Appreciating Home Values and Distressed Properties

Last year at this time, banks were happily approving more short sales transactions. Many lenders finally came to the realization that these deals proved a lot more profitable alternative than having non-performing assets–foreclosures– on their books.

Foreclosed homes are much more expensive because along with having toxic assets on their books, lenders banks also have to maintain foreclosure properties and keep them from being vandalized.

Home price appreciation changes the landscape

Recently released data from several sources show that values continue to appreciate. However, the rate of increase has slowed down, which the Chief economist for the National Association of Realtors (NAR), Lawrence Yun” believes it’s important to keep values in-line with salary and wage hikes.

The Zillow Home Value Index climbed 5.1 percent, year-over-year, to $157,600 in the first quarter (Q1) and a 0.5 percent increase over Q4 2012. The S&P Case-Shiller Home Price Index showed a 9.3 percent gain wit all cities in the 20-City Composite Index registered positive gains.

However, one of the effects of a healthy housing market and higher home prices—fewer sellers with underwater market are motivated to sell their homes in a rising market –hoping to recover lost equity and  eventually selling for a profit.

Here are the metropolitan areas with the biggest year-over-year price gains—of more than 20 percent: Phonex-24%, Las Vegas 23.3%, San Jose 22%, San Francisco 21.4% and Sacramento 20.1%.

Markets that have seen the greatest appreciation in home values include five metros that showed year-to-year appreciation of more than 20 percent: Phoenix (up 24 percent), Las Vegas (up 23.3), San Jose (up 22.1), San Francisco (21.4) and Sacramento (20.1).

Distressed sales down

As short sales occur when the borrower sells the home for less than the balance owned on the home loan. The lender must approve the sale.  Compared to the final quarter of 2012, foreclosure sales have dropped 18 percent and 22 percent from the same period one year ago.

Overall, home foreclosures activities continue to trend down.  With more than 11 million homeowners still underwater with their mortgage, “many analysts expressed surprise about the decrease in the number of short sales. “Rising home prices in many markets may be giving underwater homeowners the determination to stick it out in the hopes of being able to eventually sell at a profit, “said RealtyTrac vice-president Daren Blomquist.

In addition, short sales do not look as appealing to mortgage lenders because bank owned homes are actually appreciating in value, which makes foreclosures more profitable than when homes prices are in decline.

The number of properties in the foreclosures pipeline or completed foreclosed homes transactions fell 18 percent from Q4 and 22 percent over Q1 2012. Foreclosures sales made up 21% of sales in the first quarter—a 25 percent decline over 2012.  These transactions are 45 percent off the peak level of 45 percent attained in Q1 2009.

Dr. Stan Humphries, chief economist at Zillow, predicts that the annual appreciation rate will slow down as more homes come on the market.

Like Yun, Humphries also warns of  the rapid appreciation of home prices. He describes the current market as “a troubling sign of volatility and a potential future headache, as affordability is compromised and homes begin to look much more expensive to average buyers.”

Foreclosed homes and other real estate investors should closely monitor prices in their investment areas.

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