Paul Cardis

Founder and CEO Avid Ratings
Anje Jager/ Paul Cardis Founder and CEO Avid Ratings

Builders continue to wonder whether the U.S. housing market will reverse course or keep free-falling and potentially cause a second, and more severe, recession. With wave after wave of confidence-killing news it’s hard to imagine when the housing recession will end. Fortunately, there is some good news on the horizon—most buyers don’t want a trashed home that is in need of repair. This fact bodes well for builders who provide new, affordable homes that are trouble-free and offer better energy efficiency and lower operating costs, as well.

Granted, there is no easy solution to fixing the housing recession. However, one thing we do know is that home prices are being depressed by the extremely large number of homes in foreclosure, near foreclosure, and hidden in “shadow inventory” (vacant homes not listed for sale).

A report from Lender Processing Services offers the following statistics on the number of U.S. loans in trouble:

  • Number of properties that are more than 30 days past due, but not in foreclosure: 4,187,000
  • Number of properties that are more than 90 days delinquent, but not in foreclosure: 1,921,000
  • Number of properties in foreclosure pre-sale inventory: 2,164,000

Total: a staggering 8,272,000 homes.
With so much existing inventory on the market, it might be hard to imagine new-home sales ever increasing. But the fact is, much of this inventory is in disrepair and would cost too much to make it livable. Most buyers today don’t want to buy a home that requires a lot of work. In fact, Realtors in the Phoenix market and elsewhere tell me that when a quality home comes on the market, it goes fast. In some cases, the price is even bid up. Clearly, the market is saying that finding a good home comes down to more than just price.

Chief housing analyst for Moody’s Analytics Mark Zandi, who spoke at the Housing Leadership Summit in May, stated that “a vast number of houses that are sitting empty will be destroyed by pests or suffer severe water and mold damage and will need to be gutted or razed entirely.”

Indeed, this summer, Bank of America announced that it would start donating and demolishing hundreds of its 40,000 foreclosed houses, starting in the Cleveland area and moving on to Detroit and Chicago. According to the company, the teardowns are in varying states of disrepair, with some estimated to be worth less than $10,000.

In an interview with Bloomberg, Gus Frangos, president of the Cleveland-based Cuyahoga County Land Reutilization Corp., which works to salvage vacant homes, said, “There is way too much supply. The best thing we can do to stabilize the market is to get the garbage off.” The Cuyahoga County land bank owns about 900 properties and will demolish about 700 of those in the coming months, Frangos says.

People want homes that are clean, pest free, and not neglected. It is not satisfying to buy a home with big problems—at any price. Clearly, these abandoned, dilapidated properties represent a different class of homes for sale—namely the “fixer-upper” that is attractive to a smaller subset of buyers and investors. All of this means that the real number of “good” homes for sale is much lower than economists have used as their inventory numbers. Once the trash inventory gets properly recognized as such, it will create higher demand for the actual number of good homes for sale, and subsequently cause the prices and sales of these homes to rise dramatically.

But none of this will happen until consumer confidence is restored and appraisers are forced to price foreclosures separately from homes in good condition. The good news is that with every passing year, the homes in disrepair just get worse, and the demand for new homes will have nowhere to go but up.