Thankfully, the Harrisonburg and Rockingham County real estate market is not greatly affected by foreclosures and short sales.  Many people ask why we haven't seen an overwhelming number of foreclosures in this area -- to which I offer:

• We did not see as many hopeful homeowners pursuing the wild and crazy loan programs (interest only, reverse mortgages, etc) that some borrowers utilized in larger metropolitan areas.
• We did not have a great deal of overbuilding as was seen in many other metropolitan areas, leading to even higher levels of surplus inventory than we experienced in our market.
• We did not have investors contracting to buy multiple new construction properties with the sole intent of flipping them once construction was complete.
• We did not see as huge of an increase in values as was seen in many larger metropolitan areas.

All of these factors contributed to a relatively low foreclosure rate in the Harrisonburg and Rockingham County.  But indeed, some houses are foreclosed upon, and this often causes neighbors to wonder what will happen to the value of their property because of this foreclosure sale.  But before we get to the potential impact, let's examine how such a property might be sold:

• The homeowner might seek their lender's approval for a short sale -- a sale in which the proceeds from the settlement do not allow the homeowner to repay their lender in full, and where the homeowner does not have sufficient personal funds to cover the difference.  For example, if a homeowner borrowed $400k for their purchase, and a year later could only sell the house for $350k (and didn't have $50k to cover the gap), they might seek lender approval for selling the house at $350k and short-changing the lender by $50k. 
  
• The property might be sold at a Trustee Sale, which is an auction on the courthouse steps. 
  
• If the property is not purchased at the Trustee Sale, it becomes a bank owned property (REO) and is then put back on the market, sometimes at a below market value.

In any of the scenarios above, the property is likely to sell at a "below market" price.  Consider for a moment that homes in a particular neighborhood generally sell for between $250k and $300k.  We'll assume that the property in question (either a short sale, trustee sale, or REO sale) sells for $200k instead --- a big gap below market value.  Again, neighbors would understandably wonder whether that now means that their house is only worth $200k. 

So, what is the impact?  In our market, with a very low number of foreclosures, this sale will not have a tremendous impact, unless the particular neighborhood where it is situated happens to have an above average number of foreclosures.  Let's see why . . . .



The table above demonstrates the impact of foreclosures on a given market when 8% of the sales are foreclosures, 50% and 75%.  Of note, I have informally heard from several colleagues in Winchester that earlier this year 75% of active listings in their market were foreclosures, short sales or bank owned properties.  The analysis above assumes that "normal sales" range from $250k to $300k, and that the foreclosure sales are all at $200k.

As you can see, with a foreclosure rate of less than 10%, the impact on median sales price is marginal.  However, the market value of homes really starts to shift as there are more and more foreclosures in a market.

Interestingly, this is a bit of a snowball effect.  More foreclosure sales bring home values down, which puts more homeowners under water, which causes more foreclosures, which brings home values down further, etc., etc., etc.  Thankfully our local market has escaped this downward cycle to date!

This is a broad topic, so feel free to ask some clarifying questions or raise other thoughts or perspectives, in the comments below, by e-mail (scott@cbfunkhouser.com) or by calling me at 540-578-0102.