Foreclosure problem drags down home values

When one person loses a home to foreclosure, it’s a personal tragedy.

But when thousands default, the problems extend beyond property lines and ripple through the community.

Record numbers of foreclosure filings in each of the past three years in El Paso County have led to thousands of homes coming back onto the market for sale after they’ve gone through the foreclosure process — undercutting prices of nondistressed properties, leaving homes vacant for months and creating foreclosure fatigue in several neighborhoods, according to a Gazette analysis of more than 5,000 foreclosed properties during a 28-month period from 2007 to 2009.

How far-reaching is the problem?

About half of all homes, condominiums and townhomes that go into foreclosure typically wind up back in the hands of banks and lenders, based on last year’s El Paso County Public Trustee Office records. Another 10 percent are bought by investors and later listed for sale.

“Every month, every week, foreclosed properties show up on the market,” said El Paso County Public Trustee Tom Mowle, whose office processes foreclosure filings. “It’s not like you can wait it out, or kind of look for a gap where, OK, there aren’t any foreclosed properties. Every week, in every neighborhood, just about, there are foreclosed properties coming on the market.”

(Return to the foreclosure story index here.)

When those distressed properties come back on the market, they’re typically discounted to the tune of about $26,000 below market value, according to The Gazette’s analysis. That creates fierce competition; sellers of nondistressed properties often feel compelled to lower prices to match homes across the street, down the block or in the neighborhood, although other factors such as the condition of homes will have an effect, too.

Bank-owned properties also usually sat unsold for many more weeks than nondistressed properties. The Gazette’s analysis found that distressed properties average 141 days on the market before selling. That’s several weeks longer than homes sold by real estate agents, according to the Pikes Peak Association of Realtors.

The situation isn’t doom and gloom for everyone, however.

Some buyers have been able to afford homes that otherwise would have been out of their price range. So-called fix-and-flippers have invested thousands to buy and repair homes — selling them for higher prices than they otherwise would have sold for and raising property values in some neighborhoods.

Foreclosure problems in the Springs and El Paso County, meanwhile, have never become as bad as some other parts of the country. There are so many foreclosed homes cluttering south Florida, for example, that Miami-Dade County officials recently started an online bidding service to attract buyers.

Still, don’t expect the steady flow of foreclosed homes coming back on the market in the Colorado Springs area to slow any time soon, according to The Gazette’s analysis and interviews with members of the local real estate industry, government officials and economists.

The Gazette analysis revealed:

Significant discounts

Homes resold after a foreclosure went for significant discounts.

Of 5,099 properties classified as completed foreclosures during The Gazette’s study period, 4,023 were subsequently resold at a median price of $136,500. The median market value for those same properties was $162,607, according to the Assessor’s Office. That means the median reduction on foreclosed properties that were resold was $26,107 — a 16.1 percent discount.

The median — whether it’s price or market value — refers to the midpoint of all figures in a series of data. When it comes to the median price reduction of $26,107, for example, half of the discounts were more and half were less.

That discount gives buyers an idea of the kind of deal they might get on a foreclosed home, but it’s also an indication to sellers of homes not in foreclosure that they might need to lower their asking price if they’re competing with foreclosures and so-called short sales. A short sale is another kind of distressed property included in The Gazette’s survey. In a short sale, banks allow homeowners to sell their property short of the full amount they owe on their mortgage; even though banks take a loss, they avoid the costs and hassles associated with taking back and selling properties, while homeowners stave off a foreclosure.

Tiffany Lachnidt, a real estate agent specializing in foreclosures with Re/Max Properties in Colorado Springs, said the $26,107 reduction might be deceivingly high. Home prices have fallen in recent years because of the slumping housing market, but the Assessor’s Office market values haven’t been adjusted to reflect sagging prices, she said.

From a lender’s perspective, however, $26,107 probably is too low, said Jay Garten, branch manager with MetLife Home Loans in Colorado Springs and board chairman of the Colorado Mortgage Lenders Association. Banks and lenders must hire real estate agents and property managers and pay for maintenance, utilities and other costs that are above and beyond the price fetched by a resale, he said.

Jo Stinett, owner of Peak View Real Estate Appraisals in Monument and board president of the Colorado Association of Real Estate Appraisers, said foreclosed properties typically sell for 5 percent to 25 percent less than fair market value, based on appraisals she’s done. Reductions depend on how many foreclosures and short sales take place in a neighborhood, along with traditional factors such as when a home was built and its location, she said.

