Foreclosures: Impact on Real Estate Market May Not be as Severe as Expected

by Alex Stenback on May 6, 2008


We’re talking about foreclosures and short-sales folks, or, as a new report from the Minneapolis Area Association of Realtors terms it: Lender-Mediated Sales.

Jeff Allen, research director at the MAAR and Aaron Dickinson, Edina Realty agent (and blogger) are responsible for this tight little report, entitled "Foreclosures and Short Sales in the Twin Cities Market" which gets to the heart of some questions that have been on a lot of minds lately. 

Chief among them: Just how much of the current market activity is foreclosure/short sale related, and what are the broader impacts?

The report itself confirms a fact that many of us tracking the issue anecdotally have suspected: Almost 30% of closed sales (Q1 2008 – see graphic above) are/were in some stage of foreclosure or other "lender-mediated" status, such as a short sale.

One surprising data point gleaned by Jeff and Aaron was the fact that there is a fairly stark dichotomy between lender-mediated and traditional real estate activity in our market.  Check out this graphic:


The key takeaway from this is that Median sales prices outside the universe of lender-mediated properties have only deteriorated by 3.9% over the last year.  One possible conclusion to be drawn from this is that the rising tide of foreclosures and short sales lender-mediated listings and sales are not putting as much downward pressure on prices of traditionally marketed properties as we would have imagined, and has been reported.

This obvious good news is also seasoned by this fact, from the report:

The actual number of traditional seller new listings has fallen by 27.4 percent over the last two years…So clearly, homeowners are holding steady in their current residences with greater frequency and home builders are producing far less new inventory.

In other words, many sellers, sensing a bear of a market, are simply opting out, while those that are selling, aren’t taking nearly the bath that one would expect.

Though it is still early on, and we have a lot of ground to cover before the real estate contraction is over, this report presents a far more optimistic view of the state of our housing market than we, and many others, would have expected. 

Yes, prices are falling dramatically in the aggregate, but the bulk of the carnage is occuring in the lender-mediated market, and the traditional market is holding up rather well, all things considered.

Anyway, go read the report – too much good stuff to list it all here – and kudos to Jeff and Aaron for putting this together.   

{ 14 comments… read them below or add one }

Nate May 6, 2008 at 11:25 am

Interesting report, though I’m not sure I agree with all of their conclusions.

Lender-mediated properties have been increasing at more than the “steady rate” they claim. “Steady growth” normally implies linear increases. Look at their numbers, lender-mediated properties have tripled each year, which is exponential growth for this time period. (note: expect this to decouple this year and slow, otherwise by Q1 2009 lender-mediated properties may represent 75% of the market activity)

Non-bank-mediated median sales for Q1-2007 were flat from Q1-2006, that’s a significant drop from the rates of yearly appreciation we had been experiencing, and more importantly was during a period that did not have the current lending challenges.

That is where I think this report misses the point. The report tries to focus only on bank-mediated sales numbers to explain drops in median prices; unfortunately the market is more complicated and bank-mediated concerns are not the only drag on median sales prices. Stricter lending continues to be a significant drag on home sales as well, but wouldn’t really show up in their data until Q4-2007 (when changing lending rules really started to impact closings).

So back to the reports conclusions. The writers are trying to make the case that even though Case-Shiller numbers indicate a 10% drop for our area, non-bank-mediated properties have been less impacted. Case-Shiller provides an average for the area, so there is no doubt that specific numbers would break down in a way that bank-mediated properties would be more impacted. Properties become bank-mediated sales due to specific circumstances where the market determines the original sales price to be too high. If you CAN sell your property without involving the bank, odds are you would see less of a drop. I haven’t met many short-sellers who are working with the banks because they want to save the buyers money, if they could have received their original asking prices I’m sure they would have been happier.

The real issue should be the trend for non-bank owned properties. Appreciation went flat, than negative. Foreclosures continue to increase, and as a result bank-mediated properties represent a major and growing piece of the market. Lending conditions continue to be challenging. The increasing pressures to sales prices should be concerning.

Nate May 6, 2008 at 12:36 pm

I went to the author’s blog and I think they’re missing the point. Leaving comments over there isn’t working, but he talks about how “Traditional Sellers” aren’t seeing 10% price declines.

Sellers do not determine the price they receive, the market does, i.e., you don’t decide if you are a “Traditional Seller” or not.

The report is looking at median sales prices, and determining that non-bank-mediated sales receive a higher median price. But, those other bank-mediated properties normally begin as regular or “Traditional Sellers” as well; it’s just that the market rejects their price.

In other words, why weren’t these people originally able to sell their properties at the -4% figure the report tries to conclude for non-bank mitigated properties? The answer is that there are other factors involved with these properties that lead the market to reject the asking price. Typically this is because these properties are in some form of distress.

