Is This the Reason New Home Sales are Rising?

According to last week’s release by the US Dept. of Commerce, new home sales rose in April by a 7.1% growth rate compared to March of this year. With no discernible positive change in residential real estate and the broader macroeconomic landscape over the same time period, and the view shared by most that housing is mired in an ugly slump, where is all this activity coming from, and why has the good news not made its impact on the larger real-estate market (NYSE:IYR)?

The answer it seems, is the sharp rise in sales of foreclosed homes. According to a new report released by RealtyTrac, “The leading online marketplace for foreclosed properties,” bank-owned homes and those in some stage of foreclosure accounted for 28% of all residential home sales in the US this quarter. According to RealtyTrac CEO James Saccacio this is not a positive sign for the housing market, “While this is probably helping to keep home prices relatively stable, it is also delaying the housing recovery. At the first quarter foreclosure sales pace, it would take exactly three years to clear the current inventory of 1.9 million properties already on the banks’ books, or in foreclosure.”

With foreclosed homes representing a much cheaper alternative to privately owned residential properties, it is no wonder that the prospective home-shopper would want to land a deal on a foreclosed property instead of dishing out more dollars for a more expensive private home. As Saccacio realizes, the massive influx of foreclosed homes to the real estate market that followed the bank-end of the 2008 financial crisis has effectively bludgeoned the residential (and to some extent commercial) real-estate market into a coma. Private home owners, new home builders, and other property vendors are hard pressed to compete with such cheap prices.

The states with the highest percentage of foreclosure sales this quarter were Nevada (53%) California (45%) and Arizona (45%). The average sale price for a bank-owned home in Nevada was 18% lower than sale prices for homes not in foreclosure. If that number had you holding your breath, check out these three states with the highest average foreclosure discounts in the country; coming in at #1 was Ohio (41%), Illinois (41%), and Kentucky (39%).

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