Will luxury “short sales” drive housing prices down across MA?

With hyperbole-filled housing headlines “soaring” across the internet in Boston, it’s important to take a sobering look at a “sleeper” trend that has the potential to pull down housing prices across Massachusetts in 2010 and beyond.

Last Friday, Bloomberg published a chilling headline (no pun intended) that has yet to attract a comment on Boston.com:

Luxury-Home Owners in U.S. Use ‘Short Sales’ as Defaults Rise

Hard to believe that “Payments on about 12 percent of mortgages exceeding $1 million were 90 days or more overdue in September,” harder still to believe that nearly double the delinquency rate on loans under $250,000.  More troubling, however, is that the delinquency rate over $1M has almost tripled during the past year.

What implications does that have for the housing market in Massachusetts?  Over the past nine weeks (10/18/09-12/21/09), just 63 of the 6068 MLS listings priced over $729,750 (the jumbo loan limit for the nation’s highest-priced housing markets), were short sales or lender owned listings.  That’s just one percent of all “jumbo” listings statewide.  What will happen to housing prices when more distressed high-end homes come into the market?  Instead of one in 100, what if one in ten jumbo listings is a short sale or lender owned property in 2010?  Bloomberg says, “Luxury home prices probably will drop another 5 percent before reaching a bottom in September 2010, according to Sam Khater, senior economist at First American.”

But the Real Estate Cafe‘s research suggests price declines could be much worse.  If the past nine weeks are any indication, we already know is that 64% of luxury short sales and lender-owned properties are priced UNDER their assessed value, some as the graph below shows, as much as 40% below the assessed value (see graph above).  What’s going to happen to your property value when the paper “Millionaire Next Door,” is no longer a millionaire and his home is on the market at a distressed price? (Bloomberg says, “The number of U.S. households with a net worth of more than $1 million, not counting primary residences, fell to a five-year low of 6.7 million last year from a record 9.2 million in 2007, according to Spectrem Group, a Chicago-based consulting firm.”)

So what if $600,000 becomes the new million dollar listing?  What impact would a softening of high-end housing prices have on less expensive homes, particularly with interest rates increasing and tax credits expiring early in 2010?  We’ve already created another graph showing sales prices of luxury short sales and lender-owned properties during the past nine weeks, and will make them available to potential clients.

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Posted in Bubble Hour, Defensive Homebuying, Foreclosures, Million Dollar Markdowns, Price trends, Real Estate Bubble, Savings & Rebates, Trend analysis

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