The Mortgage Meltdown

Bits of good news surface for Twin Cities housing market

  • Article by: JIM BUCHTA , Star Tribune
  • Updated: March 23, 2011 - 1:13 PM

A report to be issued today is expected to show sales rising and inventories falling. But other factors, including the rising number of foreclosure sales, mean it's still too soon to celebrate.

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17829 Formosa in Lakeville, last sold for $483,400 in August 2005 and is now in foreclosure and on the market for $379,700.

Photo: Glen Stubbe, Star Tribune

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For the past three months, pending home sales have increased while the bloated inventory of homes waiting to be sold has begun to dissipate -- and a Twin Cities home sales report to be released today promises more of the same. All good signs in a housing market that hasn't had much to cheer about.

Not that anyone's celebrating yet. The market still faces rising unemployment, slack wage growth, higher down-payment requirements and stricter mortgage qualifications. Perhaps the most ominous trend out there, particularly for sellers, is the rising number of foreclosure sales taking place -- in many cases a sign that prices are still far from the bottom in those neighborhoods.

Nationwide, a sharp rise in foreclosures is blamed for a decline in home prices that has rocked the economy -- and led lenders and the government to launch a sweeping effort to keep homeowners in their homes, even if it means renegotiating the terms for hundreds of thousands of loans.

While about one-third of all home sales in the metro area during the July-September quarter were "lender-mediated" transactions -- foreclosures and short sales, in which the lender agrees to a sale for less than what is owed on the mortgage -- in some communities they represent more than 60 percent of sales so far this year, according to data compiled by the Minneapolis Area Association of Realtors.

"If they're on your block and you're selling, it influences your price," said Ross Kaplan, a Minneapolis sales agent who says that the housing market is more nuanced than ever and that sale trends vary block by block. "Your world gets very small when you're trying to price a house."

In Brooklyn Center, for example, 64 percent of home sales so far this year have been lender-mediated, while in Edina only 8.3 percent were.

Why such a disparity? Foreclosures tend to be concentrated in areas with an abundance of first-time and low-income borrowers who are more likely to have subprime mortgages, which are more likely to go into default. A recent report by the Federal Reserve Bank of Boston found that subprime borrowers are more than six times as likely as a prime borrower to end up in foreclosure.

According to the Realtors group, communities with a high percentage of foreclosure sales also tend to see a steeper decline in the median sale price. In the Regional Multiple Listing Service district that includes north Minneapolis, 67.2 percent of the sales were lender-mediated. As of October, the median sale price of houses in that district fell 70 percent in two years.

In Edina, where foreclosures include a number of multimillion-dollar homes but make up a low percentage of the total sales, the median sale price has fallen only 1.2 percent.

Mary Korfiatis, an Edina Realty agent who lives and works in Brooklyn Park, said foreclosures haven't hit all the city's neighborhoods equally. Pockets have been hit worse than others.

She's the listing agent on a rambler that's been on the market for more than a year; after it had several price reductions she recently received an offer from a qualified buyer. Though she can't disclose the offer price, she said that the house ultimately will sell for about $20,000 less than it should have because of its proximity to several foreclosed homes that are now on the market.

Some pockets are doing OK

Korfiatis said that in large markets like Brooklyn Center and Brooklyn Park, pockets are holding their own and maintaining their values, and she's encouraging prospective move-up buyers to remember that even if the value of the house you're going to sell goes down, you'll pay less for the house you're buying.

"You're going to take a hit when you sell, but as long as you are buying, that's where you have your power."

Korfiatis said that there's no shortage of buyers, including many cash-carrying investors who are interested in picking up a foreclosure bargain, but few are willing to endure the complicated process of buying a short sale or foreclosure. It can sometimes take 90 to 120 days just to get a response to an offer from a lender, and by that time the buyer has moved on -- and the lender is forced to reduce the price even more to generate more interest in the property.

"It's really due to the banks -- they can't move on them fast enough," she said.

Those subsequent price reductions, sometimes as much as a $100,000 or more, hurt not just the houses on the same block, but any others that are in a similar price range or condition. That's because those foreclosures often become comparisons for appraisals. Often, those bank-owned listings are going to be priced below market value to move quickly to avoid paying more holding costs. Just how much of an impact those foreclosures are having on the broader market is unclear.

Many appraisers are now debating whether it's the quantity of foreclosures or the proximity and likeness of a particular foreclosure to a comparable house that will have a greater impact on the value of a property, said Alan Hummel, chief appraiser for Forsythe Appraisals.

"There is a correlation between the number of properties [in foreclosure] to overall values in those neighborhoods," he said.

That depends on the community and the condition of those bank-owned listings, though industry experts agree that the impact on values is property- and neighborhood-specific, he said.

For example, for appraisal purposes, a 1950s two-bedroom rambler that's been condemned isn't likely to be considered direct competition for the pristine, two-story, four-bedroom Victorian next door. That doesn't take into account, however, how a prospective buyer might view living next to an eyesore -- that could reduce the pool of buyers and therefore the price.

Hummel said that as more homeowners fall into foreclosure because of increases in their adjustable-rate mortgages rather than because of a job loss or other economic calamity, a growing percentage of foreclosured homes are well maintained and hence likely to be used as comparables for traditional home sales.

Alex Stenback, mortgage banker with Residential Mortgage Group in Minnetonka, says that the upshot for communities hardest hit by foreclosure sales is that while prices might fall further, they're also likely to fall faster.

"Who recovers first is the next question," he said. "This whole thing is unpredictable -- it's like Whack-a-Mole."

Jim Buchta • 612-673-7376

  • about this series

  • This is an occasional series examining the effects of the collapse of the housing market.
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