All the data is separating out, is that properties in distress tend to sell lower. And that in a declining market, like the one we are in, distressed properties are much more likely to become bank-mitigated sales.

Case-Shiller reports an average result for a market. Currently reported as around 10%, this doesn’t mean that all properties have fallen 10%, individual properties will vary greatly. The market determines where a property falls into this range, not some notion of a “Traditional Seller”.

Alex/Editor May 6, 2008 at 1:45 pm

I think this report has something to say beyond a simple semantic argument about sellers.

I am not sure we can distill this down to something as simple as bank-mediated sales are simply and always failed “traditional” sales. Though it would be interesting to see the data broken down further to determine whether and how many of the bank-mediated sales have a prior history in the MLS indicating there was an attempt to sell prior to bank involvement.

Rationally, you’d think every last one of them had an attempt at an open market, non bank-involved sale, but given the fact that sizeable numbers of defaulting borrowers never make contact with, or aknowledge a servicers attempts to contact them, this likely varies a great deal.

I think what we may be seeing here is that owners (whether banks or individuals)in “must sell” situations (cannot afford the home any longer, or in the case of a bank, must sell because an REO portfolio is simply a cost center and is to be liquidated as quickly as possible) are getting smoked out. The data also suggests that these tend to be lower bracket homes under $200k, which I suppose is not all that surprising.

These are not, to steal a term from the appraisers, “typically motivated sellers.”

In other words, yes the market determines the price, but for those that the seller must sell, (the non-typically motivated) there are additional downward pressures. Others can just take it off the market and hold out for another day.

I suppose one could argue that any market increasingly dominated by must-sell sellers would depress prices more than the fundamentals would suggest, and this may be the reason that we are seeing many “optional” sellers hang tight, as evidenced by the dramatic fall in listings in that space.

As an aside, I think we might be able to draw some useful conclusions from this about the prevalence of “ruthless” borrowers who would walk away even though they can afford the home, just and only because they are upside down on paper.

Nate May 6, 2008 at 2:34 pm


How can you not see a bank-mediated sale as a failed “Traditional Sale”? Be it a foreclosure or a short sale, the sellers are not able to sell at a price that would meet their obligations. Even if the sellers never bother listing the house, instead “walking away”, they are doing so based on a calculation of the expected sales price. They simply avoid listing based on a rational decision.

This is precisely why during the housing bubble there were so few bank-mediated sales. The vast majority of sellers could sell their property for at least enough money to satisfy their mortgages. It’s when banks started assuming this would always be the case we started getting into trouble.

This report simply dices up the market into 2 groups, bank-mediated and non-bank-mediated sales. Unsurprisingly, properties that fall into bank-mediated sales sell for less. Did we need this report to tell us that foreclosures and short sales make up the lower end of the sales market? Given all the circumstances that go with these types of properties, how is this not obvious? Yes, sellers in those circumstances are more aggressive in lowering prices. That’s all been common sense for some time now.

Essentially you may as well rename the 2 groups; Sellers and Economically Motivated Sellers (must sell situations). The economically motivated sellers are on average accepting lower prices. Where is the big surprise?

Jeff Allen May 6, 2008 at 2:44 pm


The market obviously determines home values. To argue otherwise would be to contradict the centuries-old discipline of economics. Traditional properties don’t exist in a vaccuum independent of lender-mediated properties. This is not the report’s claim.

But the differences in price change between the two markets are significant enough to make it an item that merits mention. And it’s just one item discussed in the report among many.

And not all foreclosure and short sale properties were once on the market as traditional properties. This is an incorrect assumption, as Alex stated.

Nate May 6, 2008 at 4:42 pm

I never assumed all bank-mediated properties had been listed on the MLS. A potential seller doesn’t have to go through the process of hiring a realtor and listing on the MLS in order to make a decision about trying to use a “traditional sales” method for their home.

“Traditional Sales” in this sense seems to simply imply whether a bank is involved in the decision process for the sale. I drew that conclusion since that is the major differentiation in the report data, one column for non-bank-mitigated, and the other for bank-mitigated. Short sales and foreclosures put the decision process with the bank, “traditional sales” leave the decision with the seller. “Traditional Sales” therefore assume a lot about what offers the seller can accept.

My point was that individual sellers don’t get to determine which they are, the market does. If a seller has X% equity in their home they could potentially use a “traditional sale”, however if the market has declined more than X% they can’t. Furthermore, buyers do not cede the decision making process of selling their house to a bank for no good reason. They do so because the “traditional sales” process will not work for them. Any bank-mitigated property can therefore be seen as a failed “traditional sale” whether it was listed on the MLS or not.

My issue is in how you define out these 2 markets.

The bank-mediated group skews to the lower income brackets, as the report indicates. 63% of the properties are 190K or less. Coincidentally if you look at the market activity numbers for the last year, the 190k and under price brackets are also where we have seen the most significant gains in inventory. 25-150% gains in inventory depending on the specific prices within that group. We are also seeing more sales occur in the lower price brackets as well.

