Huge Price Discounts on Distressed Properties Harm Overall Home Values

By Kyle Chezum Updated on 4/21/2011

Though the Mortgage Bankers Association's home purchase mortgage index has increased by as much as 10% in the past week, home purchases are not as common or frequent as the troubled housing sector needs them to be in order to fully recover from the damage done during the recent recession.  Part of the reason for this is the continued downward pressure placed on the market by distressed or foreclosed properties.

These properties sell at significantly discounted price points when compared against non distressed homes in a given area.  In California, for example, the median sale price for standard homes this past month was $386,500, while the median price for distressed properties was just $205,000.  This makes standard homes a whopping 88% more expensive than distressed homes.

The lower prices on these properties have pushed the overall state median home price down to $286,010, almost 5% lower than it was just a year ago.  Standard and Poor's reports that it may take up to four years to clear the shadow inventory from the state's market.

This is a picture that is repeated elsewhere around the nation.  California is simply an example.  The fallout from the financial crisis has created a complex financial environment, and as each day passes, some changes occur for the good while others seem to bring more bad news.  In this case, the shadow inventory of distressed properties is a burden the market will have to bear for years to come.