California home sales improved for the second consecutive month in December to 520,680 homes, a 5.9 percent month-to-month gain over sales of 491,590 homes in November. Sales continued to lag behind the pace of 2009, declining 6.8 percent compared to 558,840 units a year ago. The December median price dropped 1.6 percent year over year from $306,860 to $301,850, while decreasing 1.7 percent from the November median of $296,690. For the year as a whole, sales decreased 9.5 percent from 546,860 units to 494,900 units and the annual median price for 2010 jumped 10.2 percent from $274,960 in 2009 to $302,900, after declining more than 20 percent in each of the past two years.
While the median price of the overall market experienced a year-to-year dip in December, the price trends behaved differently in the distressed and the non-distressed sub-markets. The median price for non-distressed sales fell 9.6 percent from last December, but short sales decreased only 5.3 percent and Real Estate Owned properties (REO) actually increased 1.8 percent year over year. In fact, recent price trends suggest that home prices in the non-distressed market were more adversely affected by the expiration of the tax credit than those in the distressed market. The median price for non-distressed sales averaged a 10.2 percent year-to-year decrease in the second half of the year after the federal tax credit expired, while the median price for short sales decreased an average of 6 percent, and the median price for REO sales averaged a 7.6 percent increase in the last 6 months of the year. Part of the REO increase was likely due to rock-bottom prices in 2009, after bank-owned properties depreciated significantly in 2008 and 2009.
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While home prices of distressed sales were holding up better than those of non-distressed sales in recent months, price differentials between the two sub-markets remained substantial. The December median price of non-distressed sales at $375,000 was 44 percent above the median price of short sales at $260,500, and 83 percent higher than that of REO sales at $205,000. The monthly median price of non-distressed sales averaged 45 percent higher than the price of short sales in 2010, and averaged 91 percent above that of REO sales for the same period.
What explains the differences in prices? REO properties are sold substantially below market price because they are generally not well-maintained, and may have title clearance issues that are not desirable to home buyers. Also, since banks and lenders are not in the business of property management, they try to get rid of the inventory faster by reducing prices to below-market levels.
Short sales are usually priced somewhere between REO sales and market sales. These are properties owned by “underwater borrowers” who cannot pay off their mortgage balance. To avoid incurring hefty costs from a foreclosure proceeding, lenders agree to discount the loan balance. With lenders willing to concede, short sale properties are priced below market value but above what they would have sold in foreclosure status, allowing lenders to minimize the financial loss they would have incurred otherwise.
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