Distressed Properties Erase Gains in Home Values
By: Jeff Brown

NEW YORK (MainStreet) – With home prices still falling in much of the country, many prospective buyers are understandably staying on the sidelines. But what if you really must move, perhaps for a new job? How do you avoid buying a money loser?

New data from housing monitor CoreLogic underscores the importance of avoiding neighborhoods with lots of “distressed” sales – short sales, foreclosures and sales of lender-owned properties, as those are responsible for a large part of plummeting home values.

CoreLogic says the average U.S. home value fell 4.7% in 2011, but when distressed sales are removed from the calculation, the drop was only 0.9%. The trend changed little at the end of the year, with all properties down 1.4% in December compared to November, while prices actually rose a tad, 0.2%, when distressed sales were excluded.

Sellers of distressed properties are often desperate and willing to take low prices. Lenders may slash prices on homes they own to put problems behind them and avoid maintenance and other expenses. So while some distressed homes can be bargains for savvy buyers, a cluster of distressed sales drags down prices for the whole area. Even if you buy a property that is not distressed, prices could fall further if more distressed properties are thrown on the local market.

Of course, it's hard to predict if and when that will happen. But distressed sales do tend to cluster in certain areas where prices rose especially high during the bubble, where unemployment is high, or where a large portion of homeowners owe lenders more than their homes are worth.

“While overall prices declined by almost 5% in 2011, non-distressed prices showed only a small decrease,” said Mark Fleming, CoreLogic’s chief economist. “Until distressed sales in the market recede, we will see continued downward pressure on prices.”

Local real estate agents should have a good handle on the number of distressed sales in any given neighborhood. Notices of short sales and foreclosures are also often appended to for-sale listings on Realtor.com and Zillow.com.

Aside from avoiding distressed-heavy neighborhoods, a buyer can reduce the risk of losing money on a new home by planning to stay in it for a long time. If you stay for 10, 15 or 20 years, you’ll probably have a good chance of coming out ahead even if prices continue to drift down just after you buy.

Of course, there is also the option of renting. In many parts of the country rents are rising because so many people either worry about the risks of buying or cannot get mortgages, driving demand above supply. But even if renting costs more on a month-to-month basis than buying, renting may be the better option if the risk of home-price declines is high. Use BankingMyWay’s Rent vs. Buy Calculator to assess your options.

The government is also taking steps to alleviate the burden of distressed properties on local housing markets, with a deal worth a reported $26 billion, but while it will help homeowners there are still doubts about the deal’s effects on home prices. Read more on MainStreet!

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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