(Foreclosure Monitor is an effort by MHP to helppublic officials determine how best to use their resources to help homeowners and neighborhoods hard-hit by foreclosure).
By Tim H. Davis
June 17, 2010
Three-family homes are considered to be the "problem child" of the Massachusetts housing market. On the up side, they have served generations of working-class families and provided thousands of small landlords a piece of the American dream.
On the down side, these properties - concentrated mostly in urban neighborhoods - have seen their fortunes rise and fall more drastically than other property types.
The volatility of three-family properties can be seen in Boston where between 1997 and 2005 the median price for all residential properties - condos, single-, two- and three-family homes- jumped from $142,000 to $390,000 (175 percent). In this group, three-families in Boston saw the most dramatic median price increase, rising from $135,000 to $540,000 (300 percent).
When prices began to slide, three-families in Boston saw the worst decline. From 2005 to 2009, median prices for three-families dropped 50 percent to $268,000 while all other properties dropped 16 percent to $327,000.
This volatility - which leads to speculation - is a recipe for foreclosures and it's no surprise that three-family homes are over-represented among Massachusetts foreclosures. For this reason, MHP's Foreclosure Monitor has completed an analysis of distressed property data from The Warren Group in order to get a better sense of what's happening with three-families and what it means for policy makers.
Three-family foreclosures concentrated in distressed neighborhoods
The "problem child" aspect of three-family homes can be seen in the ratio of three-family properties in distress (properties in somestage of foreclosure). In Massachusetts, three and four-family properties represent 10 percent of all Massachusetts housing units, according to a 2008 American Community Survey. In terms of distress, units in three-families account for 17 percent of all distressed units, according to an MHP analysis of data from The Warren Groupas ofApril 1, 2010.
A closer look reveals that distressed three-family properties are concentrated in the state's most troubled neighborhoods . The 100 most distressed census tracts in Massachusetts account for seven percent of the state's total housing unit supply and 16 percent of the state's distressed units. In terms of three-family properties, 43 percent of the state's distressed three-families are in these 100 census tracts.
Three-family homes are moving through foreclosure process
Now that we have a feel for the extent and concentration of distressed three-family properties, the next thing to figure out is how these properties are moving through the foreclosure process and whether banks are holding onto three-families longer than other properties.
To answer these questions MHP examined the results of foreclosure petitions filed during Q4 2008, to see the progress of petitions that resulted in a transfer of the property up to April 1, 2010.
For all property types, average sales before the foreclosure is completed took 246 days from the filing of the foreclosure petition to the filing of a sale at the Registry of Deeds. These sales before the foreclosure is completed are commonly referred to as "short sales", if the lender is willing to take less than the outstanding mortgage.
The 246-day average for sales before foreclosure is completed compares to 311 days for foreclosure deeds(a private buyer purchases the property at the foreclosure auction) and 310 days for bank-owned properties (the lender "purchases" the property back at the foreclosure auction).
There was no statistically significant difference by property type. Condos sold more quickly (228 days) and three-families sold more slowly (263 days).
Three-families more likely to be sold before foreclosure
MHP did find that 34 percent of three-family homes were sold before foreclosure, more than any other property type. Single-family sales were next (29 percent), followed by two-families (28 percent) and condominiums (22 percent).
In addition, three-family homes were less likely to become bank-owned ("REO"), with 58 percent of three-family homes becoming bank-owned, behind two-families (59 percent), single-families (61 percent) and condos (64 percent). This indicates that there is a market for three-family homes, although the question remains as to whether the market for these homes is driven by owner-occupants or investors.
This pattern is stronger in the 100 most distressed census tracts. While the percent of three-family homes sold before the foreclosure (35 percent) is similar in these tracts compared to the state as a whole (34 percent), single-family (18 percent) and two-family homes (22 percent) are less likely to sell before foreclosure in the most distressed tracts compared to the state as whole (29 percent and 28 percent respectively). Condominiums were also more likely to be sold before the foreclosure (27 percent) in distressed tracts, than statewide (22 percent).
REO three-families sold in same time frame, regardless of area distress
To understand the rate at which foreclosed, bank-owned properties are re-sold to private buyers, let us look at Massachusetts properties that were foreclosed and bought back by lenders ("REO" properties) during Q4 2008. Of the 1,777 REO properties from Q4 2008, 84 percent had been re-sold to a private buyer by April 1, 2010. The average number of days between the foreclosure deed and the new sale was 187 days.
Three-family homes took the longest to sell (204 days), and there was little difference between the number of days these properties took to sell in the 100 most distressed census tracts (203 days) than for other census tracts (204 days). Statewide, single-family homes sold in an average of 182 days, condominiums in 183 days and two-family homes in 197 days. Even though three-families were slower to sell, the difference was not statistically significant, either by property type or by the level of neighborhood distress.
There was, however, one property type where there was a significant difference between the 100 most distressed census tracts and the remainder of the state: condominiums. On average, REO condominiums in the most distressed neighborhoods took 214 days to resale, compared to 176 days in the remainder of the state.
While the data does not provide information on whether the REO condominiums in distressed neighborhoods are in two- to four-unit properties, our experience with these distressed neighborhoods is that many two- to four-unit properties were converted to condominiums during the real estate boom era and their failure to sell as quickly today is a symptom of the speculation that is common with three-family homes in distressed urban neighborhoods.
What does this mean for policy makers?
The data suggests that three-family homes are not being sidelined in the real estate market recovery. The challenge is to make sure that we do not return to the boom-and-bust cycle that has characterized the three-family market in the past.
In this respect, local agencies may want to focus on getting three-family homes into the hands of responsible (for- and non-profit) owners who will own these properties for the long term and create stable homes for renters. As a part of this, local agencies may need to address condominium speculation and re-convert small condominium associations (two- to four-units) into single-owner, multi-family properties.
Real estate data roundup
In case you missed it, here's a roundup of recent real estate reports:
The Warren Group and the Massachusetts Association of Realtors released April Massachusetts sales data. Both reported a seven percent increase in median selling prices over April 2009, as well as record increases in the volume of sales. With buyers rushing to get properties under agreement before the federal homebuyer tax credit expired at the end of April, we will have to wait for July sales results to see if the market is actually recovering.
The Federal Housing Finance Agency (FHFA) reported that Massachusetts sales prices (seasonally adjusted) dropped 1.54 percent over the year ended March 31, 2010, and Massachusetts ranked 18th among the states. Eight states and the District of Columbia saw an increase in prices over the year, including Vermont, with a 1.44 percent increase.
Standard & Poor's released the latest from the S&P/Case-Shiller Home Price Index. Greater Boston prices are 3.8 percent higher in March 2010 than in March 2009, higher than the national increase of two percent. Half of the twenty cities measured continue to see a decline in values. Boston's recovery is outpaced by Washington, D.C., Denver, Cleveland, Minneapolis and cities in California.