Meet the Author

Daniel Hartley |

Research Economist

Daniel Hartley

Daniel Hartley is a research economist in the Research Department of the Federal Reserve Bank of Cleveland. He is primarily interested in urban/regional economics and labor economics. His current work focuses on crime, public housing, and neighborhood housing market dynamics.

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Economic Trends

Distressed Sales and Housing Prices

Daniel Hartley

Has the housing market stabilized, or are housing prices still on a downward trajectory? Recent data suggest that the answer to that question depends upon where the home is and whether it—or nearby homes—are being sold in a “distressed” sale (foreclosure, REO, or short sale).

Across the 50 largest metropolitan statistical areas (MSAs), the price growth of existing homes, excluding distressed sales, ranged from −8.5 percent in Las Vegas to +6.6 percent in Miami from December 2010 to December 2011 (the most recent month available). The mean and median price change among these 50 MSAs was about −1 percent.

On the other hand, when we include distressed sales, price growth is much more negative. It ranges from −11.8 percent in Chicago to just +2.0 percent in Pittsburgh, and the mean and median change are both around −3 percent.

Nationally, the fraction of existing home sales that were distressed over the past year is around 35 percent. However, the national numbers hide much of the variation across MSAs. The fraction of distressed existing home sales ranges from 9 percent in Nassau and Suffolk Counties of New York all the way to 68 percent in Las Vegas. The problem with distressed sales is that they can pull down the value of nearby properties.

At the beginning of the foreclosure crisis, a number of MSAs experienced large increases in the share of existing home sales that were distressed. MSAs with greater increases in the share of distressed sales also experienced larger drops in nondistressed sale prices. In 2008, for example, there was a strong negative correlation between the price growth of homes sold in nondistressed sales over the year and the change in the fraction of distressed sales from 2007 to 2008 in the MSA. In 2009 this relationship weakened a bit, as most MSAs had experienced smaller increases in the fraction of sales that were distressed from 2008 to 2009 than they had from 2007 to 2008.

In 2010 and 2011, however, the correlation was even weaker. The fraction of distressed sales changed little from 2009 to 2010 and 2010 to 2011 in the average MSA. These two trends—the slowdown in the rising fraction of distressed sales and the moderation of price declines—could be a hopeful sign for homeowners and policymakers concerned about the detrimental effects of distressed sales on nondistressed property values.