Zillow: Prices Between Foreclosed and Non-Distressed Homes Leveling Out

Monday, 12 Nov 2012 07:51 AM

By Peter Moses and Nancy Stanley

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The days of buying discounted foreclosed homes throughout the United States seem to be coming to an end, according to a report by Zillow.

The foreclosure discount rate, for which Zillow compared the actual sale price of foreclosed homes nationwide with the estimated price of the same home if it were to sell in a non-distressed transaction, dropped from 9.1 percent in September 2011 to 7.7 percent in September 2012, meaning traditionally purchased home and ones owned by banks in foreclosures have almost evened out.

At the peak of the housing crisis in August 2009, prices of foreclosed homes were discounted at a national rate of 23.7 percent, on average, relative to the prices of non-distressed home.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

While that’s good news for financial firms, investors who had been gobbling up distressed homes, rehabbing them and then flipping them for good profits are becoming scarcer.

“The smallest foreclosure discount is found in places where competition for homes is so high, people there are willing to pay the same amount for a foreclosure re-sale that they would for a non-distressed home simply to take advantage of historic affordability," said Stan Humphries, Zillow’s chief economist.

Phoenix and Las Vegas currently have a zero foreclosure discount rate. Those communities had among the highest foreclosure rates in the country, but discount shoppers and speculators have gobbled up almost all of the bank-owned properties.

Cities like Baltimore, Cincinnati and Pittsburgh are all still hovering around 20 percent, while New York’s rate is 15.5 percent, trailing downtrodden Detroit, which sits at 15.2 percent.

“The sale price of the property is only one consideration; other factors include the cost of repairs needed to make the property rentable, and what the anticipated rental price of the home is,” Rick Sharga of Carrington Mortgage Holdings, a private equity fund that invests in distressed homes, told CNBC.

“It's entirely possible that an investor can make a reasonable yield on a property even paying close to market price on a home, if the rental rates are attractive enough. If the investor believes that home prices in a given market are going to continue to rise over a longer period of time, this can also factor into a decision to continue to buy there even without a foreclosure discount," he said.

The housing market is still depressed throughout much of the country despite these numbers. There are now 6.7 million more households renting than 2004, according to Paul Diggle of Capital Economics.

“The combination of rising house prices and an unchanged homeownership rate is a useful reminder that investor demand is a significant driver of this housing recovery,” Diggle told CNBC.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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