In a Wall Street Journal piece, Nick Timiraos says he thinks rising real estate prices are a result of fewer distressed homes (short sales and foreclosures) on the market.
Prices have risen this summer for a simple reason: more buyers have chased fewer properties. But the drop in supply and the boost in demand isn’t the only reason that Case-Shiller is now turning positive. Another related factor is that the share of non-distressed home sales is rising and the share of distressed sales—foreclosures and short sales, mostly—is falling.
As we’ve covered recently and repeatedly (e.g.), distressed homes are making up a smaller and smaller share of the market; in MRIS territory (which covers a lot of Virginia), total distressed sales were about 20 percent of the market in July 2012 — down from more than 25 percent the year before.
That’s good news for a lot of reasons. Although distressed sales don’t hurt property values these days the way they did a few years ago, they’re still not as good as a traditional sale. And the shrinking number of foreclosure/REO/short sales — despite the resumption of the foreclosure process by the big banks — is an indication that the “shadow inventory” everyone was worried about really isn’t a problem.
Timiraos’s argument has its weak spots, though. Saying rising prices come from lower supply is a gimme — that’s obvious. But it’s not likely that fewer distressed sales have have that much of an impact. Unlike a “normal” market, these days foreclosures and short sales aren’t priced that much lower than traditional sales. Reducing their number doesn’t mean a major boost to pricing averages. (If your baseball team has hitters with batting averages of .400, .398, .395, .397, and .392, getting rid of the .392 guy isn’t going to raise the team average all that much.)
Still, fewer distressed sales probably have some impact, as do many, many other things, from consumer sentiment to unemployment to the stock market to the weather. So no complaints.