A Bifurcated Market

publication date: Aug 18, 2008

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author/source: Jeromy Trask

By Jeromy Trask

Jeromy Trask

Ron Peltier, CEO of Warren Buffet’s real estate company Home Services of America, the second largest real estate company in the country and owner of Atlanta’s premier real estate firms, Harry Norman, Realtors and Jenny Pruitt and Associates, indicated during a guest host appearance on CNBC’s Squawk Box that we (the US) are in a “bifurcated housing market.” He went on to say there is the “primary market, consisting of the typical discretionary sellers moving from one home to another and the distressed market.”

In order to best illustrate the effect this bifurcated market is having in our local area, specifically zip codes 30004, 30005, 30022, 30075, 30076 in Alpharetta and Roswell, I decided to focus on the largest segment of our real estate market – single family resale homes. However, condos, townhomes and new construction homes are in a similar situation. Also, to more accurately reflect the majority of homes, I removed those priced more than $1,000,000 from the research, as they tend to skew the true numbers. In fact, a First Multiple Listing Service (FLMS) custom search from August 15 shows that 97 percent of all single-family homes listed and sold in our area since 2006 were priced under $1,000,000.

Trying to extrapolate accurate sales data for the distressed market can be challenging considering most sellers attempt to hide the fact they are in a tough spot. This is hard to understand, as the first thing often disclosed to a buyer is if the seller is a bank or otherwise distressed. Nonetheless, for the distressed market, I selected only those homes listed as vacant, in foreclosure or corporate owned. In my opinion if you are trying to sell your home and have already moved into another one, you’re at least somewhat distressed.

Since 2006, statistics show that distressed properties have gone from 21.42 percent of the resale market referenced above to 33.25 percent. The increase is keeping the primary market flat, which is how most real estate professionals describe our current overall situation. The reality is even though the primary market has seen closed units drop off by 53.47 percent versus the same time frame in 2006, average prices are almost identical with a 2.09 percent increase in 2007 followed by a 2.13 percent decrease in 2008. In comparison the distressed market has seen closed units drop by only 2.29 percent with average prices increasing by 8.85 percent. (7.82 percent price increase in 2007 followed by a 1.12 percent increase this year)

Now, before you decide to move out and pretend you are in a distressed situation, consider this. While distressed properties have seen their average prices come up slightly, it is mostly due to higher-end foreclosures coming into the marketplace. The bottom line is distressed properties are selling at a 6.86 percent discount. That’s almost $25,000 less than a similar home in the primary market.

Unfortunately, the increasing percentage of distressed units in relation to the total closed units means average prices in the primary market are likely to slightly decline for the remainder of 2008 and in to 2009. However, if you are part of the 34.2 percent who falls into the distressed category, the picture could be a little worse as foreclosures in our area continue to be on the rise. By this time next year the distressed market is likely to see double-digit year over year price declines.

The good news is for those of us not in a distressed situation our average prices shouldn’t experience the decline the news media would have you believe. This is mainly because the media usually references a much broader market. I call it the blended market, consisting of new construction, high end, primary and distressed properties.

Clearly, Mr. Peltier has it right when he says we are in a bifurcated market. So the next time you hear someone talk about the real estate market, keep in mind they are likely referring to the blended market. As long as you understand the differences and how they relate to your unique situation, coupled with the fact that all real estate is local, making an informed decision will be much easier – even if the reality isn’t. 

Jeromy Trask, V.P. Managing Broker, Harry Norman, Realtors, 770-518-5550, jeromy.trask@harrynorman.com