Ravings of a Research Junkie
When the NAR Research Committee met in D.C. in May, a question was asked about the impact the FHA’s new 90 day requirement for comps used in an appraisal in a declining market might have on sale prices.
So I went home and looked at my local data; below is what showed up. Now since all real estate is local, anything here would not necessarily be relevant where you are. However, if multiple markets are experiencing the same thing, perhaps there is value in collecting the data on these patterns such that if this 90 day rule thing is not good, the data might show why it must stop.
From a high in February of 2009 of over 21%, the amount of bank resales being “For Sale” has dropped significantly. Yet the sale of bank owned properties has remained a significant percentage of all homes sold. This is because they are initially priced at a “liquidation price” roughly 25% to 35% below market
The reason bank owned properties are dominating the sale market is because they offer great value to both the buyers and the banks selling them. An under priced home provides the buyer with instant equity. Simultaneously, these sales offer great value to banks because the banks actually free up capital by liquidating the properties below market value. Furthermore, not only do the banks get cash out of the home when it sells, I believe they also get access to TARP funds to cover some of their losses and it eliminates the loan loss reserve requirement imposed by the FDIC. Thus, banks’ losses are subsidized by TARP making it impossible for an individual seller to compete.
Consequently, this liquidation price, which is roughly 65% to 70% of market value, gets the bank-owned home sold faster than those of non-bank owned sellers and the banks receive closer to asking price. Furthermore, to ensure new loans are not going to once again be considered “toxic assets,” banks have arbitrarily chosen to use the FHA rule on non-FHA insured homes despite the absence of such a requirement by the G.S.E. The result is a drag on non-foreclosed resales as banks are not only giving the loans but dictating which comparables can be used by appraisers.
By the way, what is interesting about this last chart is that it shows that around the third quarter of 2008, roughly when the HUD announced its “Declining Markets” requirement for appraisals, non-bank resales took a large hit on price. This suggests that non-bank sellers have been forced to accept much lower prices…prices that are approaching those of the bank-owned fire-sales.“
Finally, while this is only a glimpse into a very small population of home sales, it does raise a question: if appraisers are required to use “Liquidation Prices” for sold homes over the last 90 days to determine today’s “Market Price,” what is today’s “Liquidation Price?”
Robert E. Taylor, Jr.
Michigan Association of REALTORS
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