A Little Healthy Competition

I ran into some interesting numbers in yesterday’s Wall Street Journal Economics Blog. The article, Foreclosures Distort Home-Price Measure, discusses the impact of REO properties on the FHFA’s housing price index over the past few years. The information that really caught my attention came in the last few paragraphs.

Distressed properties that sold in the 1990’s were priced at about 10-15% below normal sales. Today distressed properties are discounted about 25%.

What changed over the past two decades that led banks and individuals to price their distressed homes an additional 10% lower than their non-distressed competition?

The housing boom of the last decade attracted millions of people to the concept of investing in real estate. The idea of making tons of money flipping houses was a lot more attractive than a 9-5 job. With banks were handing out money to anyone with a pulse and prices rising day after day, Real Estate investing became a very hot topic.

Over the past 20 years we have seen some amazing changes in technology. The internet went from dial-up at a snail’s pace to smart phones at lightning speed. Any information we need is literally in the palm of our hand.

The combination of interest and information has produced investors that are more. They have resources at their disposal that did not exist a few short years ago.

The increase in the discount rate of distressed properties over the last 20 years is a direct result of today’s more educated and prepared investor.

No seller, bank or otherwise, wants to take less than they can get for any property. But the market dictates the price. Since a large segment of the distressed-home market is made up of investors, they are the ones that dictate that price.

Educated and informed Real Estate investors help us all. There’s nothing worse than being outbid by someone poised to lose their shirt on a deal because they do not know what they are doing. Those individuals will eventually weed themselves out anyway. In the mean time, the results for the rest of us are sellers with more realistic expectations and lower housing prices in the distressed home market.