Sales of Foreclosed Homes Are Up Nationwide

As housing continues to slump, in many states foreclosed properties make up the largest share of existing-home sales

It used to be that buying a foreclosed home was considered risky for all but the most seasoned investors. Most casual buyers didn't know how or where to find such houses, were nervous about the condition of the properties, and generally felt uncomfortable with the notion of benefiting from someone else's misfortune. But, just as buying on credit was once anathema to many Americans, the longtime thinking about foreclosures now seems increasingly antiquated. Today, in many parts of the country, it's difficult to find a listing that isn't either owned by a bank or just a couple of missed payments away from foreclosure.

That's especially true in California. In the second quarter of 2008, seven in 10 existing-home sales in San Joaquin and Merced counties were of properties that had gone through foreclosure in the previous 12 months, according to DataQuick, a La Jolla (Calif.) real estate information company. In Sacramento County, six in 10 sales involved foreclosures.

It's no wonder that prices in these markets are tumbling: Distressed sales have a way of dragging prices down for entire communities. Aaron Smith, senior economist at Moody's, says markets in which foreclosed homes dominate listings suffer from a kind of "negative feedback loop."

"Prices decline, so you have more foreclosures, and then more price declines," Smith said. "But it's better to have activity than not.", working with data from Moody's, came up with a list of the 20 states where foreclosures, or other sorts of distressed sales, made up the largest share of existing-home sales. Unsurprisingly, California topped the list, with foreclosed houses and condos making up 41% of existing-home sales in the second quarter. That's up from 9% in the second quarter of last year. Nevada was next, at 40% (up from 11% a year ago). To people tracking foreclosures across the country, the litany of other hard-hit states such as Arizona, Florida, and Rhode Island are all too familiar. Even Michigan and Ohio—Rust Belt states that didn't experience the same level of overbuilding, rapid home-price inflation, aggressive lending, and speculation during the boom—hit the top 10, largely because of the loss of manufacturing jobs and other economic hardships.

Yankee Shock

The list also included some surprises. Massachusetts, where foreclosure filings ballooned this year, came in at No. 8. And the third-place surprise: Connecticut, famous for affluent suburbs like Westport and Greenwich.

Connecticut shot up the list because its overall sales have slowed dramatically in recent months while its foreclosures surged. The data show a snapshot of the second quarter when many of the homes that might have gone into foreclosure months earlier finally sold.

Vincent Valvo, group publisher and editor-in-chief for the Warren Group, a New England real estate tracking company, said the year-old credit crunch is to blame for Connecticut's relatively recent foreclosure problems. Unlike California, Florida, and Nevada, the state didn't have an oversupply of new construction during the boom. Connecticut and Massachusetts did not see a big increase in mortgage defaults until the credit crunch hit and the pool of buyers who could qualify for loans suddenly shrank. Massachusetts saw the rise in foreclosures before Connecticut because it had a relatively large share of small-time investors and, to a lesser extent, second-home owners who started defaulting on loans for homes of four or fewer units, Valvo said.

Connecticut's foreclosures are concentrated in cities such as Bridgeport, Hartford, and New Haven. But foreclosures are up in suburbs as well. Greenwich didn't have a single foreclosure last year. This year, it has already had four, Valvo said.

The problem is "starting to surface the way a submarine surfaces from the bottom," Valvo said. "It shoots up in the air and makes a dramatic entrance."

Getting the Market Moving

Valvo said he expects a chill to spread across the New England housing market this fall, when the cold weather arrives and homeowners see what high energy costs can do to their heating bills.

The good news about the jump in foreclosure sales is that it's pushing up existing-home sales in some communities, and that could help to clear out languishing inventory.

Bargain-seekers pushed up existing-home sales in California's San Joaquin County by 107% in May compared to a year earlier, according to DataQuick. Elsewhere in the state, existing-home sales in June were up 61.9% in Riverside County and up 21.1% in San Bernardino County, the company said.

"You don't want to say it is a good sign for the marketplace, but it kind of is," said Terrin Griffiths, an economist for the California Credit Union League, which represents 10 million credit union members throughout the state. "So many homes are for sale. You have to get them sold so you can get back to a normal market."

Smith of Moody's said the spike in sales isn't likely to do much to boost home prices, at least in the short run. But it gets us closer to the bottom.

"The reason you've seen a pronounced downtrend in financial shares and equity markets is that there's no end in sight," Smith said. "Even if the bottom is a little bit lower for prices, if we can get there quicker, it reduces some of the downside risk."

Click through's slide show to see a ranking of the states with the highest second-quarter sales of foreclosed homes.

Before it's here, it's on the Bloomberg Terminal.