Thursday, April 29, 2010

Distressed Home Sales Put Pressure on Prices

Distressed home sales have added to the downward pressure on house prices. Weak housing sales in winter months and the near 25% of mortgages that were underwater at the end of the 2009 resulted in an increase in distressed sales in December and January.

The share of distressed sales peaked in January 2009 at 32%. Through the spring and summer months, housing activity increased and the share of distressed sales declined, helping end 33 months of home price declines. However, as economic strain continued into the winter and housing activity dissipated, the share of distressed sales increased and housing prices started a second series of declines. Distressed sales comprised 29% of sales in January 2010, nearing this cycle’s peak.

The increase in distressed sales in late 2009 and January 2010, accompanied with lower housing activity, forced sellers to accept greater price reductions. The discount for distressed sales in January 2010 was 34%, the peak for this cycle. The greater share of distressed sales, paired with increasing discounts, contributed to recent declines in home prices.

The expiration of the first-time homebuyer tax credit on April 30, 2010 will drive increased housing activity in March and April. The increased demand, along with the typical increase experienced in spring and summer, should result in a decreasing share of distressed sales and a decline in the price discounts during this period. However, as this temporary stimulus passes, the housing market will be subject to broader economic conditions, which are on a slow pace of recovery.

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