Peter G. Miller
CTW
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Q: I read recently that fore-closures were going up but that home auctions were going down in my area. How is this possible?

A: Auctions have been a traditional part of the foreclosure process because even though a home has been lost, owners still have some rights. The idea of a foreclosure auction is to get as much money as possible for the property, not only to pay off the loan and the lender’s costs, but also to give any remaining equity from the sale back to the owner.

In many markets today there’s no excess equity because the value of the debt is vastly larger than the sale value of the home. In many markets there’s a second problem as well: If lenders simply auction off properties as they foreclose, they’ll flood the market with distressed homes. More supply will push down home values even further. The result is that many lenders are holding on to properties, keeping them in inventory and slowly releasing them for sale in an effort to not drive down prices – or the value of their inventory of unsold homes – any further.

For August 2009, ForeclosureRadar.com reports that in California, “year-over-year trustee sales remain 32.2 percent lower than August 2008. Just 13.4 percent of scheduled foreclosure sales were sold at auction this month, while 37.9 percent of scheduled foreclosure sales were sold in August 2008. The majority of sales are being postponed to a future date at either the lenders request or with their agreement.”

Nationwide, Rick Sharga of RealtyTrac.com, estimated earlier this year that as many as 600,000 to 700,000 foreclosed properties nationwide were being held off the market by lenders. This is a huge number. The National Association of REALTORS® estimates that existing home sales this year will total about 5.1 million units.

“The national median existing-home price for all housing types was $177,700 in August, down 12.5 percent from August 2008,” says the NAR.

“Distressed properties continue to downwardly distort the median price because they generally sell for 15 to 20 percent less than traditional homes.”

The problem is especially acute in six states. According to RealtyTrac, “California, Florida, Arizona, Nevada, Illinois and Michigan accounted for 62 percent of the nation’s total foreclosure activity in the third quarter, with 579,541 properties receiving foreclosure filings in the six states combined.”

In essence, it’s actually good that lenders are not dumping foreclosed homes on the market as fast as possible. Were that to happen, home values would take another beating, especially in the major foreclosure centers.

E-mail peter@ctwfeatures.com