2011.

Third, the data we're talking about here are from two different sources. NAR and RealtyTrac might not agree on the number of home sales or what portion of those sales are distressed. But if nothing else, today's report from RealtyTrac provides another perspective on the housing market narrative. Although foreclosure sales continue to occur at elevated levels and provide significant discounts, we aren't seeing a new paradigm shift in distressed sales yet having a major effect on prices.