The median price for a home sold in the United States in October was $199,500. The price of what is called a “distressed home” was $127,000, or 36% less, according to RealtyTrac. “Distressed home” is another phrase for a foreclosure home. While the difference between the two numbers cannot be bridged, the gulf is bad for both the housing market and the broader economy.
One theory about the housing market is that the price, and probably the ultimate sale, of a foreclosure home hurts other home prices within the same neighborhood. The argument makes sense. A home sold for $100,000 that sits next to one worth $200,000 would make many buyers wonder why the difference is so great. An intrepid buyer, willing to take a risk on the condition of the cheaper property, might take it ahead of the better maintained home. Like a falling domino, the effect on other home prices in the same area should be damaging.
Banks are inclined to dump homes that come into their possession, since they are in neither the real estate nor rental business. The irony of the practice is that banks may also have mortgages held by homeowners in the same area where the foreclosed home is located. The bank, in essence, has hurt the value of something on which it has a loan. In some parts of the country where foreclosure rates are high — say some large cities in Florida — the likelihood of banks suffering from such self-inflicted damage is highest.
The only potential winner in the purchase of a foreclosed home is the buyer who receives the discount, and perhaps Home Depot Inc. (NYSE: HD), which sells the items for upgrades. The buyer only benefits though if his or her estimate of what it will cost to repair the home so it is livable is close to accurate. Perhaps after all the financial work and rebuilding, the home will be worth what others in the neighborhood are worth. That is a tortured was to improve real estate prices.