Condition also is a big factor, said Casey Clark, a real estate agent with Avalar Real Estate Solutions.

Distressed homes that have been trashed by their former owners are deeply discounted, Clark said. But homes in good condition will sell at a higher price as banks seek to recover some of the costs they incurred with taking back and marketing the property, she said.

“It will depend on the condition of the house,” Clark said. “They’re not just discounting them left and right.”

Time lag

It takes awhile to sell a distressed property: an average 141 days, The Gazette found. By comparison the Pikes Peak Association of Realtors reported that home sales handled by its members averaged around 90 days — give or take a few days —  as the local home market was at the height of its slump during the first few months of 2009.

The time will vary, Clark said. Some banks and lenders might want to dump properties in a hurry and will reach a deal to sell in less time, she said. Then again, she’s had short sales drag on for eight months because large banks with many decisionmakers sit on offers they’ve received.

“We tell our buyers to be prepared for a nightmare; this isn’t going to be easy,” Bill Hurt, president of ERA Shields Real Estate and current board chairman of the Pikes Peak Association of Realtors, said of short sales.
But the length of time it takes a bank to sell a distressed property represents only a fraction of the time the home has been in trouble, said Mowle, the public trustee.

Banks and lenders typically don’t send out foreclosure notices until homeowners have missed three months of payments. After a notice goes out, several more months will go by before the property goes to a public trustee’s auction, which is the point when a lender or investor takes control of the property. An additional month will go by before the property is deeded, Mowle said.

Lenders then must prepare the property for sale — which can include hiring real estate agents or cleanup crews, depending on the property’s condition.

By the time the process is finished, Mowle said, homes that receive a foreclosure notice might not be resold for more than a year.

Older areas

Neighborhoods with the highest percentage of foreclosure sales, and which had at least 100 properties and 20 sales during The Gazette’s study period, included several older areas with lower-priced homes on Colorado Springs’ south and southeast sides, or just outside the city’s limits on the south side: the Stratmoor South, College View Estates and Fort Carson B Street areas; Stratmoor Valley; Eastborough; Pikes Peak Park; and Heritage. Unincorporated rural areas of south and southeast El Paso County also had high percentages of foreclosure sales.

Not surprising, say some real estate agents. Homebuyers in those neighborhoods sometimes are lower-income residents who haven’t put down a lot of money on their properties to begin with, said Hank Poburka of the Platinum Group Realtors in Colorado Springs.

If they lose a job or have other income problems, they might be quicker to walk away from the property since they have little invested, he said.

“People with no ‘skin in the game,’ they’re going to be hit the hardest,” Poburka said. “They’ll turn and walk away.”

A look to the future

The problem of distressed properties coming back on the market isn’t going away.

The Gazette’s analysis showed that 1,061 foreclosed homes during the 28-month study period remain unsold. Their median assessor’s market value was $172,000.

But those aren’t the only homes coming back on the market; the area’s foreclosure problems continued at the end of 2009 even as the single-family housing market showed some encouraging signs during the final quarter. In December alone, foreclosure filings totaled 560.

Fred Crowley, a University of Colorado at Colorado Springs economist, said he believes the area’s housing market has reached bottom and is beginning an upswing.

When it comes to foreclosures, Crowley said, filings could drop 10 percent in 2010.

Anything that holds down the supply of homes for sale will help boost prices, which Crowley says could climb 8 to 10 percent this year.

Some real estate agents, however, say Crowley is overly optimistic.

Prices will remain stagnant or even decline this year, Poburka predicted. He fears more layoffs locally, and worries that homeowners with adjustable-rate mortgages will see their interest rates rise this year, which could create a “tidal wave” of foreclosure filings and distressed properties coming back on the market. Expect the area’s foreclosure problem to continue through at least early 2011, Poburka said.

Mowle said it’s difficult to believe that the area’s foreclosure problems could get worse in 2010. But even if foreclosures decline 10 percent as Crowley said, that still means filings would total about 5,000, he said.
“The river may be going down,” Mowle said of the foreclosure tide, “but it’s still above flood stage.”

Return to the foreclosure story index here.­

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Call the writer at 636-0228.