So you’ve created a subset of data that skews into the lower brackets, which is also where we are seeing the biggest inventory gains and sales. The end result is, unsurprisingly, a larger percentage drop in median prices within this group. This could quite possibly be accounted for simply because your data subset skews to these lower price groups, and thus a lower median. It does not necessarily have anything to do with the search terms. The correlation of bank-mediated search terms to lower prices, does not necessarily mean that bank-mediated properties were the cause for the pricing. Though in this case it may well have been.

My point is that this report shows that bank-mediated properties skew to lower priced properties, which correlate to lower median prices. What is significant in that as a takeaway? It’s been common knowledge that banks will more agressively lower prices. If we’re just trying to reassure sellers, isn’t it easier to point to the appreciation numbers for our entire area that shows appreciation, or the lack there of, varies greatly from place to place?

Aaron Dickinson - Edina Realty May 7, 2008 at 12:11 am

Ask and ye shall receive… here is some data regarding price per square foot:

The report that Jeff and I produced puts a context to what we’ve all been seeing in the marketplace. The very fact that such a large number of the homes in the bank mediated category are at such low prices is a great explanation on it’s drag on median sales price, even if you don’t agree with the year-over-year trend.

On your point of the sharp decline of the median sales price on bank mediated sales, why would you think a higher number of them would skew the numbers further down? The number of sales increased substantially over the last two years but the search query was identical… why wouldn’t there simply be more of everything rather than your premise, which is that the increase in activity was all at the bottom?

skeptic May 7, 2008 at 8:39 am

I seriously doubt this. I honestly no longer trust RE-industry generated analysis such as this.

TRADITIONAL affordability needs to be restored, and consumers need to restore their crumbling finances. Prices are still too high to allow for 401k saving, college education saving, accommodating higher gas and food prices, not to mention other factors.

Why is the market slow? Because consumers are RE-EVALUATING the actual worth of a house. Houses have now lost their ability to be short term cashout money machines. Irresponsible borrowing is now not bailed out by ever-rising prices.

The willingness to go in debt for housing is being reassessed, and the sooner the RE industry realizes it, the better.

I understand that those in this business are sad to lose the ‘rising prices’ sales tool, but understand this: For most of history, people didn’t buy homes for the cap gains. The bought them to live in.

And the idea that you make a ‘profit’ on the Average HOME SALE after adjusting for inflation is going to be harder to sell than ever.

Sell houses, originate mortgages, and quit calling bottoms – it’s getting old.
The credibility you save may be your own.

Ned A May 7, 2008 at 5:08 pm

These statistics are a joke. A real estate transaction is a buyer and seller coming together period.

How many buyers have blond hair vs. last year? How many sellers wear boxers vs last year?

Has anyone seen that commercial-it goes something like this “You can make 90% of all statistics look how ever you want-50% of the time”

Avoid Foreclosure May 8, 2008 at 12:56 pm

This site may be useful to some of you guys and gals.
It has some practical information on how to avoid foreclosure.

Good Luck

norm May 9, 2008 at 8:11 am

This report makes the most sense if one assumes that the, uh, lender-mediated sales happen at a relatively even distribution through the marketplace, which we know is not true. Viewed in the context of reports that show that the north side of Minneapolis, just to cite one very well-known example, has been hit disproportionately hard, renders the suggested conclusion nearly meaningless.

A ‘traditional seller’ attempting to sell in a region with many (screw it) foreclosures and short sales is going to find their price dragged down hard, while a seller in a desireable area with few foreclosures is going to find that the market can bear a higher price.

Break up this report by neighborhood and then maybe I’ll take a swig of the Kool-Aid.

Aaron Dickinson - Edina Realty May 9, 2008 at 10:48 am

Skeptic & Ned A – The purpose of this market report was not to try to make things sound all rosey or suggest we’ve hit a market bottom.

The information presented makes it clear there are two different sales markets due to the nature of the sales and that they should be evaluated differently. Many products have different prices depending on the nature of the sale i.e. wholesale vs. retail for example. Short sales and foreclosures are clearly a different type of transactions if you’ve ever been in one before.

Jeremiah Arn May 13, 2008 at 8:39 am

Kudos to Aaron and Jeff and Alex! Even though the report may not be academically bullet-proof, it still illustrates that this particular MSA is stronger than others.
Nate does have a point, though, that other factors like tightening credit affect the pool of buyers (who may often be sellers, too).
Keep up the good work!

Mystic Greg May 19, 2008 at 5:49 pm

I know its also affecting the fact that some people CANT sell their house. They need to get a value that they could have got a year or two ago and now they are stuck. They refuse to sell their house for such a loss but can afford to continue to make the payments. Where is the chart that shows the number of people who didn’t sell their house because the foreclosure next door hurt the value to much.

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