Thursday, December 3, 2009

How foreclosures screw up real estate price data

In my families' 2008 house hunt, it took 10 offers before we finally had an offer accepted.

Many of the offers that didn't work out were attempted short sales or owners who couldn't negotiate on price because of high mortgage balances. Ultimately, several of these properties were foreclosed and are now coming on the market as REOs for substantially less than what I offerred for them originally (I bet those banks wish they would have taken my original offers now.)

For research purposes (and yes a little nosy rubbernecking too), I have taken a peak at a few of these properties after foreclosure to examine the before and after condition of the properties. In many cases, these don't even seem like the same property. The foreclosure process is definitely destructive.

The nicest of these properties just came back on the market in Stockton for $100k less than I offerred 18 months ago. However, the entire kitchen (even the cabinets) were stripped from the house (this was its nicest feature as it was a very expensive custom kitchen), a new AC unit was stolen, some landscaping features are gone or dead, the pool is disgusting and green, and I probably missed some other stuff. I would estimate that about $100,000 of damage (maybe more) was done to the property in the foreclosure process in the past year. That property will sell at a big discount, and it will distort any type of quality adjusted price index.

What a mess. I mean that both as a citizen seeing destruction to the community and as an economist trying to make sense of the real estate data.

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